Sunday, May 23, 2010

Nightlines', Brian Williams, On Strategic Defaults

Got Questions? Get Answers.. BB Wants To Know How To Handle A Second Mortgage

Hi my name is BB and I live in Nevada. I have owned my house for 10 years and Zillow gave its value as about $221,000. I have a first of $217,000 and a second of $224,000
I am thinking of either going into foreclosure or trying a short sale. In either case the first would get paid and the second would not. I also own two rental properties that are worth more then I owe.

My questions are any other suggestions to foreclosure of short sale?

In your situation, your primary concern should be about the consequences of foreclosure or short sale. You credit will be impacted negatively. A foreclosure and a short sale stays on your credit report for 7 years. The other issue is a deficiency. A deficiency is the difference between what you owe and what the lender collects. For example, if you sold your house for $200,000, this would leave a balance of $17,000 to the first lender and the entire balance of $224,000 to the second lender. Your total deficiency would be $241,000. A lender has two options when handling a deficiency. The lender can obtain a court ordered judgment for the balance and attempt to collect from you or the lender can forgive the $241,000. Once a debt is forgiven it is considered a taxable event. The reason is forgiven debt is considered income. The IRS and your state tax authority has rules regarding any amount of taxed owed. Please read this article so you understand what I just wrote: What Every One Should Know About Debt Forgiveness Obligations, and Deficiency.

You can also consider a deed in lieu of foreclosure. A deed in lieu is an agreement made with your lender wherein you agree to give the title (deed) to the property in exchange for the outstanding debt owed. Now in your situation, you can only give your deed to the first lender not the second. This can be a viable option if you are unable to get enough money to pay off the first lender. You can approach the second mortgage lender and offer a settlement. For example you can offer the second lender $20,000 to forgive the $224,000 loan. The goal is to get this in writing and to get the second lender to forgive the balance not seek a judgment for the balance.

If I quit paying the second would or could they foreclose on the house if the first is up to date and they would get little or no money out of the house?

Yes the second mortgage lender has the right to foreclosure even if the first is up to date. However it is not likely since the lender will evaluate the chances of collecting on its mortgage. It is more likely that they will sue you personally for the debt since it is not likely they can collect from the sale of the property. Once again read this article:

What Every One Should Know About Debt Forgiveness Obligations, and Deficiency

In Nevada can either lender come after me for the unpaid balance?

You are asking if Nevada is a non-recourse or a recourse state. State laws regulate the actions that creditors can take when trying to collect on a secured loan. In some cases, states prohibit the creditor from seeking more than the collateral used to secure the loan. This is called “non-recourse” or “anti-deficiency,” meaning that if the creditor cannot recoup its loan from the sale or seizure of the asset used for collateral, it has no further recourse. Other states, such as Nevada, are considered “recourse” states. This means a creditor can seek to collect more than the collateral used to secure the loan. Keep in mind Nevada is a “one action state”. This means your lender must choose foreclosure or a personal lawsuit. It cannot chose both.

Will I owe taxes on the unpaid balance?

See my prior answers and read this article --

Any other questions you think I should be asking?????

Here is a link to responses I gave to other readers. There are a list of questions you may find use full in these responses. Got Questions? Get Answers...

Thanks For Your Time

Not a problem. Feel free to contact me at anytime.

Monday, May 17, 2010

Recent Updates from the Strategic Default Monitor

The Wall Street Journal reports that "More US Homeowners Choose To Default on Mortgages".

Let's quote the most salient parts of the article. Each quote can stand alone. It points to the realization by WSJ that strategic defaults are real. It points to the realization that Wall Street is concerned and hints that something better be done. It presents a strong summary of the current trend.

"Strategic defaults are on the rise as more borrowers who are underwater on their home loans decide it's not worth it to stay current on their payments each month. That trend could have repercussions for the housing market, and for borrowers, in the future."

"These homeowners neglect their monthly principal and interest payments, but still pay other bills on time, including credit cards and auto loans"

"Growing social acceptance of this behavior could have ramifications not only for personal credit histories and the health of neighborhoods, but also for the future of mortgage lending...As more people watch their friends or neighbors choose to default, the more it becomes a viable option for homeowners who may otherwise wait years just to return to a positive equity position in their properties"

"If it really does become a legitimate problem, the implications are pretty dramatic for anyone that wants to buy a home in the future...[t]he lenders would have to build this into their risk models with either larger down payments or higher interest rates"

MY COMMENT : I find the above quote the most interesting of all. How could a lender price strategic defaults into its lending risk model. Is the implication that those individuals who strategically default will face higher interest rates and down payment requirements than someone else who unintentionally defaults on their mortgage? Or will lenders just price this risk generally, across the board, so all borrowers will face higher costs for loans? Whatever the implication, I am interested in seeing the underlying factors that will make up this new risk model. I doubt it will amount to much except an excuse for lenders to charge more for loans and blame it on strategic defaulters.

"In our data, what we've noticed is at about 25% negative equity, the behavior of owners begins to mimic that of investors -- they're more ruthless and rational, they're looking at it from a cash-flow perspective...The default rate rises as the negative equity gets deeper and deeper...People are also learning they often have one or two years before they get thrown out of a home after stopping payments...CoreLogic estimates that the typical underwater borrower is five to seven years away from regaining their lost equity...If people figure they'll wait more than a decade before regaining the equity they've lost, they're much more likely to cut bait and leave."

MY COMMENT: Its about time that owners behavior mimics investors. Why should any individual, investor or not lose money on a worthless asset.
Bottom Line: The Wall Street Journal has taken notice and the larger investment community is nervous. If consumers start acting like all business players aka "action rationally (not emotionally) about investments where does it leave investment models as it relates to consumer behavior.

Let's explore another update:

JP Morgan Warns Investors that Strategic Defaulters Will Cause Losses.

Before I get into this article, my initial comment is HUH!. I thought the losses had to do with exposure to bad bets on credit default swaps and derivatives, declining values of asset back securities, poor lending practices, acquisition of Washington Mutual (albeit for only $1 billion with none of the WAMU lossess) and throwing money to international ventures that went sour.

Let's look at JP Morgan's explantion in detail:

Now I do not want to be dismissive but lets get to the bottom line of JP Morgans recent announcement. Recognizing that negative equity is a primary factor for people to choose strategic defaults, JP Morgan reported "As of March 31, [2010] 27 percent of the home mortgages in its consumer credit portfolio were worth more than than underlying property, meaning those homeowners are underwater, according to the bank's Monday filing with the SEC. At the end of the previous quarter, which ended Dec. 31 of last year, that rate stood at 26 percent, according to the bank's filing...JPMorgan's Washington Mutual loans, though, are detailed in the bank's SEC filing -- and they're even worse than JPMorgan mortgages: The entire portfolio -- $98 billion of unpaid mortgage principal -- is underwater...And those mortgages are even deeper underwater at the end of this year's first quarter than they were at the end of last year's fourth quarter. The options ARMs loan-to-value ratio was at 113 percent, meaning they were 13 percent underwater; now they're at 119 percent, according to JPMorgan's Monday filing. Home equity loans were 15 percent underwater; now they're 20 percent. Prime mortgages were at 6 percent; they've climbed to 11 percent. Subprime jumped from 10 percent underwater to 13 percent." UH OH! That's Huge.

MY COMMENT : So in essence, JP Morgan understands that consumers who own properties with no value and such property having little chance of regaining value, are likley to stop paying their mortgage even if they could afford to pay. Hmmm...seems like something JP Morgan would do. JP Morgan doesn't like it but respects it.

The company respects it enough that it felt compelled to make mention of strategic defaults as a factor in future lossess.

So let cut to the chase. JP Morgan is using a very tangible issue by putting it out in the press. Essentially, the battle lines have been drawn. The consumer who strategically default (because it was in their best finanical interest) will start be to get a negative label. Where this goes, no one really now because this represents a major and permanent shift in consumer behavior. To further emphasize this point just read the following:

"[D]uring a conference call with investors and analysts, Dick Syron, Freddie's former chairman and CEO, in noting that the firm had seen a rise [in strategic defaults], used different terminology to phrase it...'[T]he term that['s] used for people walking away when they are caught up upside down, more frequently used in autos than it is in homes, is ruthlessness. Right? And we are seeing an increase in ruthlessness and I think, it is probably not just speculators or investors, but [I] think it is a different period and the changes... we have seen an enormous amount... [have] the potential for changing consumer behavior'...It's that change that JPMorgan Chase is warning its investors about."

And so it is.

Thursday, May 13, 2010

Got Questions? Get Answers...From Underwater In Phoenix


In addition to my primary residence in the Bay Area, I have 3 rentals, 2 in Phoenix and one in San Diego, an inheritance which is free and clear. As a single unemployed woman paying 3 mortgages, with declining earning power offset by inflationary prices, I feel trapped, overwhelmed and weighted by paying into a black hole - - I will be dead before I see this as a positive investment. It doesn't make sense to me to keep paying, but I am so frightened to lose my 800 credit score and for unseen consequences down the road.

I can understand that the unforeseen consequence of strategic default can create quite a bit of nervousness. Yet with knowledge and patience, and the right team you can handle what’s in front of you.

Remember the minute you default on any mortgage, credit card, or loan payment your credit score will drop. Most negative credit stays on a report for 7 years. You can rebuild your credit during that time.

Keep in mind that despite what’s ahead you need to do your math.

Here are answers to your questions:

If I stop paying on one of my mortgages, what can the bank do to recover their losses?

A bank will declare your mortgage in default. The bank will most likely start a foreclosure auction to force the sale of your property to pay off the mortgage. If the bank sells your property at a foreclosure for less than what is owed then this will create a deficiency. Normally, the bank has the right to collect the deficiency or forgive the deficiency. California and Arizona are non-recourse. This means to a certain extent these states prohibit the creditor from seeking more than the collateral used to secure the loan. For example if a you owe a lender a $100,000 deficiency after the completion of a short sale or a foreclosure sale, the lender cannot get the money from you. Be aware that this principle may not apply to investment property, only your primary residence.

Can they come after my 401K? Other properties?

A bank or a creditor cannot seize your 401K as long as you didn't put money into there to intentionally avoid the creditor (which is very hard to prove). However, a bank or creditor can garnish wages, put a restraining order on a bank account, place a lien and eventually seize any personal or real estate asset you own. However, in order to do this the a bank or creditor must properly complete a legal process and obtain a proper court ordered judgment. This takes time depending on where your assets are located. Furthermore, you have the right to defend yourself against any action to get a judgment or seize any asset. You can challenge the method a bank used to collect the money or challenge the paperwork in the possession of the bank or challenge the exact amount that is owed.

Do Not Keep Your Cash or Savings In The Same Bank That You Owe A Debt To! For example Chase can take money from your savings if you are in default on a Chase credit card or loan.

What financial ramifications will I have down the line with a short sale?

If the bank agrees to let you sell your property at an amount less than what you owe the bank, then this difference will create a deficiency. The bank has the option of forgiving the deficiency or seeking to get you to pay the balance.
Keep in mind that you should negotiate debt forgiveness with a lender and you should always get it in writing.

Remember what I said about non-recourse states.

Will I continue to owe taxes?

You will not owe any property taxes after the property is sold to a third party or sold at a foreclosure action. You are responsible for taxes while you own the property. As I mentioned before if a lender or creditor forgives any amount of a debt owed, the forgiven amount can be considered taxable income by your state and by the IRS.

Is there a government consumer group I should be working with?

There are many reputable organizations you can work with. There are local organizations and national organizations. I recommend that you contact several organizations to see which one can best help you. I have met quite a few people who have worked with NACA – Neighborhood Assistance Corporation of America. Just remember to speak with several organizations in order to get a good fit.

Please make sure to read these links and the questions below:

Please visit this link to review common questions to ask when faced with a similar situation.

Read this link about debt deficiency so you are familiar with all of its implications.

Read this link to learn more about Non-Recourse and Recourse States.

Good luck!! I hope this helps.

Friday, May 7, 2010

Got Questions? Get Answers...Walking Away From The Old To Start Something New


I'm going to do the best that I can to make a long story short and see what advise you may have for me.

I have a house in Michigan that I have owned for 10 years as a primary residence. My company is relocating me to Pennsylvania. I have a first mortgage that is $120,000.00 and an equity line of credit balance of $38,000.00. I have had a couple mortgage brokers out to the house, sent out by the relocation company, that have come up with a $50,000.00 number on my house. Basically $108,000.00 upside down on my house. I have a short window to find a new place to live and do something with my house. Obviously I'm not coming up with the difference to make the Michigan deal go away. I would consider renting the property but then I have to find a renter and hope to get at least what my monthly payments are, which is next to impossible in Michigan. To the best of my knowledge the original mortgage is an FHA and I believe I have been paying PMI for the last 10 years as well.

Walk away? Would the bank still be able to garnish wages to make up for difference being an FHA loan? Roll the dice and see if the bank is willing to do the leg work?

File bankruptcy and let the house go that way?

I an current with my payments and have been for a very long time. I am unable to afford this house as well as a place to live in my new state.

Any advise would be greatly appreciated.

Thank you very much!


First things first. You need to determine your ultimate objectives. This requires asking yourself a series of questions and determining the appropriate answers. Please visit this link to review common questions to ask in your situation.

If you walk away and the bank does not agree to forgive the $108,000 deficiency then you can be liable for the amount. The deficiency may be more or less depending on what the banks collects after the sale of your property at a foreclosure auction.

Remember, a bank or creditor cannot garnish wages without first obtaining a judgment from a court. Michigan allows debt deficiency judgments which can last for xx years. That said “rolling the dice” may not always work in your favor. If a bank or creditor obtains a proper judgment then it may be allowed to garnish your wages. Read this link about debt deficiency so you are familiar with all of its implications.

A debt can follow you from state to state. So just because you have a judgment in Michigan does not mean the judgment cannot be enforced in the state of your new residence.

In this current environment banks and creditors are becoming more aggressive with their “leg work”. There is a growing market of third party debt collectors purchasing bank debt for cents on the dollar. For For example if a third party debt collector purchases your $108,000 for $20,000, then there is strong incentive to go after you and perhaps try to settle for perhaps $40,000. Especially if you are working or have other assets or savings.

Your goal is to minimize the impact of any decision to “walk away” from your mortgage debt. Let’s look at various options:

1. You can ask the bank to take the property back in exchange for satisfying the entire debt or forgiving any deficiency. This is called a Deed-In-Lieu of Foreclosure. You will need to contact the lender to find out the requirements to apply for a Deed-In-Lieu. If the lender agrees to a Deed-In-Lieu and subsequently forgives the mortgage debt then you may receive a 1099. The 1099 will be sent to the state and federal tax authorities. The 1099 will show the amount of debt that was forgiven. This amount can be taxable. It is important to speak with a competent and reputable accountant about this. Most importantly, make sure you get the lenders agreement in writing that your debt has been completely satisfied or forgiven. NEVER ASSUME.

2. You can try a short sale. Your lender may be willing to accept less than the full amount due on a mortgage loan if you try to sell the property. . This is commonly referred to as a “short pay” or “short sale.” Generally, a buyer will be willing to purchase the property from a seller in foreclosure at a "short sale" amount. You will need a good realtor who knows how to market a short sale property and locate a short sale buyer. The lender will want financial information from you and the exact terms of any short sale deal. The lender will ask for a hardship letter and specific financial information. They use this information to establish that you are not financially able to pay off the loan. The lender will need to see a written contract between you and the buyer to make sure you do not walk away with any cash from the deal. A short sale deal takes time. It can take up to 4 months or more. You mentioned that timing is everything for you. Like the Deed-In-Lieu, you must make sure the lender agrees to satisfy the deficiency debt or forgive the deficiency debt IN WRITING.

3. You can explore the option of bankruptcy. Under bankruptcy law, as long as you fulfill specific requirements, you can eliminate your debt or you can receive an affordable payment plan. I suggest you consult with a bankruptcy professional, preferably a bankruptcy attorney to explore this option completely.

All of these options, including walking away will negatively affect your credit score. This may impact your ability to obtain a loan to purchase another house. It can impact your ability to rent. I recommend you contact several lenders and/or realtors to learn about how this can affect your ability to purchase or rent a place.

Once again seek the advice from qualified professionals who can guide you along the path.

I hope this helps and feel free to write back.

Good luck and be well.

Augustine Diji

Freddie Mac says "Don't Strategically Default"

Mortgage giant Freddie Mac aka The Federal Home Loan Mortgage Corporation is a government sponsored enterprise (GSE) of the United States federal government. a recent Wall Street Journal piece the head of Freddie Macs single-family credit-guarantee business, Donald Bisenius argues that strategic defaulters destroy neighborhoods. He said "We know from experience that foreclosures and vacancies drive down the property values of everyone else in the neighborhood. Thus, strategic defaulters, in effect, deplete the personal wealth of their neighbors. Get a critical mass of strategic defaults, and broader communities and regions become affected". He also pointed out that mortgages may become more expensive in the future.

So what is Mr. Bisenius advice to homeowners with properties worth substantially less than the properties value? He feels that "[f]or borrowers who are deeply underwater and who aren’t in financial hardship, the answer is little more than to wait for home prices to improve. To quote Mr. Bisenius “For those who have not suffered any disruption in income and have a longer time horizon, simply continuing to pay the bills might be best.”


Anyway what else can he say. The real issue: There is evidence strategic defaults by strategic defaulters are on the rise. The latest quarterly findings from the Chicago Booth/Kellogg School Financial Trust Index indicated that strategic defaults have increased dramatically over the past year. The researchers, reported that:

"the number of homeowners willing to default when the value of a mortgage exceeds the value of their house, even if they can afford to pay their mortgage, dramatically increased compared to just a year ago. The percentage of foreclosures that were perceived to be strategic was 31 percent in March 2010, compared to 22 percent in March 2009...One likely reason for this growing trend is the increasing perception that lenders are not going after borrowers who walk away. In December 2009, the average homeowners surveyed said the probability that a lender will go after a borrower is 56 percent, as compared to 54 percent reported in March 2010...The results also indicate that the likelihood of strategic default increases by 23 percent when homeowners learn that their neighbor with negative equity has received a partial loan for forgiveness. Additionally, strategic default increases by 29 percent if homeowners are able to find an alternate way to finance a new home."

Essentially, Freddie Macs plea is based on fear not real solutions. There is fear that more and more homeowners will strategically default because there is no equity ("negative equity") in their home and more homeowners are beginning to recognize that there never will be any equity.

Freddie Mac knows this. However, as one of the holders and buyers of most of the issued mortgages in the country, Freddie Mac is well aware of its precarious financial position. Especially after the bailout, which by the way, has not officially ended.

It looks like the solution is to eliminate negative equity. I doubt we will hear Freddie Mac recommending it.