Foreclosure Fence: On Which Side Do You Stand?
One of our favorite don't ask, don't tell topics in the finance world is the foreclosure mess. Call it Foreclosuregate , the Credit Crunch or the Housing Crisis it just will not go away.
Simply put for greater econ minds than mine:
When you base your wholesale economic growth on property being just another giant credit card, you are going to be SOL when said property (ies) cease(s) to appreciate in value.
As much as we want to bury our hamster noses into the ground and diligently burrow to a better day, it ain't happening on the wholesale level until the housing market improves.
Last week, a significant event occurred in this tedious process.
U.S. Bankcorp and Wells Fargo, both took a face dive in the Supreme Court of Massachusetts when it was deemed that they were not the legal mortgage holders at the time of foreclosure;making their ability to foreclose and collect ...nil.
This case, which (for our legal buffs and lawyers) looks to become the holding precedent in such adjudications may spell great/terrible news, depending on the perspective you hold in this regard.
As many of you here, I hold the firm and simple belief that borrowed money need be repaid. Many times in the past I have shaved valuable months and years off of my own life clock to repay debts that nobody could have ever forcibly collected upon.
I did this because it was the right thing to do, in spite of it being a burden upon my own selfish interests.
That having been said, when you read about Morgan Stanley reneging on $5,000,000,000 worth of their own mortgage obligations, it gets tougher and tougher to take the hard banker line...for me, at least.
Curious where you guys stand now that the Credit Crunch is (supposedly) in the rear view.
Where do you see the housing market going from here?
What sort of recovery will come about with housing markets continuing to languish?
...and most importantly...
Are you prepared for the aftershocks of a massive wave of planned foreclosures?
I support banks foreclosing, but I also support them following legal practice. If you are going to lend money you sure a hell better have legal claim. Banks got sloppy and now they are getting it.
I know this is going to boil down into a quasi moral argument, but if you say I owe you something it is your responsibly, not mine to prove it. Banks have been in this game for a long time and have expensive legal teams. Zero excuse for this kind of amateur hour.
Going forward, mortgages will be harder to get and this will exasperate the housing issue. I hope te consumer realizes this. Cause and effect.
I work in the industry and my best friend is a mortgage banker. Now, I'm as racist, right-wing, homophobic, xenophobic and mysoginistic as they come, but geesh, the horror stories of how loan originators (and the whole loan team, frankly) committed out and out fraud, lying to prospective borrowers, constructing false W2s via scanning techniques, guaranteeing that the housing market would continue to rise, etc. The vast majority of these originators didn't know the first thing about their products or about the law and yet they made a ton of money because their phones were ringing off the hook from prospective clients.
That said, most of the borrowers were complicit in the fraud, believing lies that were obviously too good to be true, or out and out participating in the fraud themselves. But the truth is, most of these fraudulent loans have worked themselves out, with unqualified borrowers having already been foreclosed on years ago. Most of the people now currently in trouble are having financial difficulties, likely as a result of the economy (like my brother-in-law, who was laid off and fell behind on his mortgage payment).
The housing market has recovered greatly already (with a lot of bad inventory moving) and most of us see historically low interest rates persisting into 2013 at least, if not far beyond that. But there are certain areas throughout the nation that have horrendous economies and a parallel housing market, so these areas are doubling down on people, where they can't find work and they can't sell their houses to go find work elsewhere. It's probably one of the reasons we're seeing high unemployment rates persist.
I agree with this completely, especially the part about a lot of borrowers being complicit in the "fraud". I too work in the industry...have been since 2001 with my current company. I was involved in directly making a lot of the NINA/SIVA type loans when I was a banker. While I'm sure there were bankers who explicitly lied, deceived, and took advantage of unsuspecting borrowers, i believe that most bankers just followed the guidelines that were set forth. When we were making NINA loans, the guideline was simply a 620 credit score...that was it. So if someone wanted to refinance and take cash out and their income didn't qualify, we just put them on the NINA program. Everything was "by the book". And of course there were times when we knew that there was no way the client wouldn't be able to make the payments after a few months, the borrowers themselves had to have known this as well...but still took the loan. It goes both ways. I do think borrowers have to be held just as accountable as mortgage bankers are, for the mess that we are in right now.
Recently our client relations dept got a letter from a borrower that closed on a NINA loan with us back in 06. He wanted to sue us b/c we put him in a NINA loan when he should have been given a "conventional loan" and now he's about to get foreclosed on. I was made aware of this complaint b/c it was one of my bankers who originated the loan. In looking into the file, the client was self employed and told the banker he needed a no doc loan. He was was going through a divorce so he needed to get the wife off the loan as well...and he wanted to get about $30K in cash out to pay off credit card debt. The rate he got was 6.25%, which was a pretty damn good rate...and the loan was saving the client close to $1000/mo (due to the credit cards we were paying off). After digging a little deeper, we've come to find out that he only paid off some of the credit cards...he used the rest of the money to by a harley. and the last couple years, his business wasn't doing so well so he fell behind on his payment. Yet he wanted to blame the NINA loan that he was given 4 yrs ago as the root of his current problems.
Insightful post, Virginia Tech 4ever.
ill agree with ant's points. furthermore, i feel that if there are legal ways to game something, then you. while midas said that you have a responsibility to hold those debts, if i were one of these massively underwater homeowners who lived in a 'walk away' state, id toss the keys. if its able to be done, then fuck it. part of the system. others got gamed in one way or the other about home values ( or their own stupidity), but its dumb to hold your keys and get destroyed financially while your neighbor and others can hop away with no issue.
play the game and win at life.
question for everyone : will the debt burden of school, be it undergrad law school etc, and inability to pay back have a future impact on peoples ability to purchase real estate, slump demand and thus price?
personally i kinda feel that i would prefer to see an uptick in legit prices and inventory. NYC area -- esp brooklyn, harlem, fidi, jersey, etc -- has tons of shadow inventory on hand that noone is currently buying. i think it is best to try to pay a little more for 'security' (minus a double dip perhaps) in the value of your home than to try to catch a potential falling knife.
all real estate property issues asides, i think the 70k cash deals for a 2 bed 2 bath luxury condo in fort lauderdale and miami are money for the long term (where they are otherwise selling for 225-250k lol)
I've really come full circle on the whole strategic foreclosure issue. In the beginning, my knee-jerk reaction was that people making a business decision to default on a legal debt was morally reprehensible. Now, I totally get it. In fact, in the course of my research, I've found that a strategic default clause (for lack of a better term) is written into most commercial real estate purchases. The lenders just kept it out of residential mortgages to put more pressure on homeowners to pay.
If the banks aren't willing to fulfill their obligations, I don't see why homeowners should be expected to.
I have to agree. In my mind this whole mess comes back on the underwriting. If as a lender if you intentionally underwrite garbage, you deserve what's coming. If you buy or package paper that I wouldn't use to wipe my ass and you deserve what's coming. If you're entire risk mitigation strategy revolves around foreclosing and selling properties at a profit, you deserve what's coming.
Karma is a bitch and you get what is coming to you. There is no question in my mind that the banks were at fault for underwriting terrible mortgages. My question: Could the banks have dealt with both defaults and foreclosures with an entirely different strategy? I've heard that Mortgage Insurance companies have been stressing "loss mitigation" efforts (aka sending trained employees to customers' homes and devising plans to help said customer stay in their home and pay off their mortgage (yes, it's sad they can't figure this out on their own)) and that these efforts have made a significant impact. Obviously, it is in the interests of a Mortgage Insurance company to keep a customer in their home, but do you think employing similar "loss mitigation" efforts instead of forging foreclosure documents would have A) been in the interest of the bank and B) saved the banks' image?
Emotions during business decisions are what banks and companies rely on. Walking away from a mortgage is as morally wrong as selling a stock you lost money in. Cut your loses.
I have no moral obligations from walking away from an underwater house. Banks made bad loans because they were generating good fees. Time to live with those decisions.
I see home prices heading lower, lower, lower. No amount of QE is going to prop prices up and I think in a year or two, the risk premiums in RE, particularly in Florida and Cali (bonus points if the state defaults) will be absurd. Major props to Massachusetts for the Ibanez decision by the way, it's hard to believe that a few months ago some rats in congress were trying to pass a bill protecting the robosigning, rocket-docket complex we're now dealing with.
@dshin525
As bad as that is (and that example is really bad), the burden still lies with underwriting in my book. What business does a bank have writing NINA loans anyway? Pretty much a clear violation of the fiduciary responsibility to the bank's investors (even though I know those investors were clamoring for more). And a 620 credit score? Are you shitting me?
Everyone is guilty here, there's no doubt about that. But the banks carry the biggest share of the blame, by a wide margin.
Obviously my perspective is a little biased since my I have the industry perspective.
I do agree that burden lies with underwriting....but in their defense, when the underwriting guideline was: "FICO > 620, approved for NINA", you cant really blame them for approving these loans. Also...I recall putting good credit borrowers who could have easily qualified for a conventional loan into NINA b/c they closed twice as fast (since there is nothing to verify). BUT we always cut costs/rates so that it was basically identical to what it would have been if we went the conventional route. We could do this b/c the revenue on the NINA loans was 2-3 times that of agency (fannie, freddie) loans.
And also just to clarify one thing...when people hear NINA, SIVA...people automatically think "sub prime", neg ams, arms with pre-payment penalties, etc...and this isnt always the case. The NINA product we did was a standard 30 yr fixed with higher rates and fees to compensate for the add'l risk associated with these loans. NINA/SIVA is simply an underwriting method so to speak, not an actual type of a loan.
First off, I see housing prices decreasing another 10-ish% before bottoming out mid-2012. As people have mentioned, there are WAYYY too many foreclosed housing sitting there (shadow invetory).
Congress passed a law a couple months ago that makes it harder for people to challenge improper foreclosures. This law has not been signed by Obama yet, but could prove to be a major influence moving forward (assuming it gets signed soon).
Either way, I don't personally like the idea of a strategic default, but can understand where one would come to that conlcusion.
Both strategic default and the foreclosure crisis play on two sides on the housing market. I have been watching the two closely for a while but will use an even more watchful eye in 2011- Iceberg ahead, captain!
I think we are going to see a continued drop in the housing market. We still have another 20% to go before we start hitting the historical price trendline. I am not sure if we will get to that point, but before things get any better, the job market needs to get better, and at the same time, these unsustainably low interest rates need to stay put. Even with 4% interest rates, the market is falling.
And you know what? There are two GIANT elephants in the room that no one is talking about- Fannie and Freddie. These firms are by any definition insolvent. These entities are essentially an undercover stimulus program by the government. I can't seem to find the exact figures right now, but since the housing crisis started, Fannie and Freddie have backed more than 80% of the loans out there. In other words, they are the housing market, and things would be very bad if they were not in the picture. These two are going to require a massive bailout at some point, but no one seems to be taking much notice.
I still think we still have quite a ways to go before this war is over.
The actual figure is closer to 97%. In other words, the private mortgage market (non-Fannie or Freddie) comprises only about 3% of mortgages originated today.
I thought it was that high, but the number seemed too absurd to put in there without citing it, so I put 80% to be sure I was correct.
That makes things a lot scarier. Almost every single house sold is done through a completely bankrupt entity.
Thanks daddy government. Thanks for Fannie and Freddie which we will pay for, forever, with our taxes.
It's rare I get a bunch of comments that I can't disagree with at all, but I do think that all of you guys have ignored one potentially calamitous caveat.
Namely, with everyone pissed about the situation and things rapidly not improving.
What do we do about people who are not under water and decide to try to game the situation to their favor?
I mean, after all...can we really blame anyone at this point who decides to adopt the "fuck it, they're doing it, why shouldn't I?" worldview.
I still haven't read one single piece anywhere adjusting this very issue. With healthcare, sovereign default potential in several states, this housing mess is just another drop in an already leaky bucket.
It seemed that back in 2008 people were at least ready to talk about facing these issues, two years later...they're not gone, they've just gotten worse.
Is there a straw? Where's the camel's back? I know there isn't an answer, but can the presses keep printing long enough to cover what has gone from next week, to next month, to next year, to now possibly... next decade ...
I just don't know...
Hmm
Maybe 97% when talking about Fannie, Freddie, FHA, VA and the Federal Home Loan Banks. Yeah, that's probably close. But Fannie and Freddie don't back or finance 97% of mortgages.
Correct. 97% from GSE's of one type or another. Nice catch.
At my firm, 100% of our business is fannie/freddie/fha/va
Kinda scary when i think about it. Is fannie/freddie sustainable in it's current form? I recall reading something about the costs to keep them afloat could rise as high as $150 billion (I could be wrong about this figure...but I am pretty certain it was > $100B).
If they were to become unwound, will the private markets have the capacity to absorb it? My opinion is it will be a huge cluster f***, rates will shoot through the roof, purchase/refinance activity will come to a standstill...basically the housing market will be non-existent. The other option is the gov't taking over the housing market (as if they haven't already I suppose)
Ultimately given time, things may get figured out...but the current situation is such a calamity that any add'l friction may just exacerbate the problem even more and may not able to recover.
So let's recap. ~97% of mortgages outstanding are owned by insolvent entities, which happen to be government sponsored.
Nope...we are not socialist at all...not at all...
All is well citizen, remain calm.
Add to that the fact that Fannie and Freddie were used to bail out BofA in the putback thing, there is just way too much of a mess in the real estate game right now for things to look up anytime soon.
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