A good friend of mine in California is having trouble making payments on her house she bought in 2005-ish - yeah, perfect timing. She paid about $280K (she put 20% down I think), but it's now worth about $90K less.

She'd been making the payments - she's a small business owner struggling to get by, but her business is surviving, and she was able to make the payments...until the bank noticed an "error" in the original lending documents about her income. For some reason, they used a misstatement of her actual income as an excuse to raise her monthly payment by a few hundred bucks (from $1400/month to about $1600/month). Whether or not that's fair to my friend, that makes the payment almost impossible to make.

She's tried to renegotiate her mortgage and payment amount with the bank. They have refused to negotiate with her at all, saying that there is a long list of people ahead of her who haven't made payments in a YEAR!!! (And they are still in their homes, according to my friend.)

At first my friend felt compelled to try to keep making the higher payments, because she didn't want to feel like a deadbeat. But now she's feeling stupid for making them at all. Why should she struggle to make this higher payment when her neighbors are making none and still in their homes??? (And at the top of the list for renegotiation.) So, as of January 1, she stopping making payments. Now the bank is getting $1600/month less from someone else.

My friend isn't sure if she should even bother trying to stay in the house - she's willing to let it go and accept the consequences (even though she put about $60K into it up front herself, so it's not just the bank losing money). In some sense, I can't blame her.

Anyway - this all seems symptomatic of the current housing crisis and the perversity of being punished (in a sense) for doing the right thing but treated better if you, say, stop making payments on your home. Any solution would seem to need to address fundamental issues like my friend's.

(And I don't think Obama's proposed new foreclosure program would apply to her.)

What do you think? What if anything should be done about the mortgage crisis in America? Or should we just let everyone foreclose and let the banks go down the tubes with them?

" What if anything should be done about the mortgage crisis in America? Or should we just let everyone foreclose and let the banks go down the tubes with them?"

Well, for the average homeowner, about 60% of their net wealth is in the property. If we just foreclose on everyone and let the banks collapse alongside, we will be at 1929 all over again. The domino effect would be catastrophic.

We really need to police the mortgage industry, and insist on tighter requirements for lenders, so they don't screw the borrowers.

Brianl: We really need to police the mortgage industry, and insist on tighter requirements for lenders, so they don't screw the borrowers.

I don't disagree, but first of all, I think the lenders themselves have already done that (my parents recently tried to get a mortgage despite having amazing credit and they had a really rough time getting a loan - lots of hoops to jump through).

And secondly, tightening requirements now doesn't fix the problem for the existing homeowners facing foreclosure.

I personally think it's going to take trillions of dollars pumped into the system by the US government to stabilize the housing market. It's a lot of pain that most people don't want to deal with, but I fear it may be inevitable.

They are doing that NOW, yes. Now it's the polar opposite Andrew, people with outstanding credit, the responsible ones, are getting screwed because largely of the greed of the lenders in the past.

You're right, we might have to subsidize the housing market. I HATE that thought, but the alternative is bad news.

Don't think it's better we do this now rather than putting it off while things get worse and worse, while more and more jobs get shed? It's like putting off surgery longer and longer while you get sicker, hoping you will recover on your own...

Let's get something straight here: The greed is not limited to the lenders. Remember, if there was no demand for the loans people were taking out, nobody would have offered them. And, no one is ever forced to buy a home or refi a loan. It's a voluntary action. The bulk of the people in trouble right now are in trouble because of their own greed, not the greed of the lender. They had the choice to do the straight and narrow loans that had fixed interest rates, required down payments, and required income to be documented. But, it was a lot easier to take the path of least resistance AND get that larger home. While there are plenty of scumbags out there that duped borrowers, they are the minority in this mess. Most duped themselves and have no one to blame but themselves.

As for tightening the requirements, that's already happened. Down payments are required, as is income and asset documentation. Debt to income ratios are tighter and many loopholes have been closed. Mortgage insurance companies are limiting what they will insure using tighter guidelines. Credit score requirements are higher and lower scores now pay higher rates and fees. The mortgage market has adjusted, almost too far to the point they are now causing some of their own pain.

What to do? If it was my call, I'd institute a $25K tax credit to ANY home buyer as long as the home is owner occupied and is not sold for 3 years. I would use the rest of the money to purchase billions more in mortgage backed securities which would push rates lower, perhaps down to 4%. Both of these actions would stimulate the sale of homes, thereby stopping the free fall in prices and allowing those that are hopeless to get out of their house they never should have been in. I'm more or less against bailing people out, as most of them are a lost cause. The shit has to wash out of the system and the entire industry will have to reset. Yes, there will be losers, and those losers will be the speculators, cheaters, and those that were living beyond their means during the boom years and used their home as an ATM. Let them lose and allow new blood to come in and take over.

The bulk of the people in trouble right now are in trouble because of their own greed, not the greed of the lender.

I think it's both of their faults.

Sure, the buyer should have reigned in their desire for a house they can't afford, AND the lender should have been more diligent in screening the applications.

I like your suggestion of the $25K tax credit.

...as most of them are a lost cause...

I don't buy that. sure, some are, but I don't agree that most are. You can find deadbeats in any situation.

There are a lot of good people that have lost their jobs and now can't afford their house. Even if it was well within their means when they bought it.

50% of modified loans become delinquent within 6 months: http://www.washingtonpost.com/wp-dyn/content/article/2009/02/02/AR2009020203163. html

And when I say lost cause, what I meant to say is that they couldn't afford the loan even with a 1% interest rate. Those people need to face reality.

"There are a lot of good people that have lost their jobs and now can't afford their house. Even if it was well within their means when they bought it."

Yes, this is true, but the vast majority that are having troubles bit off more than they could chew. All you have to do is look at the foreclosure rate between subprime loans and FHA/Fannie/Freddie loans.

And why is that?

Because wages are flat, while costs and risk continue to rise.

This is exactly what happened to me. It's still happening. I walked, and managed to short sell. Covered the bank, but lost the equity. Some of that was hard dollars too, not just value... ;(

Anyway, we've scaled back hard. Thought why not? It's a good time, things are tough, so here we are, and that tide keeps rising!

I cut by nearly half! And it's catching up, with FOOD being the biggest rise, energy a close second.

Honestly, we need both jobs and home ownership to improve. Keep people in homes if it makes sense, but also get some jobs out there, and over the longer term boost the buying power per hour worked. This is killing people. Even modest means, living small people!

If $200 makes a payment impossible, that's tight! Really tight! A small bump in food, energy, something, and it's over. That's too tight, and a whole lot of people that bought in, with a nice pad on their income, you know the right ratios and all that, have been squeezed right to the edge.

I hate to say this too, but given where things are at, 90K is one hell of a catch up. I would absolutely walk, short sell it, and scale back, just like I did.

When things improve, maybe bank a little, reset, and try it again, if that makes sense.

That's exactly what I'm doing. I think it was the right choice all things considered.

My home value dropped about half that much. I had a similar amount of equity in the place. With that much equity, she will be at the front of the short sell list. A good agent can get it done. Many people doing that are in to nearly the home value, and it's a long haul.

I don't like the loss, but having liquid cash each month right now is very important, because I don't want additional debt, and the medical is brutal to catch up.

Some wheeling and dealing there actually netted me a significant discount, bringing the whole thing about even. I could have done way worse.

Just FYI, if she is gonna walk, let her know to just get out of the house. Don't pay, get a rent scene, pay stuff off with the 3 months of liquid dollars, and start the process to short sell the minute she is out.

Being out of the house, frees it for an immediate move in, and will trigger the lender to just do it. An agent can get an offer or two lobbed in to start the process. Also, it can be listed for a modest profit at the same time.

Maybe she gets lucky and pockets a few bucks, maybe she just gets clear of the place. What happened with me, is I just didn't pay anymore. We sold with enough to cover the bank anyway, even sans the payments. I got liquid dollars to move and reset with, they got covered from the short sell and equity. It all worked nicely.

I flat out told them that was the plan too. If they were gonna come out of it whole, their best move was to deal and help make the sale. The quicker the better. I maintained the house, they didn't get in the way of a short sell, and now they've converted those dollars, and somebody is in the home.

Maybe they can pay. At least the bank didn't lose hard dollars on me.

If a rent scene is less, those extra dollars can be put to good use, right now, today. I'm using them to pay down the ugly medical. Didn't have credit card stuff, so that's good.

In about another year, maybe less, I won't actually have any debt left. So then, save, then think about it again in the future. Given where I was with the loss in house value, I'm up in the end, with just money in the bank and the modest interest return on that.

Way better scene. Glad I did it. Costs are probably not through rising. It's gonna be ugly, but at least I'm not seeing added debt over it, and my income is stable. When things pick up, costs will drop, and I'm likely to see a gain in income. Usually do.

From there, it's not a long climb back into a good scene. Total reset.

As soon as the lender knows absolutely a short sell is going to happen, they will deal. The quicker the better. That means being out of the house, and an agent on task, and in contact with the lender. That all takes about a month to get rolling.

From there, you've got liquid dollars each month, so use them wisely!

Just curious, you said you did a short sale, but the bank was made whole? The definition of a short sale is when the bank accepts less than what is owed and lets the borrower off the hook.

If you ask me, the advice is different for CA. I'd quit paying and stay as long as possible. With that amount of equity loss already in place, it kinda forces your move. Something will have to happen, and no matter the choice, you will walk away with ruined credit and not a red cent of equity. This is guaranteed no matter what path. That equity will never be gained back, not for 10-15 years. Why bother to pay each month when it's going towards an eventual nothing? Stay for free as long as you can and use your money to pay down other debts or find a way to save cash where the bank can't get to it. I'm sure that in CA you could probably stick around rent free for 2 years before you get booted. Use that time to build up your 401K, nobody can touch that no matter what!

Absolutely they were. That was a part of my decision to do it.

I must say though, given the pickle I was in, I would have walked anyway, whole or not, but I did my part to help make it happen. I needed liquid cash more than I did to keep equity that may well have evaporated.

Oh, and I agree with you about staying as long as possible. It's all about what her options are. Personally, I wanted to get rid of the home, and cause as little grief as I could.

If I wanted to, I could have not paid, listed it, then just stayed in the home, using a few of the dollars to prolong the process!!

I had a rental option that was cheap ass (I helped a family member buy a duplex, so it's one investment that paid off huge!!) Was easy to move, so I just did.

If you are in the home, it's not a "short sale" really. At least that's the criteria my lender applied to the process. That was one qualifier. If you were in the home, then that's a full on foreclosure. You can still sell, but they are planning on having to forcefully evict you from the home.

Law on this varies too. In some states, the balance owed from the short sell is still on you. In others, like this one, it's not!

Additionally, there is a moritorium on taxes on forgiven debts in place right now. I think it runs through 2010, making a total walk possible in a lot of places.

Banks don't want this, we don't want this, so it's in the best interests of everybody to just deal, and get that property paying again.

That's what I did.

I did though, send written notice to the lender that I was not going to pay *anything* at all, ever again. At that time, they offered either to foreclose (stupid), or I could sign over my interest, leaving them the home plus equity (kind of stupid, because that's a huge credit hit), or enter into the short sell process.

That meant, being outta the house having an agent and listing active, and to start it off, an offer on the table.

All of those things took about a month and a few days to get done. All the while, I had it listed at a modest profit for me, leaving the bank with only the principle to pay off. They were not getting any return on those dollars, from the moment I walked, but I was also losing my ass, so even steven.

Sold it for that amount too. They got their hard dollars back, and we both didn't get any return.

That's just how it is.

With the short sell, having some equity means being at a lower price, meaning a faster sell.

Also, some areas are in a total mess. Take Vegas, for example. I know people there looking at houses for 50K, that were once $150K or higher!

All depends on the region. Here in PDX, it's possible to walk, and leave the bank in fair shape. Not everyone is going to be able to do that, but some are. Just depends on a lot of things.

I do believe your definition is correct. Technically, the lender didn't see value from the loan, and they took a loss on some fees and a payment or two. They got nearly all of it though, in my case.

I could have been a lot uglier, and they would have gotten less, but what's the point? The sooner I start healing, the sooner they do too, so let's get after it.

In the case of the woman staying as long as possible, the lender will get more hosed on that deal, as the pressure to sell and others selling will drive the price down to their hard dollar amount, and below.

Being outta the house, means immediate move in, and some flexibility on pricing. Double list! Short sell it, and list it. First some first serve!

Andrew, what's the name of your friend's bank?

Andrew--Your friend needs to talk to a BK atty. ASAP. There is some things a BK can do to help poeple. It puts a third party between her and the bank. Someone the bank has to listen to.
Also she should NOT leave the house. If someone copper mines the house it distroys its value. Regards: Steve.

KSKD, it sounds like you did a "deed in lieu of foreclosure", not a short sale.
http://en.wikipedia.org/wiki/Deed_in_lieu_of_foreclosure

No. I did a short sale. Went through all the paper work associated with a sale. HUD, escrow, the whole deal.

What happens is when you get offers, the bank will then work with those people to reach a sale price that is acceptable, with your agent working to facilitate that.

There is an absolutely HUGE inventory right now. If somebody wants to sell for market value, they are gonna wait a while, possibly a year, unless the property is significant some how.

So then, if a person leaves, and makes it very clear they are not going to pay, the bank then has the choice to deal with those who can (which is what my agent and I got to happen --She's good), or go the long route and do a full foreclosure.

Going the full route is costly, and it takes time, and time is money.

To clarify how this works, consider a 100K loan. Let's say the payment on that is $1000, just for grins.

Let's also say the house is worth $120K.

Buyer has 20K into the home. Not enough to stay for, and both parties know it.

If the buyer walks, and the bank does their foreclosure, legal might cost them $5K. If it takes 6 months, then it's another 6K, for a total of 11K, and that's assuming auction will deliver the remaining value.

If the buyer decides to the deed in lieu, they save most of their legal, but still have to sell the home. In this case, let's say that 5K buys 5 months. If the property is in good shape, that's probably gonna fly.

If the buyer does not do the deed, but instead wants to short sell, then the bank is left with only the choice of forcing the matter through foreclosure, or dealing with the offers on the table.

So then, on a $100K loan, a sell for 90K, that happens quick is a deal! They don't get their return, but they do get their hard dollars back, and they get them quick, meaning they can put them to work and cut their losses.

In some states, the home owner (sorry, not buyer) can be held liable for any amount not covered by the short sell. Oregon is not one of those states, meaning a home owner that walks here, really does put the pressure on the bank to deal, as they are getting nothing from that buyer, after they choose to walk.

I did the research on this and chose the short sale, and declined the deed. I did it because I wanted to share that loss, and see somebody get the home that might have a better shot.

If I have to lose my equity, I'm coming away from the thing free and clear.

At all times during the sale process, they did have the option of actually modifying the loan to make more sense. My income would have permitted that, though with things continuing to rise, I'm not sure I would have followed through on it longer term. I would have entertained the new loan terms, paid some and left the listing on the house. Maybe not. It's a long inventory right now.


So, the property was listed at a very modest price above the actual value the bank was owed, plus agent fees, and short sell offers were entertained at the same time, and I was out of the home.

(I kept an eye on it, would stay in it, from time to time, and had neighbors be there often so it does not look abandoned. That was a risk, but I've replacement insurance for that, so who cares?)

The dynamic was then me being liquid that very month I made the decision. The bank could either grow tired of waiting and pay legal and take the home, or entertain the offers, or a favorable buyer would be interested, and it would close that way.

When pressured by the lender to do the deed, I outlined that exact dynamic and let them know the nicer they were about it, the less of a loss they would take, and that's the end of it.

Sold in 5 months, I think, and all in all a sweet deal for them, given the alternatives.

My point in telling this story is that banks are taking it hard. I do not advocate people just dumping homes, but I also think people should take care of themselves, dig in for the long haul and keep their families covered.

This was the best way to do that.

Not to belabor the point, but if you did a short sale, the bank was not made "whole" and did not get back all their hard dollars. The home was sold for less than what was owed on it and the difference between the amount owed and the amount netted after realtor fees was eaten by the lender.

Example: $200K is owed on the mortgage, home sells for $180K, net is $169,200 after realtor fees, lender eats $30,800 and former home owner walks away with nothing but likely has ruined their credit as a result.

They were made plenty whole, all things considered. I sure as hell have no worries about that. And I absolutely know they have no worries about me either.

They did collect the interest dollars for a time. The difference between what their hard dollars cost them and the rate I paid equals hard dollars they collected. Can't forget that, now can we? I sure didn't.

So then, if they have collected that (and they did), and the home sold for a bit less than what was owed (and it did), the two together equal (in my case) their hard dollars.

What they didn't get was their projected return, and neither did I, and I stated that above.

If one considers time to be money (and I do), then the whole affair was a loss for both parties. I no longer have the hard dollars I invested in the home, and they didn't get their projected return for the money they invested.

They do however actually have pretty much all of those dollars available to invest again. I also have my ability to work and skills to invest in like kind.

Actually, if I add it up, they probably got some minor league return. And again, that's roughly equal as well as I've seen considerable value from having liquid dollars available to me.

That's equitable all things considered.

Given what I have learned about this whole mess, this is absolutely a shared burden. Banks wanted to get access to the more sexy investment bank profits. These have largely proven to be funny money, and if you don't believe that, just keep a close eye on the derivatives market over the next coupla years.

Government believed that deregulation was the answer to our wealth woes, when it really was 30 years of supply side economic policy coupled with trade agreements that wiped out our ability to contribute to our own well being.

Many people entertained both life styles and home ownership deals that were not viable. Living on credit, using the house as an ATM every few years, you name it. It's ugly.

Now, I didn't actually do the last one. Never, ever have. And I'm pissed at the loss. I'm even more pissed over the state of health care and jobs. I am quite pleased that I didn't have an assload of credit card stuff to deal with in addition to the mess so far.

I've a reset and so do they. I could have very easily made it a whole lot worse, but didn't. There was no reason to.

The window is closing on the Democrats legislated income tax moratorium on taxes owned on forgiven debts (and that's fucked up and should be another thread I think that's usury, coupled with the draconian bankruptcy law we have now), and the law here in Oregon lets me off the hook for any balance owed.

The reality of that is people can just walk. They can shut it down, mail in the keys and call it all good. I would have had a MUCH easier time of things had I done that. Would have been a few thousand more up too.

If I had been in just a bit more trouble, I would have absolutely gone there. Just didn't quite have to. Came close though. Too close.

Credit is a non-issue for me. Long ago, I chose not to live by the score. I won't EVER live by the score. Don't need to, don't want too. It's important to me that I don't.

Doing so is part of the problem this nation has! Instead of finding more creative ways to put off the burdens of life, we really ought to return to where we work hard, get paid well, and avoid most of that issue.

That is exactly what I have done my entire life.

When the time comes, I'll be able to document this and get a loan if I want to. There are too many people out there that got hosed in this mess, that were doing fine otherwise, for this not to be the case. I'm one of them.

And let's face it, they will want to write loans. Can't make the money otherwise. I won't take one until I'm ready either. No sense in abusing the thing.

I've already done my documentation, and it's filed away. Had we not gotten bit on health care, life would be good, and that's the reality, and I can show that cold.

If lenders are interested in cutting their risk (and after this, I would bet they are), then they too can consider backing common sense economic policy. Until they do, trust me when I say I could really care less about how "whole" they ended up out of this deal.

The primary reason for my action was not so much to make sure the bank got all they should have gotten. It was for my good neighbors struggling with their own deals. An auction sale might lower their value. If the house was vacant for too long, that has the same impact.

This went fairly quickly, and delivered enough dollars for all parties to move on.

When somebody makes a loan, they take on risk. The reverse is also true, having taken a loan there is risk as well. Where I have control of it, I keep risk low. The banks didn't do the same, or we would not have the derivative mess we have right now. Something to think about no?

At the end of the day, I value people more than I do dollars, and enough was enough. Having reached that point, my contract clearly provided for the means that I used, so I exercised those means. Life is only so long.

That's why they are in there. If it's "just business" for them to pursue the aggressive tactics they have (and this is not all lenders, but a whole bunch of them), then it's "just business" when I look at the economics surrounding that home, my chance at a return, and decide to walk on it.

I want my best chance at a return just like they do. They would consider the same things, in the same way.

Many people have spoken to me about "honoring obligations", and have tried to make me feel guilty for leveraging the terms of the deal.

Tough shit. Terms are terms, and sometimes things happen. That is exactly what the terms are for. That is why I do a deal with an attorney each time, so I understand ALL the terms, just in case SHIT HAPPENS.

And that's a problem too. Many people just don't. Cuts both ways too. People that are ignorant of their options can be pressured. That's happening right now. Well, guess what? People ignorant of their options also sign shitty deals.

Cuts both ways man.

This is the kind of shit we get when we encourage a high risk, low wage environment for people. I had the higher risk, stuff happened, and the only saving grace for me really is that I don't have a low wage.

(and that's been a struggle too, requiring lots of personal investment to maintain and build on)

In my case, following through on that home meant living the majority of my productive adult life trying to catch up on a home to eventually get a modest return. No thanks.

I did the math on that too, and frankly, just eliminating all current debt, lowering risk, living small and saving for a while generates more in the short to mid-term.

I've never done a bankruptcy either. Don't plan to. Don't need to. I don't live on credit, so that's kind of a non-issue. Funny how that works.

Call the whole thing the KSKD stimulus package!

The opportunity cost for me was high as well! having saved and eliminated debt, I can very easily enter the market again at a far better time, thus having a very much improved shot at a return.

Given I like to have a significant amount down, this will not ever be a problem. I want the lower risk deal every single time. If I present that, there will be a taker. Always is, always will be.

Remember, it's just business. Either that goes both ways, or it doesn't. I didn't live above my means, nor did I have intent to go this way. Stuff happens.

Anyway, to get back on topic.

If I were in the position Andrew's friend is in, I would pay a bit of legal to sort out what options are available, then do the math to consider what the best returns are, then do what makes sense.

Obtain a good realtor, and a good attorney. Actually, the realtor can probably recommend somebody. Both of these people are worth their weight in gold right now. Just for knowing ALL the options, so solid choices can be made. That's the priority. Nothing else.

I do notice the legal firms advertising on the radio now. Good for them. People could use the help, and they will get it quicker if they have representation that's going to promote their best interests. The lender is NOT about that.

(which is why it's "just business")

If, after sorting that out, that means bagging on the home then bag on it! If that means renting, or selling, or some other thing, then that's what needs to be done.

Where the bank is in all of that really should be her absolute last concern. That's "just business". Cuts both ways.

Life is only so long. Given the same scenario, that is exactly what they would do. Having set that expectation then, it's pretty damn tough to not expect people to act on it.

Missing_kskd writes: If I were in the position Andrew's friend is in, I would pay a bit of legal to sort out what options are available, then do the math to consider what the best returns are, then do what makes sense.

My friend says she contacted a real estate attorney, but the attorney directed her to some sort of non-profit coalition which I guess is offering to talk to the bank for her (since my friend is broke at this point and can barely afford to hire anyone, anyway). So maybe that will help her situation - let's hope.

Yeah, let's hope!!

Maybe she's got some good options. What I just ended up going through was FUGLY. Maybe she can catch a break.