Mortgage too much? Join the crowd, walk away

[Laurent du Var]

Why, thank you Blondie - good info. My wife sometimes watches "Extreme makeover: home edition" and to me the speedy destruction and rebuilding amazes me. Over here houses were brick build before and now are poured concrete which isn't any good for heating or a/c purposes but faster to build and less expensive.     
   
For the Record : Laurent the Var has never missed a payment in his life and his home will be his in 17 years and has increased in value a whooping 30 % since its purchase 6 years ago.

Maybe they do it differently in France?   

I wish     the difference may be that banks over here insist on a 7 (?) % percent downpayment which have to be your economies (or your aunts) and not a loan/credit. All of a sudden you have a stake in the home and will likely not walk away from it to protect your investment. To me it looks that if you have no money and the bank grants you a loan or even better a sub because you have a bad record (wth?) it looks more like a lease/rent to me than a serious financing. Other than that we bail out banks all the time in Europe because guess what, people making money out of money for a living without looking
beyond the numbers and having absolute no concern for added value, are worthless imho.

Sigh, I wish I could express myself better in English but I'm getting there.

Of course a bank has the right to loan money and gain interest on it.
But that right should be null and void if they :

A) only grant you a loan to buy a certain house:  they insist on X amount for Y house which means that you're dependent on their approval, and they should take some responsability for it if the value of Y sinks, especially if they proceed to

B) lessen the value of Y considerably by their unsound lending practicing
    causing an economical crisis which can make you lose your job at the same time.

For me there is a direct connection here and I find it is high time to put names on the guilty and put them out of the money lending business and in prison instead  of spending a gazillion dollars on a bail out.
How is that fair ?
How comes a lot of people are saying:You signed the loan with your blood and must pay it back no matter what and don't find a word for banks who wrecked your economy, lessend the value of your life time savings and then stole your tax money ?    

I may be wrong but: Money has the incredible power of being used by you as you see fit
if you have it in your hands. To me that means economical freedom. A loan from a bank
meant to buy Y and nothing else could be like being chained to a sinking boat, the bank being the iceberg in time of crisis. 

  

[Doggy Daddy]

OT,FAM

Laurent the Var

Not familiar with the word.  What is a "Var?"

DD

[Laurent du Var]

Not familiar with OT,FAM.

I live in Saint Laurent-du-Var.

The Var is a river coming out of the French Sea alps right into the mediterrenean
sea next to my home.

http://en.wikipedia.org/wiki/Var_(river)

[Doggy Daddy]

I imagine nobody is familiar with OT,FAM since, like 87% of all statistics, it was made up on the spot.  Stands for: "Off Topic, For A Moment"

Thanks for the "Var" explanation.


DD

[Gewehr98]

they should take some responsability for it if the value of Y sinks

Why should the bank take responsibility for falling housing values?  They loaned the homeowner X amount of money to purchase a home, period.  They're not clairvoyant when it comes to rising and falling home values, nor should they be.  The homeowner signs on the dotted line stating they're assuming the responsibility for the amount loaned, and will repay the bank that very amount over the duration of the mortgage until it's paid off.  Nothing I see in mortgages has allowances for decreasing home values which would modify the amount owed.

[Tallpine]

We had to pay 15% down payment 

[Laurent du Var]

The bank should take responsability for the falling of the housing values, because they are causing it.  

They loaned the homeowner X amount of money to purchase not  a home they won't let you choose any home at random,
they lend you X amount of money to purchase the Y house, period. It is like you are going to the bank saying :I've
seen this or that home and I would like to buy it with your help. Then they'll say ok or they won't.
 
The decreased home values are a direct result of bad business dealings of the mortgage financers. The decreased home values are not due to fatalism, they are a direct result of irresponsable business conduct of the money lenders.    

I think of it like you'd buy a Volvo station wagon. You have no money but a steady income and you work at Starbucks.
Dealership guy helps you financing, everybody is happy.

One year later: Dealership guy goes nuts, he'll throw a brick through your Volvo windshield, cuts your tires and scraches your doors and so diminuishes the value of your car. He then goes to your place of work (Starbucks) and burns it down.

There you are, your car is a wreck, still worth something but in need of repair,  and you're unemployed.

The day after that : Volvo Dealership guy comes a knocking on  your door and insists on you keeping up your monthly
payments. And all of APS goes : yeah - You signed the contract !  

  

    

  

[Brad Johnson]

Of course a bank has the right to loan money and gain interest on it.
But that right should be null and void if they :

A) only grant you a loan to buy a certain house:  they insist on X amount for Y house which means that you're dependent on their approval, and they should take some responsability for it if the value of Y sinks, especially if they proceed to

B) lessen the value of Y considerably by their unsound lending practicing
    causing an economical crisis which can make you lose your job at the same time.

You are intermixing two distinctly seperate issues.

1) The banks are not forcing you to buy a certain house with the mortgage.  The mortgage approval is an independent process.  You can be fully approved for a mortgage before ever even looking at homes.  Conversly, you can have found the home and be under contract before ever applying for a mortgage (though unlikely, as these days anyone who agrees to an offer from a seller that isn't 100% pre-approved should have their head examined).  The only link between the mortgage and a specific property is that the property must appraise for at least the sales price.

2)  Unsound lending practices are not the problem with home values.  Consumer idiocy is.

Again, you are trying to make two things into one.


Let me ask you this... if you loaned your friend 1000 euros to buy some gold, but suddenly gold dropped and his purchase was now only worth 500 euros, would he still owe you 1000 euros?  Of course he would.  But using your logic he should be able to give you the gold (now worth only 500) and be able to walk away with no consequences.  After all, it was you who took the risk lending to him.  He didn't cause the gold to go down in price so he shouldn't be held accountable for the full amount because the investment is now lower in value.

They loaned the homeowner X amount of money to purchase not  a home they won't let you choose any home at random,

That might be the way it is in your country.  Not here.  Again, the loan approval process is independent of the home.  What home the buyer chooses is is limited only by the amount of money the lender will approve the buyer to borrow.

Brad

[Jamisjockey]

Simply put, you're wrong.  The banks did not cause the housing crisis, that is a misperception.  Did they contribute, certainly.  Idiot buyers caused it, spurred on by idiot lawmakers encouraging loans to people who shouldn't have gotten them in the first place. 
Speculation was out of control, everyone assumed there was a profit to be made.  Home buyers dove into the flipping and get rich quick craze.  It was not a growth rate that could be sustained.

[cassandra and sara's daddy]

theres a lil more gray area  we had some bank loan officers go to jail for being part and parcel to the fraud.   they had fool brought in and they dummied up the paperwork to run a ponzi scam of sorts                                                                                 

[Jamisjockey]

theres a lil more gray area  we had some bank loan officers go to jail for being part and parcel to the fraud.   they had fool brought in and they dummied up the paperwork to run a ponzi scam of sorts                                                                                 

They could find ways to pump the system now, even with the market down.  Thats irrelevant.

[Laurent du Var]

ok, in that case:  I apologize.

"If  the mortgage approval is an independent process.  You can be fully approved for a mortgage before ever even looking at homes."

So in that case the bank gives me a great amount of money which I'll spend on the home I see fit.  
... if you loaned your friend 1000 euros to buy some gold
Those are two questions:
If I loaned my friend 1000 Euros, he better pay me back the 1000 Euros plus interest.
If I loaned my friend  1000 Euros with the obligation to buy gold and nothing else, I should win or lose depending on the
ever changing price of gold.
If I ever loaned 1000 Euros to any guy  coming along asking for money so he can buy gold  which will lessen the rate of gold, because now everybody can and will buy it, I guess friend n°2 won't be happy and I am on his side.

[Brad Johnson]

... if you loaned your friend 1000 euros to buy some gold
Those are two questions:
If I loaned my friend 1000 Euros, he better pay me back the 1000 Euros plus interest.

Oh... now there are conditions on the loan? 

I should win or lose depending on the ever changing price of gold.

Again, you are putting the cart before the horse.  You didn't hold him at gunpoint and say "You will take this money but only buy gold with it".  He (or she) came to you and asked for the money, which you lent to them after making sure they could pay it back.  You, as the lender, took a chance on the person, not the object.  The lien against the object exists only to secure your interests in case of default.  As the lender you are due your just returns no matter what happens to the market value of the object purchased buy the borrow.  Should gold double and your friend end up with 2000 euros, will you require he split the gain with you?  After all, if you expect to share in the loss you should also share in the benefits.

By the way, what you are describing is called 'net-terms' loan.  Those type loans do exist but tend to be a bit more esoteric in nature and complicated in execution.  The business world shuns them for more straightforward products.  The first industry that comes to mind when I think of them is movies.  They will put up production funds in exchange for certain ownership rights and a portion of the gross or net box office proceeds.

Brad

[Jimmy Dean]

Let me ask you this... if you loaned your friend 1000 euros to buy some gold, but suddenly gold dropped and his purchase was now only worth 500 euros, would he still owe you 1000 euros?  Of course he would.  But using your logic he should be able to give you the gold (now worth only 500) and be able to walk away with no consequences.  After all, it was you who took the risk lending to him.  He didn't cause the gold to go down in price so he shouldn't be held accountable for the full amount because the investment is now lower in value.




Brad

Here is the question though.   If you are requiring him to pay back the 1000 Euros as part of the contract, but right after he buys his gold, you flood the market with gold that you hold, in essence, YOU are the one causing the value of the gold to drop, then there is a real gray issue.  His gold is now worth crap, and it is your fault.

Maybe I am thinking wrong here BUT, follow me on this.

I loan 1000¤   (¤ is the symbol denoting currency, non-specific)  to 10 differant people for the purpose of buying gold.   You own the gold....so,  you are now out 10 units of gold, have the same amount of cash you started with, and these 10 people owe you 1000¤ each (which is equivalent to 10 units of gold)  You are breaking even  (this is before we count in the interest they owe you on that loan)   Now, you sell 10 units of gold to 10 other people for the same 1000¤, flooding the market, dropping the price of gold down to 500¤.  The 10 people who borrowed money to buy your gold cannot get their money back for their gold now,  and their ability to pay on that loan is threatened.  You offer them the deal that you will pay them 150% the value of their gold for part of their loan payment,  i.e.  you will buy that gold back for 750¤  (which is a good deal for them, as that is alot better than 500¤) and that 750¤ gets applied to what they owe you.   Each owes you 250¤ still.   After you get paid back fully,  you now have  10 units of gold, and 22,500¤.   Now that you have taken half the gold off the market, the value of gold goes up to 750¤,  you buy back your 10 units you had sold to the folks who did not borrow money from you for this price,  you now have 20 units of gold and 15,000¤.   You started with 20 units and 10000¤......so now you're up some money...hmmmmmnew busines model :)

[Northwoods]

I loan 1000¤   (¤ is the symbol denoting currency, non-specific)  to 10 differant people for the purpose of buying gold.   You own the gold....so,  you are now out 10 units of gold, have the same amount of cash you started with, and these 10 people owe you 1000¤ each (which is equivalent to 10 units of gold)  You are breaking even  (this is before we count in the interest they owe you on that loan)   Now, you sell 10 units of gold to 10 other people for the same 1000¤, flooding the market, dropping the price of gold down to 500¤.  The 10 people who borrowed money to buy your gold cannot get their money back for their gold now,  and their ability to pay on that loan is threatened.  You offer them the deal that you will pay them 150% the value of their gold for part of their loan payment,  i.e.  you will buy that gold back for 750¤  (which is a good deal for them, as that is alot better than 500¤) and that 750¤ gets applied to what they owe you.   Each owes you 250¤ still.   After you get paid back fully,  you now have  10 units of gold, and 22,500¤.   Now that you have taken half the gold off the market, the value of gold goes up to 750¤,  you buy back your 10 units you had sold to the folks who did not borrow money from you for this price,  you now have 20 units of gold and 15,000¤.   You started with 20 units and 10000¤......so now you're up some money...hmmmmmnew busines model :)

That kind of market manipulation can, and has gotten people to change into black and white stripped outfits.  One name for a variant on that it is pump-and-dump.

[De Selby]

A bank that lends on an asset which is going to plummet in value is just as culpable as the consumer who borrows to buy it.  And it also has financial "experts" who are supposed to estimate those sorts of things, as opposed to consumers who are generally not in the business of doing long-term asset pricing.

[Laurent du Var]

 You started with 20 units and 10000¤......so now you're up some money...hmmmmmnew busines model :)

not so much - reminds me of short selling, you don't even need to own the gold just borrow it :

Wiki;
In finance, short selling (also known as shorting or going short) is the practice of selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as he will pay less to buy the assets than he received on selling them. Conversely, the short seller will incur a loss if the price of the assets rises. Other costs of shorting may include a fee for borrowing the assets and payment of any dividends paid on the borrowed assets. Shorting and going short also refer to entering into any derivative or other contract

"under which the investor profits from a fall in the value of an asset." 

Yes SS, not only do they lend on assets which will plummet in value, they are directly responsable for the loss by their unsound business practices.



 

[makattak]

not so much - reminds me of short selling, you don't even need to own the gold just borrow it :

Wiki;
In finance, short selling (also known as shorting or going short) is the practice of selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as he will pay less to buy the assets than he received on selling them. Conversely, the short seller will incur a loss if the price of the assets rises. Other costs of shorting may include a fee for borrowing the assets and payment of any dividends paid on the borrowed assets. Shorting and going short also refer to entering into any derivative or other contract

"under which the investor profits from a fall in the value of an asset." 

Yes SS, not only do they lend on assets which will plummet in value, they are directly responsable for the loss by their unsound business practices.
 

Wow, so, if the house goes up in value, the bank makes a VERY small return (~6% right now) while the homeowner keeps the increase in the house price.

But, if the house goes down in value, the bank takes the loss.

Gee... that sounds like a great way to run a business.

Banks accept the small return because they are taking less risk. The owner is the one who is to benefit or suffer from wide swings in value.

Claiming the banks just have to eat the loss is a "heads I win, tails you lose" game.

It's also a great way to ensure banks won't lend money.

[Jamisjockey]

A bank that lends on an asset which is going to plummet in value is just as culpable as the consumer who borrows to buy it.  And it also has financial "experts" who are supposed to estimate those sorts of things, as opposed to consumers who are generally not in the business of doing long-term asset pricing.

May plummet in value, not will.  And when you're talking 30-40 year loans, the average expectation is the value will increase over that time period.

Plus, here's why you're wrong:  The loan isn't on the house.  The loan is to the individual, who then signs the house over as collateral.  The loan is not attached to the house, it is instead a lien against the house. 

If you take out a car loan, there is an understanding that the value of the vehicle WILL go down.  Yet you make payments on that in good faith.  Stop paying, the bank takes the vehicle. 

I still don’t get this whole “blame the bank” thing.  It’s ALWAYS been accepted that banks are in business to turn a profit.  That is assumption number one.  Assumption number two, is that if a deal is too good to be true, it probably is.  Let’s say the going loan rate is 6.5%.  You apply for a loan, but your credit is so shoddy that they approve you at 9.9%, with a 5 year arm to a minimum of 12.5%.  Would you take that deal?  Consumers ASSUMED that the home values would continue to rise.  So, thinking they could flip the house and take a tidy profit, they bought them. 

Now, plenty of banks out there were offering really bad products.  NINJA loans (no income verification), ARMS, Balloons, it goes on. 
Let’s make the comparison, though, to food.  If I’m running a grocery store, and all my products have expiration dates of tomorrow stamped on them, and you come in and buy $300 worth of groceries, who’s the idiot?  Me for selling a crappy product, or YOU for buying more food than you could possibly consume before it expires?
The rules of Buyer Beware are always in effect.  There are always scam artists out there, and they should be punished accordingly.  But when an ill-informed CONSUMER enters into a financial obligation with a bank offering a CRAPPY product, the CONSUMER is certainly at fault.
In today’s day and age, with access to information being so widespread in the western world, there is no excuse to be ill informed.  *expletive deleted*it, most of these people could have avoided problems with their loans simply by reading the documents they signed, and understanding that if the value of the home didn’t go up, they would still be making payments on the damn loan. 

[BrokenPaw]

One of the things I don't understand on the "the banks should bear the risk" side of the argument is the implication that the home's "loss of value" somehow affects the borrower's ability to pay.

The price of a house, like the price of any traded commodity, matters on two days: the day you buy it, and the day you sell it.  Everything in between is purely paper gain/loss[0], and has no bearing on the borrower's cash flow.

If the paper value of my house tanks today, tomorrow I will have the same job as I have today, so why is my "ability" to pay suddenly affected by the fluctuation in house prices?

If anything, a tanked housing market should make it easier for the borrower to pay, because if the appraised value of the house goes down, then property taxes on it will go down as well.

When I bought my house, it was for $n, back in 1999.  Four or five years ago, the guy across from me, with a comparable place but less land, sold for nearly $3n.  I recently considered refinancing, and had an appraisal done, and it came in at ~$2n.

Yet, throughout fluctuations of greater than 100% of the original purchase price, my monthly P&I payment somehow managed to say exactly the same! 

I've no sympathy for people who bought more house than they could afford, on an ARM, and are complaining about it now because they can't refi.  If they signed the papers, they assumed the risk. 

-BP

[0]  Leaving out things like property tax assessments on the appraised interim value of the house.

[Jamisjockey]

+1 to BP, with a caveat:

Some of the banks do deserve to eat the loss.  Specifically, the ones that did gimicks like NINJA loans.  Not making sure someone could actually pay a loan isn't really smart. 
But, like BP said, if you're making $xxx dollars a month, and your loan is $xxx dollars a month payment, and the house value falls, you should still be able to pay that.
Some people have legitimate reasons to stop paying.  There are also consequences to be paid for not paying your loan. 

[BrokenPaw]

Some of the banks do deserve to eat the loss.  Specifically, the ones that did gimicks like NINJA loans.  Not making sure someone could actually pay a loan isn't really smart. 

I seem to recall hearing reports of at least one lender who was preying on the fact that closing on a mortgage involves signing your name to about 40000 pieces of paper; they would hide documents for a pretty nasty ARM in the middle-bottom of the stack of papers for people who had requested a fixed-rate loan.  They were counting on people eventually getting tired of reading everything they were signing and going into autopilot.  After closing, >oops< the fixed-rate papers went into the shredder, and the signed ARM papers were retained.

I don't have a cite, but if I'm recalling correctly and someone was doing that, that's one situation where the lender should catch it in the teeth.  Yes, the borrowers should read what they sign, but the lender should not be actively trying to deceive.

When I close, I read every single page, and ask annoying questions, because I'm paranoid like that.

[Brad Johnson]

I seem to recall hearing reports of at least one lender who was preying on the fact that closing on a mortgage involves signing your name to about 40000 pieces of paper; they would hide documents for a pretty nasty ARM in the middle-bottom of the stack of papers for people who had requested a fixed-rate loan. 

There were.  They died in the first couple of weeks after the start of the mortgage mess.

Unfortunately the consumer also bears an equal share of the blame.  There is a federally required disclosure for rate and loan type that is signed at closing.  It specifically states the loan type, rate, and duration.  If the buyer is so uninterested in seeing to their own financial well-being that they miss that glaringly obvious page (which the title company usually makes a specific effort to point out) then my level of sympathy drops a couple of notches.

As for the "Blame the Bank" mentality, well, it's part of the social conditioning we've allowed upon ourselves.  Blame the fat cats, punish success, corportations kill business, whatever you want to call it, it's all the same.  People have allowed themselves to be duped into believing that any success comes at a cost to "the little guy" and it should be stopped via regulation, litigation, or legislation.  Pretty sad, really.  People want more than they have but will not hesitate to punish people who have actually made it happen.

Brad

[Laurent du Var]

Ok, I borrow money - I'll pay it back as long as I possibly can.
I totally agree on that and do so in real life.

If you walk away from your obligations while still being in good financial shape
on purpose, if your bank has not actively sabotaged the value of your house,
doesn't seem right to me either.

But here is the crisis caused by banks and housing bubbles, you lose your job and the bank gets the house. Period. What are you supposed to do? Sell your kidneys ? Every business transaction carries a risk which has to be shared by all parties involved.   

Can you say NINJA loan ? They borrow you money because you and they hope the value of bought object will rise - and when that doesn't happen only you have to carry the consequences, how could you possibly do that without any income or any assets?

And Brad you got to be kidding ? After the housing bubble and a 700 Billion Dollar bank bail out you're writing about "punishing success"? Let me ask one more question : How many borrowers will get how much money of the 700 billion Dollars which the successfull banks are getting from the government other than qualifying for another ninja loan ?

wiki:
The Emergency Economic Stabilization Act of 2008 (Division A of Pub.L. 110-343, enacted October 3, 2008), commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the subprime mortgage crisis authorizing the United States Secretary of the Treasury to spend up to US$700 billion to purchase distressed assets, especially mortgage-backed securities, and make capital injections into banks.

[makattak]

But here is the crisis caused by banks and housing bubbles, you lose your job and the bank gets the house. Period. What are you supposed to do? Sell your kidneys ? Every business transaction carries a risk which has to be shared by all parties involved.   

We are not talking about people unable to pay their mortgage.

We are talking about people choosing not to pay their mortgage. I understand that some people reach circumstances where they cannot fulfill their obligations. That is part of the risk a bank takes when lending.

What this article was talking about was "Walking away from your mortgage", i.e. you can pay it, but have decided it is not worth it to do so, so you stop paying it.