A New Wave of Defaults?

Bruce Krasting's picture

I have been working with a young couple for a year now. They have been
up against it. They look pretty typical. They bought an apartment with a
first mortgage and low down payment. Then they made improvements with a
HELOC. He lost his good job and now works for less. She works long
hours and they have a kid.

They are underwater on the 1st mortgage so the HELOC is worthless. Their
monthly cash flow including debt service has been negative for a long
time. They have been paying the mortgage(s) by drawing down more on the
HELOC.

I advised them a year ago to stop the madness. They tried to contact
their lenders for assistance but were told they did not qualify for a
re-financing, as they were current on their mortgage.

I told them to stop paying. But they would have none of that. They had
built up a credit rating that they were both very proud of. They did not
want to lose that. But more importantly they felt that walking on IOUs
was something that morally they could not do. I told them they were
nuts but that I was proud to know them.

I sent them a link to last week’s Barney Frank letter to the big banks
telling them to write down non performing second mortgages. I sent them
the link for the BoA story and their program to write down principal for
delinquent mortgage debt.

They called just now. They made up their minds. They will not pay either
the 1st or the 2nd this month. The “entrance fee” to getting the debt
relief they need is to not pay any longer. The cost will be a tarnished
credit. They no longer care.

Does this story mean anything in the Macro Big Picture of defaults? I am
certain that it does. A rising trend is about to become a rogue wave.

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Mr Lennon Hendrix's picture

Thank you to all posters on this thread. Your experience and understanding is what will guide America to the future. Please do not fight against each other outside of this little club, we are strong but there are many confused "people", as we must stand strong to face down the banks and government. I know that materialism sucked many into the Matrix; yes it is "their fault" for buying in, yet so tricky is the merchant! More than anything, this is a sad, sad state of the world. So remember, we are all in this together. This is our country, and we want it back!

williambanzai7's picture

A huge percentage of the people who signed underwater mortgages were simply incapable of understanding what they were getting into. They saw all their neighbors doing it, the banks encouraged and pushed it, the end result is not surprising.

I can't even count the number of times I received fliers for H.E. loans.

Now we have to listen to the banks tell us that a consumer finance agency is not needed.

Something is clearly needed.

You can't just blame the average man or woman on the street for this situation.

 

 

 

lawton's picture

Watch out if you are in Florida however as Florida is one of the states they can get a judgement against you for their losses on a foreclosure's sale (and even a short sell if you didnt make sure it was iron clad wording not to come after you for the loss). Banks (and collection firms) have just began to file on people who defaulted 2 years ago especially if they see you had good credit besides the mortgage suggesting their is wages to garnish and the rest for them. A lot of people are shocked by this here in Florida thinking the rules were the same as California and other states.

Bruce Krasting's picture

Guy I know in Fl had a no doc loan with a Merrill Lynch outfit (now dead). He called up and said, " I can't pay". They said, "When can you leave?. He said, "A week".

And so it went. He signed short sale papers and walked. Six months later nothing shows on his credit report. I doubt he will borrow to buy a house anytime soon. He is still broke. But two years from now? No problem.

 

lawton's picture

There has been newspaper articles on it here and the people were shocked when served with papers. They have started on some foreclosures and short sells from about 2 years ago that werent iron clad agreed to not come after you. My guess is they will expand their efforts especially if they think there is a dollar to get. Its a luck game in a way now. The banks are disgraceful imo.

trichotil's picture

also get all money out of any bank, if everyone did this it would bring it all down. pay any bills with postal money orders,  max out your credit cards buying metals from apmex and the like, tell visa to shove it, goad the collectors into breaking the law and profit nicely.

http://www.dallasobserver.com/2010-01-21/news/better-off-deadbeat-craig-...

really tempts me to trash my own stellar credit.

 

break the chains of materialism.

http://www.henrymakow.com/coping_with_crisis.html

usury has always been their most effective weapon, no wonder christ dissed the money changers. and no wonder why joomedia turns muslims into boogeymen, their laws forbid interest. the curse of usury:

http://www.islamic-awareness.org/History/usury.html

 

 

 

 

 

ozziindaus's picture

Islamic banks are gaining popularity in Australia. Rather than paying interest, the borrower simply pays a fair market rental rate that adjusts as the ownership stake increases. Note that subprime, zero down and ARM's are punishable by stoning (just kidding).

http://www.sbs.com.au/news/article/1193146/Crean-pushes-for-Islamic-banking

 

kevinearick's picture

print the money and do something constructive with it. try different things until something catches on. Just leave whatever you touch a little better than you found it and you will do a helluva lot better than the government.

don't worry about the detractors. if this process continues, all equities will fall by 75%, all the entitlement checks will halt, and nearly everyone is going to learn that they are dependent on the government transfer system in one way or another.

cut out all the middlemen.

provide low income housing, clean a park, provide security in a dangerous neighborhood, start a supply business, whatever you are particularly adapted to do that is not being done.

find real market demand not being met, anywhere, it's all over the place, and supply it better than anyone else can based on whatever unique skills you have or can develop.

sooner or later, your profit is going to intersect with declining asset values and you will be able to pay that mortgage. you can only go up; they can only go down.

tip e. canoe's picture

nice to see you back my friend

kevinearick's picture

we are at the point where script has to be printed, and better you than the Fed, for everyone.

kevinearick's picture

stay in the house. stop making payments. rent out the rooms. keep the money. grow a garden. grow some tobacco and pot if legal. cut back to part-time or quit your job. learn something about motor control. and get up to speed as quickly as possible on your next career.

you'll be doing yourself and the economy a huge favor.

kevinearick's picture

and get some exercise so we can dump the AMA as soon as possible. if you must see a doctor, pay cash to a doctor that only accepts cash, and refuses to add your data to the database.

been there done that's picture

I'm from Seattle. I met a new guy at work in late 06.He told me he bought an extra house AND an extra Condofor "investments". I gave him my stark raving bear bit.Long story short: He just stopped paying and gave up 50K already in in order not to lose his arm.More coming every day. Banks will roll over again soon enough.The MKT rally has been so obviously criminal that even people Iwork with are in disbelief. These are not people who read ZH  or any alt news.  FAZ should pop at some point. Lots of bodies near these bear ETFs.

 

Crab Cake's picture

Yeah, so Bruce, thanks....  I wasn't at work today, TBTF customer service.  Perhaps the one you mention.

Well, your story just put me back at my desk.

Yesterday morning first call I take is from an aging old lady, late 60's ish, and her husband finally broke down.  Sustainable long term illness with disability, turned dead and no disability.  She's working two jobs, after losing her one primary that paid well, to make ends meet on two different mortgages.  She is wailing and crying.  She had already spoken about a modification, and no dice because she is paying her mortgage on time and up do date.  I transferred her back to the department in question, sympathized, and then transferred.  Welcome to my world.

I get 20-30 calls a day that sound just like that one above, and ones much like your story too.  The good people of this country have no understanding that in most cases the house is the collateral on the loan.  Just walk the hell away if the lender won't bend.  Tell the owners of the loan to pound sand, and live a cash life.  Can't tell'em that though, I say, "Please speak to a lawyer for advice, and ask them about recourse provisions."  It's as far as I'm willing to prod the line, and I think it may catch up to me eventually. 

So, and also.

That BAC program is a bunch of shite.  It only applies to loans over 120% loan to value, and only a couple of ARM types.  This is almost no one who isn't already out of a home.  PR stunt.  It could open a can of worms though...

Well.  WTF.  Open the can of worms I say.  America, you listening?  If you want the fraud and lies to stop, dump your mortgage, no violent revolution necessary.  Stop complaining about your neighbor and join the game.  It's the fastest road to a jubilee, and or some sort a conclusion to this farcical game the gods of finance, monetary policy, and treasury are playing.

If you want your country back, dump your mortgage en masse.  It's the end of globalization, monetization, lots of corporations, and the federal government; pretty much all things anti middle class.  Yes you too can do it. 

anonnn's picture

 

What happened to the debtor's prison?

debtors' prisons were created by the rich powers to enforce pay-back of debt by the not-rich powerless. It was a tyranny by the rich powers, because they could manipulate wages and prices of food and housing to pressure and force credit upon the not-rich. And religion/morality played a role to convince the not-rich to accept their lower status. When the not-rich realized the unfairness of that tyranny, the rich powers had to change their system...the debtor's prison was abolished.

 

However you define money-- whether currencies, coin, goods & services,gold, iou's--- all money-games are created and established by those who have it...any other money-game created gets extinguished and never established. Such is the power of the money-trap.

The money-trap might be expressed as: Any currency will become a tyranny if it is not tied, with transparent understanding, to delivery of actual goods and services. All fraud is a failure of that transparency. All promises and iou's and risk ventures depend on transparent, mutual understanding. The money-trap occurs when the transparency can be gamed to fake the mutual understanding,,, as via trickery, deceit, clever strokes, fine-print, omitted data, wrong definition, mis-translation, Household Sector, Uncle Sam, etc.

Justice requires fairness.

Seek justice. Only justice. The rest of law is commentary and confusion.

Bruce Krasting's picture

I think this is a pretty important comment. For what it is worth, I have cut and pasted it in an email to a dozen  folks in the MSM. I will also send it to a few D.C.types, but they don't read their mail.

bk

ghostfaceinvestah's picture

Thanks for the story.  I agree.  Especially if you are underwater, there is no reason to pay the mortgage.

I have positive equity, and would be willing to miss a few payments in a mass protest, just to send a message.

Nothing else is getting through.  I have called, written, emailed my representatives about TARP, healthcare, Fannie/Freddie, etc, and nothing.  They put me on their mailing lists and occasionally I get an email about the great work they are doing.

I feel sorry for people like those in your story, they truly were suckered, suckered by a system that promoted irresponsibility and house price inflation.

They should stop paying and then go for the short sale program.  They will get out of the house, get released from deficiencies, and get paid 3 grand to move.  Fucking around with these mods is useless.

 

Buck Johnson's picture

People are going to walk away from their homes/mortgages.  For one how many of the retires or babyboomers that are retiring have their houses paid for, I'm willing to bet not many.  Because the baby boomers may have used their house as everyone else was using it to refinance and pull money out for their kids school or investment that went bad or to support their kids.  So that is one group that may have been paying on that house for 20 to almost 30 years but may owe 50% or close to the full inflated price of the house.  So they are going into their SS and medicare years without that high paying job so what will they do.  They will walk away and go rent some small apt. or retirement home.

The ones not retiring but are young (in their 20's 30's 40's etc.) why should they continue to pay on their mortgage.  If your house used to be worth 2.5 million dollars (look in california or other high places) and you bought a mortgage for that amount with a 6.5% rate and a fix 30 year mortgage.  At minimum your payments will be 19,447 dollars a month.  But now your house is appraised at 1 million dollars, and if someone else had bought your house at the 1 million mark their payments would be 7,791 dollars a month.  You see the difference.  It would be better for Mr. and Mrs. Credit rating to walk away because there is no way that their house will ever get back up to those inflated prices.  The will be lucky to even break even if they sell their "investment" at the time of their retirement.  The will end up paying for years this mortgage and essentially getting less than what they where paying for for years.

It would be smarter for them to walk away and pocket those payments and get a smaller home or even rent an apt. and build up their nest egg.  It's sound business, except they don't want the rubes (sorry the regular people) to be ruthless business individuals because they need the suckers to keep paying and to keep playing by the rules.  It's like that old saying that the good guy always comes in last place, thats not correct.  The good guy always comes in second place IN A TWO MAN RACE.  What they do is to play semantics with the rubes and call last place or sucker (integrity, honor, pride, etc.), so while you stay on the sinking boat they are getting off on the lifeboats dressed as women or children.  Because as they have figured out, is that at the end of the day you have to eat you have to live you have to survive and if it means knocking you over your head or lying to all those people in order for said bank or institution to make money at your expense, they will do it.

hedgeless_horseman's picture

One good reasons to still pay the mortgage for those that have the means.  In real estate, time ALWAYS bails you out.

Maybe this time is different.  However, if TEOTWAWKI does not occur, but rather we see another Carter/Volker scenario, or even higher inflation, those owning houses with principals priced in 90's or 00's dollars on fixed mortgages with interest under 6% are going to be sitting pretty.  I know many families who are now in about year 20 of a 30 yr mortgage paying only a few hundred dollars a month to live in a multi-million-dollar home. 

So consider all your options; staying put and paying the note can be the best one, and probably has been for many decades, if not longer.

Kayman's picture

Miker

I couldn't agree more.  But the Fed through Greenspan and Bernanke kept an effective ZIRP in place for 10 years. Bush Junior and the Congress deficit spent for 8 years.  Credit rating agencies and their masters- the crooked banks- greased the skids for mortgages for everyone (all the while skimming and dumping).  House prices kept rising (Hey let's start a TV show call "Flip This House"). 

GM got in the mortgage and HELOC game via Dietech (on CNN every 5 minutes).  Everyone was awash in Money. Nobody built businesses when the Banksters made more money in LBO's from the cheap funding.

No individual could hold back the MACRO TIDE.  This housing fiasco is a Fed/Wallstreet monster, aided and abetted by Congress.  And families are being destroyed.

America needs a leader - no- Obama and Palin are not leaders. America needs to write down National Assets and National Debt. So far, all we have is the same old Bullshit coming from the same old Puppets.

For the many individual underwater homeowners, they have a simple choice- get fucked or be fucked. Ah.... what a great country. Rotten to the core.

ozziindaus's picture

The thing that kills me is the "what if". It's like March of 09 in the stock market. Not many predicted that yet the bearish sentiment was about the same then as is now with RE. 

For those that think inflation will raise the price, then we have a long way to go since deflation is perpetuated by the defaults. I'll be convinced we're near the bottom when defaulting is no longer a dilemma.

Nobody's picture

I was discussing with my 21 year old son the 50 billion that the government has just committed to helping people pay their mortgages.  I told him that on the surface it looks all great, but it sends a wrong message.  It reinforces mad behavior, but more importantly it makes those of us who play by the rules CHUMPS.  Socialism fosters an environment where people who play by the old rules see people "gaming the system" and winning.  Sooner or later the CHUMPS decide the rules have changed and "game the system" too.  At that time the tipping point is reached and the house of cards falls.

As I have told him many times, " Socialism is great as long as the money last". 

Kayman's picture

Hey Nobody:

A socialist, by definition, is an extremely generous person (with other peoples money).

Er... I don't think that's in Wikipedia...

billwilson's picture

Huh?

 

What you are seeing is free enterprise capitalism, not socialism. It was the free marketeers (profiteers) that made the mess in their quest for money from nothing.

Time to jail the capitasit banksters, and Greenspan while we are at it.

 

J.Caesar's picture

As our friend, Publius Syrus, warned, "Graviora quaedam sunt remedia periculis."  Some remidies are worse than the disease.

miker's picture

You know, I have a whole lot more sympathy/empathy for the working people that got suckered into this whole mess.  The financial community totally abdicated their responsibility towards society.  This is what is so maddening about these huge salaries/gains they have made.  It would be one thing if they were responsible leaders looking out for our society (long term); instead they're nothing but a bunch of asshole and arrogant frat boys playing in the big leagues.  They have no fucking clue as to what leadership and responsibility means in a demoncratic society.   As long as it's "legal", they're okay with it.  And of course when testifying to Congress they admitted that no-one saw this coming.  Right.  Well if they weren't smart enough to see it coming, how do they justify the hugh compensation they received?  Can't have it both ways.  Sure, the little guy has responsiblity, but what...... does everyone in this society have to have a fucking MBA to buy a goddamn house or invest in the markets and not get shit on?  Come on folks.  Where is the responsiblity and moral compass of those folks in power that are supposed to help our society along?  They all need to be thrown out on their faces.

Justin Credible's picture

Defaults are soooo last decade.

C'mon, get with the times man!

smashmouth football's picture

In general I agree with the sentiments expressed here, and hope the stinking,rotting carcass of the big banks, the Fed, the Federal Govt., and all the rest comes crashing down under the weight of their greed, thievery, corruption and lies.

However, I want to express one BIG caveat. Anybody reading this thread who is underwater and considering taking the same action MUST consult a good attorney, accountant, or both before just walking away. In many states (including Maryland, where I live), the bank can file for a deficiency judgment after they (finally) dispose of your underwater home for pennies on the dollar. If you have other assets, these snakes will fuck you. So walk away, but do so intelligently and only after consulting a trusted professional.

Bruce Krasting's picture

Thank you for this. I agree 100%. To do this you must have a strategy. To execute it you may need tactics. How to stay afloat and still be able to get buy is not easy.

 

But at this point I do not think there is too much risk on a second mortgage or HELOC. Barney Frank, one of the most powerful guys in D.C. all but ordered the banks to write them off.

smashmouth football's picture

If the major banks are forced to write off their HELOC exposure, look for QEII to fund the FDIC so they can resolve the resulting carnage.

I think we might also expect banks to do their best to sabotage short sales under these circumstances. If they "have to" foreclose, they can still go for a deficiency judgment, if I understand correctly. (Although you and ghostface, among others, seem to know more of the details than I). (And I've read the reports that banks have been demanding illegal, off-the-books payments in exchange for releasing second liens as part of a short sale.)

ghostfaceinvestah's picture

Here is the kicker, though - under the program the government announced today, if you default, go through HAMP, and don't qualify, the servicer has to consider you for a short sale, and if that short sale goes through, they have to release the deficiency.

So you have every incentive to default, live rent free, play th emodification game, then do a short sale and get off scott free.

I agree, consult a lawyer, but the govt has made it pretty easy for you.

JohnG's picture

Find an investor to do a short sale and then lease it back to them.

JR's picture

Here’s a case I ran into last week while looking at a property in California.

The house was in a short sale for $400,000.  The owner still owed $537,000; he originally paid in the upper $700,000s for the house during the boom. (It was a chicken wire and stucco tract house, low ceilings, 3 box bedrooms but maintained.) He had borrowed $200,000 from his wife’s parents to help make the down.  Now he and his wife and three children are out the house and the $200,000+ down.

This just in today from Southern California Public Radio:

Governor Schwarzenegger vetoed a bill Thursday that would have given a tax break to Californians who sold their homes for less than what they owed on them.

Some Californians manage to strike deals with their banks to sell their homes for less than they owe on the mortgage. Banks agree to it to avoid foreclosures. The federal government doesn’t tax that forgiven debt. But California does -- It counts it as personal income.

Democratic Senator Lois Wolk of Davis sponsored a bill that would have conformed state law with the federal law. But the measure also included a provision to penalize businesses that knowingly underpay state taxes.

Schwarzenegger didn’t like that.

"Something that was supposed to be a tax benefit became a tax increase!" the governor said.

A couple weeks ago Schwarzenegger threatened to veto the bill unless lawmakers removed the tax fraud provision.

Senate leader Darrell Steinberg refused. "It’s merely collecting what is owed," he said.

For now, Californians who must sell their homes for less than they owe will continue to pay taxes on the forgiven debt.

http://www.scpr.org/news/2010/03/26/Short-sale-veto/

JR's picture

Addendum:

"Ponzi" finance units must increase its outstanding debt in order to meet its financial obligations.  A transition occurs over the course of an expansion as increasingly risky positions are validated by the booming economy that renders the built in margins of error superfluous--encouraging adoption of riskier positions.  Eventually, either financing costs rise or income comes in below expectations, leading to defaults on payment commitments. -- Hyman Minsky

Waterfallsparkles's picture

Another option is to let the House go into Forclosure and have the Family pull together and buy it for Market Value.  Sell it back to the Defaulting Family member for the reduced price and take a Mortgage Back.

Family can Mortgage their Houses and the Defaulting Family member can pay their Mortgage payment.

This effectively buys the house back for the true Market Value 1st Mortgage takes a hit and 2nd Mortgage Company gets wiped out. and the Family Member does not lose their Home.

I have suggested this to someone I know where the Parents have equity in their Homes.

JuicyTheAnimal's picture

Can I borrow your family for this?  I'll even give them a nice fee.  My parents are happily living alone in their four bedroom mcmansion.  They wouldn't dare risk their assets to help out a son.    I bought a rental property with 20% down and fixed it up just like my dad did 30 years ago.  I helped contribute to the bubble according to them.  And they're doing fine...the market is up up up.  Ha ha ha ha at me.  Stupid me. 

Augustus's picture

As long as the rent is still comming in, you have the deal you expected.  And it did have a positive cash flow, right?  Just let it work, it takes years for the wine of real estate to mature.

In fact, if you are still good on the credit checks, it is getting close to time to do it again.  Positive cash flow from the beginning, calculated on a nothing down basis, is a good way to evaluate it.  What other business gives you the ability to lock in 80% of your costs for 30 years?  Rates go down, you get it cheaper.  Rates go up, your competitive position is improved.

ghostfaceinvestah's picture

Bruce, I can back you up on your assumption.  Every lender I talked to today is getting swamped with calls asking how the borrower can get principal forgiveness.  They are all being told this is a program for delinquent borrowers.  So guess what?  LMAO!!!

More people are going to miss their April mortgage payments than ever.

I don't think the Administration thought this through, at all.

tip e. canoe's picture

"I don't think the Administration thought this through, at all."

but what if they did?  then what's the motive behind it?  
maybe to smooth out the future default curve? 
or more sinister even?

merehuman's picture

it will allow them to keep the plates in the air another week longer

perchprism's picture

 

This is why it is called "moral hazard".

Waterfallsparkles's picture

The Banks brought it upon themselves.  First with all of their Credit Default Swaps and Shorting all of their Competitors and Companies they wanted to aquire into the Ground.

They created a Moral Hazard with Homeowners.  Who wants to hold up their obligation to the Banks when the Banks do not hold up their obligations and require the Tax Payers to Bail them out?

The Banks also created the Negative equity problem.  How you say?  It is because the Banks when they want to dump a property that has been Forclosed on they put the property on the Market for at least 25% less than the Market Value.  They may sell it fast but it also becomes a Comperable for future Apraisals which deflates all of the other houses in that Market.  The next Lender dumps they property for 25% less than the last Bank that wanted to dump their House.  What happens is an negative spiral down in Housing prices.  Homeowners become underwater and do not want to pay.  So, what happens is the dump even more houses on the market for 25% less than the previous 2 Lenders.  This effectivly lowers the Book Value of all Loans on all Banks balance sheets and Homeowner equity. It also hurts all Homeowners that want to Refinance or Sell.

In summary the Banks are creating their own problems and hurting the American people thru their high risk taking in CDO's, CDS's and creating Moral Hazard in the Public.  They are also creating the downward spiral in Housing Prices thruout the County which hurts every American.

The Banks have cost the American People Trillions in Bail Outs, lost Jobs and the downward spiral in their Housing Values.

Leo Kolivakis's picture

Banks are scared that the enslaved masses will wake up, and collectively tell them to FUCK OFF, bring them the keys to their houses and tell them "go ahead, it's yours". Banks figure it's better to reduce the mortgage principal and still pocket some income, instead of being stuck with a hard to sell property. How did America become such a monumental fuck-up?!?

loki's picture

"how did America get this fucked up?"

Unmitigated greed.

bretondog's picture

How did America become such a monumental fuck-up?!?

................

Very simple.

A decision was made to allow the the Capital holders, Bondholders and Counterparties of the Financial Interests in the USA to retain their holdings and avoid suffering the pain of their actions, lack of oversight and failures and foist the Losses upon the Public.

"Debt default" took a Holiday for the Originators.

And now we are simply witnessing the results of such a stupid set of decisions.

Fraud, Deception and Obfuscation took the place of the basic tenets of an honest Market.

In other words: "A snake never bites its own tail".

Leave the poor homeowners alone.......there but for the grace go you!

"Moral Hazard" is too weak a term; see if Criminal fits better!

HungrySeagull's picture

That will motivate us to buy something better to get out of our paid for free and clear roach trap 6 months after the fact and after prices plunge again.

Maybe one of the surviving banks will be able to sell some nice property on the courthouse steps after that general movement by the mass of people occur.

I feel somewhat off that those who cannot pay are generally getting crushed and all the attention while those of us teeter between positive and negative cash flow against rising annual taxes or montly outflows.

wkwillis's picture

Why not just stay in the house until evicted? You have at least a chance of getting the house for 'free' (minus the downpayment and overage of mortgage payments vs rent) through financial collapse into hyperinflation sometime later this year.

Assuming that the rest of the world finally gets tired of giving us free things, please God.

 

Stumeister's picture

The whole mortgage garbage could have been fixed by the fed lending at 1-2%.  They ARE the mortgage market!!  I don't understand the need for the TBTF middle men.

 

 

Winston Smith 2009's picture

"I don't understand the need for the TBTF middle men."

So sorry, but they're the only indirect, less than totally blatant way of obtaining quasi-legal bribes... I mean, campaign donations and perks.