who takes the hit?
Posted by admin on January 4th, 2012
The Nation’s top mortgage companies do not want to modify even though they have been given money to do so, they have mortgage insurance, they have been asked to help fellow Americans. It’s to the point where more and more people have no choice but to walk away because of seriously reduced income and/or illness.
Consequences of Walking Away
Most homeowners don’t walk away, meaning they don’t strategically default. Yet industry experts contend that millions of Americans who are underwater, would be financially better off if they did walk away, just like Morgan Stanley recently walked away from five properties in San Francisco, five buildings which were underwater. Morgan Stanley just gave the properties back to the bank. As a company, they will not suffer shame and guilt as will a homeowner. Middle Americans are not trained to renege on debt.
These emotions of fear and shame and guilt are cultivated by the government, by the financial industry and, to some extent, the media. And they do this by cultivating a double standard, a standard in which Americans, average Americans are told to have a moral obligation to pay their mortgage and to meet their financial obligations, whereas corporations freely and frequently default when it’s in their financial best interest to do so.
Jason Opland of Columbus Ohio posted on “Real Town,” a real estate network: The difference in norms between average Americans and banks leads to distributional inequalities whereby average Americans are bearing a disproportionate burden from the housing collapse.
Brent Arends, League of Corporate Responsiblity Voters, says that the reason no one is pumping money into the economy is because millions and millions of people are paying into un-redeemable, un-repayable mortgages that are taking all of their otherwise productive income. The astronomical amount of debt, debt that these financial institutions helped to create, is what’s keeping the economy from recovering, according to Arends. His advice? Let the corporations, those financial institutions that are sporting record profits and writing record bonuses, eat the losses.
Strategic Mortgage Defaults
It’s all in the timing. Most middle-Americans would think such a move as dishonest and unethical. We agree.
However, given that lenders do not want to help in any way, such defaults are a calculated financial maneuver primarily by people with high credit scores. We know of at least one person — an attorney — who made such a calculated move. His house was underwater. He set up a corporation, brought a much finer and equally undervalued home under the corporate name. He walked away from the first home – and his mortgage on that homes – with little to no warning or indication of stress typically identified by increased delinquencies on the mortgage payment or other credit payments. And, at the time he purchased his new home, his credit standing was still good. It was a clean move.
Ethical. No, we don’t think so. But compared to what today’s mortgage lenders are doing, well . . .
Why are people doing this? Over the last decade, many people purchased homes, including their primary residence, for investment purposes as much as for shelter and protection. As with other investments, these high credit and financially savvy people are assessing the market value of their home relative to their carrying costs (mortgage payments, taxes, utilities, etc) and making the decision that they are financially better off walking away from the property and mortgage than continuing to make the payments.
Is there a moral failure in this practice on behalf of those individuals who do have the financial wherewithal to make their payments? Perhaps, but it seems apparent that people do not bring their morals into their financial affairs. This harks back to “situational ethics.”
Who Takes the Hit
Homeowners: They lose their homes. However, In California, lenders are generally barred from getting money from a defaulting borrower. The lender gets the house and that’s it, even if the borrower has $1 million in the bank. Only judicial foreclosure allows the lender to get the borrower’s other assets, but it’s slow, expensive and encourages a defense of loan origination fraud.
Mortgage bond investors: Rising homeowner loan defaults led to a loss for MGIC Investment Corp., Milwaukee, in the fourth quarter, and a return to profitability is unlikely in 2009. The Milwaukee company, the nation’s largest insurer of mortgages, posted a loss of $273.3 million, or $2.21 a share, compared with a loss of $1.47 billion, or $18.17, a year earlier.
Not the Banks: As we understand it, in additional to federal bailout funds, the mortgage lenders are covered by this mortgage insurance.
Almost any Option is Better than Foreclosure
In our frustration, many of us just want to walk away. However, the period for eligibility of a future loan differ greatly between a homeowner who loses a home to foreclosure and a homeowner who successfully negotiates and closes a short sale.
In an attempt to dissuade homeowners from walking away from their delinquent mortgages, the lender announced that it would bar defaulting borrowers from getting additional Fannie Mae financing for seven years unless they can prove that they didn’t have the capacity to pay, or they attempted to negotiate in good faith for a workout alternative in lieu of foreclosure.
This latter should be easy to prove. Keep notes and a binder of every piece of paper and every phone conversation you have had with your lender (include date, time, name of person, phone number, extension, and badge number if they have one). We guarantee that you will have sufficient evidence of inept banking practices and ongoing lost paperwork to substantiate your efforts at pinning down a modification to no avail.”


I’m 2.5 years into working to save my home from foreclosure. After two years of battle, and an 8-inch thick 20 pound binder, I was accidentally given a 5-year loan modification.
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