Giving a House Back to the Bank

[CurtEgerer]

I have a friend who is considering letting his house go back to 'the bank'. He is one of the many who got himself in trouble with a refinance. A mortgage company purposely over-appraised the house by at least 25% and gave him a 3 year APR refinance loan. The APR went fixed last year and DOUBLED his house payment. He is barely able to scrape together the payment each month. There is no equity in the house. The house might sell for 70% of the outstanding mortgage on a good day.

But that's not his problem. His problem is making this huge payment on a loan that is far in excess of the value of his home - he'd have to do this for the next 30 years. And for what? Top this off with Michigan's depressive economy where RE values are in free-fall and foreclosure starts looking like a realistic option - i.e. tell the mortgage company, 'you guys screwed me by over-appraising the house and writing this scam loan, you try to sell. Good luck, I'm out of here."

He could rent a nicer house then he has for less than half of his current mort. payment and use the other half to pay down debt. What do you experts think of his plan? One attorney he talked to said he makes too much money to file for bankruptcy. Thanks for any advice I might be able to pass along to him.

[the]

The best thing he could do is work out a deal with the bank to either short sale the house, or give it back to the bank and get a release.

Your phrasing of "purposely over-appraised the house by at least 25% and gave him a 3 year APR refinance loan" is kind of interesting, in that it seems to want to lay blame with the bank. "Gave" him a 3 year APR refinance loan? They didn't "give" him anything, any more than he "took" a 3 year APR from the bank. Also can't see what the point of "purposely over-appraised the house" is. They only loaned him the money he wanted to borrow.

He screwed himself.

[JMPRO]

I recently heard that you could be responsible for the taxes on a forgiven loan. That makes it an even less attractive prosposal.

[dad911]

If he refinanced, this wasn't a purchase, he borrowed more (pulled money out) at time of refinance? No matter, I would think he will still be responsible for the difference of what he owes, and how much the bank can sell it for.

[Dantilla]

A little communication goes a long way.

Time to sit down with Mr. Banker, and tell him what he is considering. The bank does not want to be in the real estate business. If the bank knows that walking away is a strong possibility, they would most likely be very interested in refinancing into something more affordable, rather than loosing the entire loan.

Banks are nervous right now. A little chat could turn into a win-win. The bank still has a loan, your friend saves his credit.

[CurtEgerer]

You guys are 100% correct that nobody had a gun to his head to sign the loan papers - he made a very dumb mistake. And I guess it wasn't a 'refinance' but more of a consolidation loan where he tied in other debt. Where I see fault with this particular mortgage company is that I believe they purposely make these loans at more than the value of the house because they know that once somebody is locked in, they have no way to escape. They are upside down the rest of their lives and can't refinance with another company.

I remember when he got this loan. He couldn't believe that his house value had gone up by 25% (coincidently the same amount he needed to tie in all his other debt) while all other real estate in Michigan was stagnate or dropping!!! Well, guess what? It didn't.

I understand that the bank can't sue for more than the value of the house, no matter the amount of the loan. So if it goes back to them, they sell it at a discount thru foreclosure, and he would only be liable for the difference between the sale price and whatever the actual value would be determined to be?? Am I thinking right on this?

[the]

Originally Posted by CurtEgerer

You guys are 100% correct that nobody had a gun to his head to sign the loan papers - he made a very dumb mistake. And I guess it wasn't a 'refinance' but more of a consolidation loan where he tied in other debt. Where I see fault with this particular mortgage company is that I believe they purposely make these loans at more than the value of the house because they know that once somebody is locked in, they have no way to escape.

No way to escape? He took money from the bank. Just pay it back. There's your "escape."

[Rick Lee]

If your friend didn't understand the mortgage he was getting, that's too bad for him. I doubt the bank changed the terms after it had closed. If they refinanced him for any more than 90% of the appraised value, then he should have had a lot of questions about that. And who's to say the value of the house will never get back to what the bank appraised it at? If he plans to live there for a long time, he could come out of this alright. Obviously, refinancing into a 3/1 ARM, if that's what he did, is the opposite of what most people do when they refi. The only time I would ever even think of doing that is if I knew 110% I'd be selling before the ARM adjusted and that's really dubious for a cash-out or debt-consolidation refi. Sounds like your buddy needs to take his lumps here and learn his lesson before he does this again. Such mortgages are not at all difficult to understand or even predict for adjustment. This was really a bad idea for him and he should have known better. If you think there was shenanigans with the appraiser, there might be some kind of complaint to file. But no one is forced to take out a high LTV refi, regardless of appraised value. When taking out a HELOC, USAA appraised my house over the phone based on my own word. Now the value has dropped. I'm still fine, since I put 20% down, but it's my own problem and no one else's.

[Rick Lee]

duplicate post deleted

[p911dad]

Let's try to see something positive in this situation. Like "the" mentioned, he took the money on the refi and presumably paid off some short term debt. That should have freed up some cash that will come in handy now to make the larger payments. He still has the house and shelter, so he is getting something for the money. He is preserving his credit rating by continuing to pay the mortgage. Like JMPRO says, he is also avoiding a tax payment to both Michigan and IRS by keeping the house(I also just read about that).
If he can avoid a foreclosure, by all means avoid it-banks don't forget people that break contracts and cost them money. I recently sat though a class on the effects of foreclosure and bankruptcy given by a local attorney, and believe me it ain't pretty!
Maybe he could go after the local tax assessor and plead the case to lower the assessment based on current sales. That might save a little.

[mjshira]

I don't see a lot of good options here. The best thing he probably can do is go and see the bank. Take a lawyer with him to formalize the situation, try and negotiate a compromise position between his lack of desire to pay what he is paying and the banks desire to avoid another foreclosure.

If he gives the house back he'll take years to recover credit wise, years. Probably 10. With the amount of foreclosures up there these days, I think his best bet is to put forward a compromise.

If he has any cash, or things he can sell to get cash, he should, then he can bring that to the table also. maybe make a one time payment as a part of the deal to get back square.

I think that by making this effort he will show the bank that he is not just walking away.

wish him luck, ***** situation...

[CurtEgerer]

He understood the mortgage (although sort of turned a blind eye to the possible consequences of the 3 year ARM!!!), but did not know the value of the house. The mortgage company sent a professional appraiser out. He had already owned the house for several years and didn't know what houses were selling for. Isn't the appraiser supposed to know the value of the house? The appraiser says it's worth $250,000, why would he question it? He's got the document and no house in his area has EVER sold for any where near that amount - it was a total setup. Maybe he should have, but I don't think most people go get a 2nd opinion on this. I believe this was one of those fly-by-night mortgage companies and the loan has probably been already resold.

James, I think he is prepared to have no credit for 10 years - he basically has none now. That's how desperate he is. Maybe if the mortgage company understands this, something can be done.

I'm in agreement with you guys, but am trying to fight for HIS argument and thinking. Anyway, it sounds like his best bet is to find an attorney to have a serious talk with the mortgage company about making a bad situation somewhat better for all parties involved.

[CurtEgerer]

So on a theoretical basis, shouldn't the bank only loan enough money so that in case of default they can sell the house to pay off the loan and everyone walks? This is correct, right? So if the bank makes the mistake of loaning more than they can sell the house for, didn't they screw up too? I guess that's his argument right now.

[Moneyguy1]

Curt:

That is at least one of the problems. The "average" homeowner will believe an appraiser. After all, why not? They are supposed to be the experts. Now...when the "banker" is in on the "fix" along with the "appraiser", many times the dumb ba$tard in the middle makes stupid mistakes. Besides, three years ago, real estate was skyrocketing, giing the great unwashed to believe their home actually had increased in value that much. His basic problem was going for the 3 yr ARM.

The mortgage industry has a large number of very bad people in it. However, happily, the current climate will thin their ranks as well as the ranks of real estate agents (down over 10% so far). Let the honest agents, both in real estate and in financing prevail, both realizing there is an ethical component to the business.

Friends of mine, staying with me for a while, are buying down here. They put a bid in on a nice little retirement home (1400 sq ft, 2 car garage, 2 insulated big porches outside the main house, not included in the square footage). Their bid was for 9% under the asking price and was accepted immediately. And, the asking price had been dropped twice in the six months the home was on the market. And to think 2 - 3 years ago, homes were sold around here even before the listing hit the system!!

[sammyg2]

Shame on him for even thinking he can blame the bank for his screw-up.
What ever happened to personal responsibility?

[mjshira]

I think his best strategy is to get everything ready to execute giving the home back to the bank. Then, lawyer in tow, go meet with the bank. push for the most senior person you can get at the bank. then have a reasonable proposal ready, one that involves staying in the home, but with a lessor payment. that way, if the bank doesn't work with you, you can always fall back on having made this good faith attempt. I'd also like to know if it were me, what the foreclosure percentage is for his area, what the better business folks say, etc.

[Moneyguy1]

Sammy:

We trust our doctors. We trust our attorneys. We trust the experts. So, if an individual trusts an appraiser, is this individual wrong to do so? I know very few homeowners that even know the meaning of the word "comps".

One of my finance teachers in graduate school told us:

"Your friendly, neighborhood banker is neither."

[Rick Lee]

Appraisers use comparable home sales in the area to determine market value of a house. I don't think even reporting a fraudulent appraisal would fix this situation. Traditional mortgage companies won't loan more than 80% of value without requiring the borrower to buy private mortgage insurance. Subprime lenders usually don't require this, but then their rates were pretty high and they did second trusts above the 80% first loan. Going after the appraiser in this case is sort of like rearranging the deck chairs on the Titanic. Even if the appraiser had said it was $1 million, the borrower should know how much cash out he needed and what he could afford, and shouldn't have taken a dime more.

[Rick Lee]

Originally Posted by Moneyguy1

Sammy:

We trust our doctors. We trust our attorneys. We trust the experts. So, if an individual trusts an appraiser, is this individual wrong to do so? I know very few homeowners that even know the meaning of the word "comps".

One of my finance teachers in graduate school told us:

"Your friendly, neighborhood banker is neither."

I don't know anyone who doesn't keep track of home sales in their own neighborhood. Doesn't matter. Appraisal, accurate or not, did not force the borrower to take out more than he wanted to. At worst, it let the bank loan more, but still within their underwriting guidelines. And most states have a three day right of recison for refis. So there's really no excuse for someone to get into a bad refi and then try to blame someone else.

[Dixie]

So if the bank makes the mistake of loaning more than they can sell the house for, didn't they screw up too? I guess that's his argument right now.

It's not an argument. It's a rationalization.

He took the money and spent it on debts accrued for past vacations, cars, and other crap. Then he spent the rest on more vacations, cars, and other crap, right? If not, all your friend needs to do is give the bank back the principal borrowed. (That’s called the pay-off amount. That’s the amount he no longer has because he spent it.)

If nothing else, your friend needs to keep in mind it's not just lenders that will be looking at his credit rating in the future. Employers look at credit ratings too. And your friend is a perfect example why.