Walk on Existing Mortgage??

[Dottore]

Originally Posted by m21sniper

Walk, don't look back. I wouldn't feel guilty for one second. Not now.

Proof positive that things are upside down.

I find myself agreeing with you with increasing frequency!

[CRH911S]

"Force majeure" is generally considered to be an unforeseen factor that so completely changes the bargain that was made in the contract, that it would be inequitable to hold parties to their contractual terms.

In my mind the catastrophic drop in housing values is very close to being a "force majeure" event. At least I think there are cases where a compelling argument for this can be made.

Because one made a poor investment choice is compelling enough of an argument? I'm not an attorney but I'm not stupid either.

[the]

Originally Posted by Dottore

I have some sympathy for this view. In contract law there is generally a concept of "force majeure" that excuses a party from walking away from a contractual commitment in certain limited circumstances.

"Force majeure" is generally considered to be an unforeseen factor that so completely changes the bargain that was made in the contract, that it would be inequitable to hold parties to their contractual terms.

In my mind the catastrophic drop in housing values is very close to being a "force majeure" event. At least I think there are cases where a compelling argument for this can be made.

That, I'd have to disagree with.

The value of the house has nothing to do with the obligation to ability to pay the loan.

The borrower still owns the house. It may have gone down in paper value to half, but it's still the same house, still serves the same function to the homeowner.

I don't see anything close to a force majeure argument, to legally relieve a homeowner based solely on a big drop in housing values.

The paper value of the underlying collateral is of no relevance to the borrower's obligation.

[Dottore]

Originally Posted by CRH911S

Because one made a poor investment choice is compelling enough of an argument? I'm not an attorney but I'm not stupid either.

I think you could argue that an unexpected catastrophic market collapse that slashed 50% (or more) off the value of the home you just agreed to purchase ought to be treated as a force majeure event that entitles the purchaser to walk or renegotiate.

If you're a really clever dick attorney and also lead evidence that the bank that granted the mortgage in the first place recklessly pushed that mortgage down the hapless buyers throat thereby helping to bring about the force majeure event (ie., the market collapse)...well I have heard a lot sillier arguments made in court.

[Jim Richards]

In most cases, a home is primarily a dwelling, not an investment. If the purpose of the mortgage was to finance an investment, the bank would have required different terms relative to an owner-occupied mortgage. If the owner wants to now look at their home as an investment, perhaps the bank should have the latitude to change the terms of the note.

[Rick Lee]

Originally Posted by Dottore

If you're a really clever dick attorney and also lead evidence that the bank that granted the mortgage in the first place recklessly pushed that mortgage down the hapless buyers throat thereby helping to bring about the force majeure event (ie., the market collapse)...well I have heard a lot sillier arguments made in court.

It's very popular these days to say banks "forced" subprime loans upon folks who would have qualified for Alt-A or A paper products. But I've still never heard of a case where anyone was forced to buy a house or sign a contract. And at some point, people who are old enough to sign contracts are also old enough to shop around for the best deal they can find. Why don't we go after car dealers who charged different folks different prices for the same cars? Because no one was ever forced to take such a deal!

[911Freak]

Option 2
Buy a nicer home, in better area at current depressed prices with 20% down. After closing, walk on first home.
QUOTE]

Banks won't lend to anyone who currently owns a home that doesn't have at least 25% equity.

They have been keen to this buy and walk scenario for some time!

It's in FHA, and Agency guidelines.

Pretty smart as it protect against just this thing....

[sammyg2]

There is a big difference between what it legal and what is right.

IMO many of the people walking away from their mortgages are just doing it because they are morally deficient parasites who are a negative influence on our society.

Their actions are punishing the rest of society and they and the ones who deserve punishment. Severe punishment.

Sorry in advance for sugar-coating it

[jyl]

I would tend to consider a mortgage more like a business decision than a moral contract.

There are two parties to the business deal, the borrower and the bank. Both have certain rights and obligations, defined by the loan contract and applicable law. Both had to make the correct decision and protect themselves against loss. If they were right, both expected to profit - the borrower's profit would be a combination of financial and shelter, the bank's profit would be financial. In (tens of) millions of cases all across the country now, both parties made the wrong decision and are staring at major losses.

If the borrower fully repays a hugely upside-down mortgage, he effectively takes 100% of the loss and the bank takes 0% of the loss, even though both he and the bank screwed up.

The borrower does not have to do that. He can walk away, and take a % of the loss - his ownership interest in the house, the money he has sunk into the down payment and monthly payments to date, his credit rating for many years in future, etc. But rather than taking 100% of the loss, instead he will place some % of the loss on the bank. The bank was fully aware of this risk when it wrote the loan - the industry even has a term for it, the "borrower's put". (This is in non-recourse states like CA, in recourse states it is different.)

So, that is the business decision aspect.

I realize some people view a mortgage as a moral commitment, like a marriage - to have and to hold, in sickness and in health, until death do us part, and all that.

But marriages go irretrievably bad, and people get divorced. Do you morally condemn someone who chooses to walk away from a disastrous marriage rather than stay in it and get emotionally and perhaps financially injured? Apparently not - there are plenty of divorced persons here on PPOT.

Then why do you morally condemn someone who decides to walk away from a disastrous mortgage rather than stay in it?

Surely no one thinks a mortgage with a bank, who knows you only as a number, is a deeper moral commitment than a marriage?

Okay, now, as a practical matter, I think if there is a chance to get the loan modified with a principal reduction, even one that leaves you still somewhat underwater, even if you have to put additional savings into paying down the loan, you are well advised to at least look into that option. Find out if you have a FNM/FRE loan and might qualify for one of the programs.

And I realize there is a whole range of situations. At one extreme, the borrower who can afford to pay his mortgage but realizes he will lose a lot of money by doing so. At the other extreme, the borrower who loses his job and can no longer afford to pay his mortgage. Obviously my sympathies are far more with the latter borrower. But I don't, personally, elevate either situation to a moral compulsion.

[Rick Lee]

Originally Posted by jyl

If the borrower fully repays a hugely upside-down mortgage, he effectively takes 100% of the loss and the bank takes 0% of the loss, even though both he and the bank screwed up.

The rest of what you wrote is good food for thought. This above however dances along the lines of moral relativism. Nowhere in a mortgage does it state that one or both sides is exepected to take X% of loss if the SHTF. Consequences to both sides are pretty well known in advance. If things get so bad that those consequences become acceptable, then either party is free to take the steps that lead to those consequences. What's throwing a monkey wrench into the situation nowadays is the gov't. meddling and even the prospect of judges capriciously rewriting private party contracts. That kind of stuff has consequences for lots of folks who had nothing to do with the problem and it will make buying houses more difficult and expensive for all of us.

[jyl]

Not sure what you are objecting to in the quoted part of my post?

If the borrower fully repays a mortgage, the bank takes no loss (it gets everything it could possibly get under the contract), so by definition any loss is 100% being taken by the borrower. I think that is entirely factual.

If the mortgage is hugely upside down, the borrower made a very bad business decision, i.e. "screwed up". Don't see why anyone would disagree with that.

If the mortgage is hugely upside down, the bank also made a very bad business decision, i.e. "screwed up". Do you disagree with that? If you do, then why do banks do appraisals and why do they care about loan-to-value, and would any bank loan officer actually say that lending 200% of a house's future value is not a big mistake?

I don't see any moral content at all in the quoted statement. It is simply a statement of fact.

Originally Posted by Rick Lee

The rest of what you wrote is good food for thought. This above however dances along the lines of moral relativism. Nowhere in a mortgage does it state that one or both sides is exepected to take X% of loss if the SHTF. Consequences to both sides are pretty well known in advance. If things get so bad that those consequences become acceptable, then either party is free to take the steps that lead to those consequences. What's throwing a monkey wrench into the situation nowadays is the gov't. meddling and even the prospect of judges capriciously rewriting private party contracts. That kind of stuff has consequences for lots of folks who had nothing to do with the problem and it will make buying houses more difficult and expensive for all of us.

[jyl]

Who is "us" and who is "them"?

Every month, as home values fall and jobs are lost, more people slip into "them". Many people are just a layoff or a bad tenant away from becoming "them".

When enough Americans become "them", then "them" becomes "us".

Originally Posted by Rick Lee

That kind of stuff has consequences for lots of folks who had nothing to do with the problem and it will make buying houses more difficult and expensive for all of us.

[Rick Lee]

You know the old saying. If you owe the bank $30k, you have a problem. If you owe the bank $3 million, the bank has a problem.

The bank is the taking all the risk while the borrower is still paying off the mortgage. The borrower can walk at any time and the bank is still on the hook for the tax liens, P&I. That cuts a small hole in the bank's capitalization and risk mgt. until the note is paid. The borrower only takes a loss if, at the time he makes his final mortgage payment, his house is still worth substantially less than he paid in P&I. He still has to live somewhere, so that counts for something. Otherwise, he would have paid rent to someone. Living on the street and still paying off a mortgage is what I'd call taking 100% of the loss. Having a nice place to live, a decent tax write-off and a potential equity instrument are not what I'd call 100% of the loss. And the bank has plenty of risk until the note is paid or the princ. amount becomes negligible.

[jyl]

Rick, if the borrower fully repays a mortgage, the bank has taken zero loss. Disagree?

If there is a loss, but the bank has taken zero loss, then that loss is all taken by the borrower. Only two parties to this deal, after all. Disagree?

Assuming you agree to this point, the remaining question is, was there a loss? I suppose that depends on future house values and the rent vs buy economics in the meantime.

[CRH911S]

In most cases, a home is primarily a dwelling, not an investment. If the purpose of the mortgage was to finance an investment, the bank would have required different terms relative to an owner-occupied mortgage. If the owner wants to now look at their home as an investment, perhaps the bank should have the latitude to change the terms of the note.

I don't really have any sympathy for the buyer, the bank or for that matter the seller. Because using some of the logic I'm seeing here is it not concievable to bring the seller into question?
I'm a federal employee, so what about my TSP? Should the feds reimburse me for 20+ years of loses to my investment account? I think not. I knew the risk going in and this is my understanding of buying a home. If one buys a home in a hot market isn't that akin to taking a risk? But not just the potential buyer but the bank that allows the contract to take place in the first place. We've all seen the boom-bust cycles before so we know they exist.
It seems to me a force majeure is a one time event thus not applicable here.

[Rick Lee]

Originally Posted by jyl

Rick, if the borrower fully repays a mortgage, the bank has taken zero loss. Disagree?

If there is a loss, but the bank has taken zero loss, then that loss is all taken by the borrower. Only two parties to this deal, after all. Disagree?

Assuming you agree to this point, the remaining question is, was there a loss? I suppose that depends on future house values and the rent vs buy economics in the meantime.

The loss to the borrower is only realized at the time the note is paid off, and only then if his net cost of ownership is more than he can sell the house for or could have rented for the same time. However, the bank incurs risk every day there is an outstanding mortgage on the house.

[jyl]

Risk is different from loss.

[tc-sacto]

Originally Posted by red-beard

I'll give another take on this. You stated 6.5% growth in the value of the home. Where are you getting that number? 6.5% is above the PRESENT inflation. It is also way below what I'm expecting for inflation in the next several years.

6.5% derrived from California Realestate Association
1968 median family home price $23,210
2008 median family home price $285,680
over 40 years = 6.5% growth.
At 6.5% growth, I see the house going to even at 7.5 years.

If inflation hits 10%, it will take a bit over 5 years for your loan to not be "underwater". Is the loan a fixed rate loan? Don't know

I am expecting inflation to hit, and hit hard in 2010. We're still forcasting a very week European banking system. They will continue to lower rates to spur export growth to save themselves at the expense of their trading partners. Anticipate this to continue to support the $ and thus stave off inflation for a little longer....
Oh, and +1 with what everyone else said.

...

[CRH911S]

red-beard, is it possible to use the inflation argument, as well, before the board of equaliztion to argue against an 11% increase in the assessment of my home for 2009? Presently all I have is a real estate agents' opinion as to the value of my property and comparables the bank used when I purchased the home. The city is using property 5-6 miles away in a nicer part of town to justify the increase.
Sorry, for this being OT and I will not go any further with it.

[the]

Originally Posted by Rick Lee

However, the bank incurs risk every day there is an outstanding mortgage on the house.

Not really, depending on how conservative the bank is.

If a bank makes a reasonable assessment of the value of its collateral, both in the present and the future, and requires enough of a down payment for the loan, there is almost no risk to the bank.

In the event of a payment default, the bank simply hires a lawyer, forecloses, adds the attorney's fees to the obligation, sells the house and pays itself back every penny it is owed.

Also, there is pretty much no risk after the first half of the mortgage has been paid down. By then, there is almost always going to be sufficient equity to fully protect the bank in the event of a default.