Question on US Property market

[Ilenart]

All,

having been watching from afar (really far, around 30,000 miles ) and one point that has puzzled me about the US property market. Is it true that housing finance is non-recourse in the US. In other words, if the house price falls below what you owe on it you can walk away, throw your keys to be the bank and the bank can't chase you for the outstanding amount. All the bank can do is sell the house.

Ilenart

[camaraderie]

Pretty much true. In normal times...you'd have a 20% down payment on the house and they could always sell the house and get their money out clean. Now, with zero down...interest only loans and declining housing prices and no buyers...they are up the creek with losses...and there is little point in going after people who do not have the $$ to make the payments as there is nothing there and personal bankruptcy laws would shield the collection anyway.
As to the RIGHT to go after the mortgagee for any remaining balance...that varies by locale and many locales make mortgages non-recourse and secured only by the property. That is very different than say a boat loan, where the bank has the right to both the property and full payment of any shortfall.

[Ilenart]

Interesting. I wonder if that is making the current situation worse? In Oz they won't lend you a dime unless you can meet the bank's repayment requirements, normally repayments cannot be higher than 30% of your gross salary. Plus if you try to walk away they'll hound you forever, bankruptcy for sure.

Keep reading about all these houses being abandoned, which forces down the whole neighbourhood and makes things worse. If people could'nt just walk away maybe this would help the overall situation.

Or is this too simplistic?

Ilenart

[cardiacpaul]

All,

having been watching from afar (really far, around 30,000 miles ) and one point that has puzzled me about the US property market. Is it true that housing finance is non-recourse in the US. In other words, if the house price falls below what you owe on it you can walk away, throw your keys to be the bank and the bank can't chase you for the outstanding amount. All the bank can do is sell the house.

kinda, sorta... yea...
You go to the bank to get the loan for the house you wanna buy.
If you had any credit at all, the banks said, ok, we'll "take" the propety as collateral. You pay us back next to nothing for the first couple of years, then, we'll adjust your interest rate up...

Thre were many reasons why the banks "gave" piles of bucks to the people. I'm not going into them here, there are just too darn many fingers in that pot.

Now, in a nutshell the people that bought into these deals, "say" that either they didn't know what they were signing, thought their income would increase, or, thoght that they would be able to get refinanced before the rate increase. I'm going to leave that alone too. Funny thing about me, I seem to try to figure out what the terms of a loan are. Apparently, these people didn't?

Lets suppose that you had "questionable" credit to begin with. Ok, its already "bad" credit, right?
So, "skin in the game" is next to nothing. Little or no down payment, initial payments were almost equal what they were paying in rent, now, there is no equity in the house, its worth less than was paid for it, and the payment almost doubled due to the interest rate increase coupled with the increase in property taxs due to the re-assessment of the house, based on the inflated value.(shortfall in escrow last year, increase this year, some people saw their property tax bill more than double) (deep breath)

So yes, there is percentage that throw the keys inside, rent a uhaul, and skip town. Their credit is already shot, so what does it hurt them?

In many instances, they can claim bankruptcy, walk away from the debt with little or no money owed.

Now, add in that the banks (I use that term loosely) that "made" the loan on the asset, only held their interest in it for sometimes hours. The loan was made, the asset (house) put on the books, and then bundled with hundreds of other good and bad mortgages in one bundle and sold off to another party(s) as great "mortgage backed securities" . So, Mr. Banker on the corner has NO interest any more if Joe Blow can't make his house payment, he doesn't own the note he doesn't care.

He made money on the fees, and made money when he sold off the box of mortgages. The entities that bought these notes, then split, rebundled, split again, chopped, sliced and diced pieces-parts of these notes to other entities rated them top notch (either because of greed, incompetence, or both) and sold them again...
I know of one property (I'm sure there are many more) that is in process of foreclosure. The servicer (payment collector) of the note told me that last year the house had people in it, the equity holder of the note changed 7 times. This property in 2003 was sold for a little over
190k, sold 4 times since, last purchase price was 569k. June, 2007.
The last people in the house left in Dec. 2007, in the house 6 months... their payment was going to double. Due to increase in interest rate, and increase in property taxes. Double. The mortgage servicer said that since Feb. of this year, equity holder has changed 3 times, and he's had no contact with the last one since July of this year. (phone disconnected) I guess nobody "really knows" who owns the property today.

Horses eat, Cows eat, Pigs... get eaten.

Mind you, approx 3% of property is in "default".
97% of people are paying their payments on time.

[Ilenart]

thakns CP. Thought my understanding was too simple. We have has similar situations here, however I think it is a lot less common, probably more like 0.01% of the market. Plus many sections of Oz are still growing rapidly and houses are in short supply. However things are starting to turn.

In answer to who owns all the mortgages.... sounds like you all collectively are about to acquire them, care of the US government

Ilenart

[AjariBonten]

Wow, what a great conversation. I just gave rep to everyone who posted here. How often do we have a thread about a potentially volatile issue where everyon posts well thought out and balanced opinions on such a complex topic?

Good job everyone!

[sailingdog]

Of course, most of this mess wouldn't be here if the banks hadn't gotten in the habit of handing out money and then worrying about whether it could be paid back again. That's what lead to most of the "identity theft" problems too.

[SailKing1]

Ilenart,
There are a couple of other factors. One is PMI (private mortgage insurance) which is required on loans with less than 20% down in most cases. There is also FHA loans. Both insure that when the bank sells the property at auction they get the balance of what is lost between highest bid and payoff. FHA foreclosures are sold through real estate agency's and the FHA has the option of taking an offer or holding out. They also report it on the homeowners credit.

[Ilenart]

Originally Posted by SailKing1

Ilenart,
There are a couple of other factors. One is PMI (private mortgage insurance) which is required on loans with less than 20% down in most cases. There is also FHA loans. Both insure that when the bank sells the property at auction they get the balance of what is lost between highest bid and payoff. FHA foreclosures are sold through real estate agency's and the FHA has the option of taking an offer or holding out. They also report it on the homeowners credit.

Ok, system is starting to sound more and more similar. We also have mortgage insurance on loans greater than 80% of the value. I believe the cost is around $2-4k.

Sailingdog, have to agree with you. If the banks had done a better job of analysing the risks when the original loan was made the outcome would of been a lot better. Still as CP said, by being able to offload the mortgage it becme someone else's problem.

In some respects Iam Glad I'm 30,000 miles away

Ilenart

[tweitz]

Just to correct one comment: It was almost never true that the bank could not go after you (what is called a non recourse loan). As a legal matter there was a loan (evidenced by the note you sign) and the mortgage was security for the loan. If you walked away and defaulted on the loan, you still owed the money, the bank simply had a right to seize and sell the property to pay for the loan. As a practical matter, and for people who did not care about their credit ratings, in times of rising prices the bank might just seize and sell the property, it would cover the loan because, even after the expense of the sale, the loan was only a portion of the original value of the property and because everyone assumed the value would go up and make the collateral (your house) ample to cover the loan.
With amazing stupidity, no one seemed to notice that there had been many times when property did not go straight up -- for example, I remember talking to some folks in Austin, Texas in the early 1990's. They said that almost all of them were upside down -- they owed more on the house than it was worth. This was because Austin was home to the Savings and Loan associations that were going bust and had been doing 95%, 100% and even 110% mortgages, and house prices had sagged. History can repeat with a vengeance.

Once upon a time the bank that loaned you the money held the loan, so they cared whether you could pay it back. What happened more recently is that the originator of the loan would quickly sell it, to get packaged in a loan portfolio, and therefore the originator had less incentive to be careful. In fact the financial incentive was to push the loan, and the originator got the fees and did not carry the risk. While we can all blame Wall Street, there is plenty of greed to go around, and I suspect the most criminal and fraudulent behavior was by loan originators and appraisers, who had every incentive to push the deal, and buyers, who chose to ignore any risk, who bought far more than they could afford and who often also exaggerated their income or history. There is lots of blame to go around.