As more and more homeowners are deciding to just walk away from homes that they either can’t afford or are no longer willing to pay for, lenders are starting to fight back: [Thanks L!]
The country’s two largest sources of mortgage money have a blunt warning for anyone thinking about joining the growing "walkaway" trend, where homeowners stop making payments and months later send the house keys back to their lender: You will feel the pain.
On March 31, Fannie Mae sent out new guidelines to lenders aimed at walkaways and other foreclosure situations. Fannie will now prohibit foreclosed borrowers from getting another mortgage through the giant investor for five years, unless there are "documented extenuating circumstances." In those cases, the mortgage prohibition is for three years.
Even after five years, borrowers with foreclosures in their files will be required to make at least a 10 percent down payment, and will need minimum FICO credit scores of 680.
Freddie Mac, Fannie’s rival, counts foreclosures as major credit blots for seven years, and a senior official said the company is now aggressively pursuing some walkaway borrowers "to preserve our deficiency rights" where permitted under state law.
Measures by lenders might discourage the "optional" walkers, but for too many borrowers, they have no choice. Strapped borrowers will continue to walk, regardless of the consequences.
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Even with these tougher rules, it still makes a lot more sense to walk than to pay more than a depreciating asset is worth.
In all honesty, with these rules in place, it makes sense to get out sooner rather than later. Let the clock start now, not in a year or two.
Feel the pain of walking away? As opposed to feeling the pain of paying into a depreciating asset that is worth significantly less than the mortgage? Clearly the lenders are in panic mode. They failed to properly analyze the risk of default in a declining market. Turns out credit score, job history, annual income etc. has little to do with the probability of a borrower making payments when upside down on their house. Once the borrower has negative equity, they are much more likely to default period. The lenders know that as house values continue to fall, more people will default, hence their threatening rhetoric. Good luck with that freddie and fannie. Most people will be more than willing to take the credit hit rather than throw money away into house worth less than the note. As for deficiencies? Most lenders don’t even have the resources to process the overload of foreclosures, let alone pursue deficiencies. See you in three to five years with 10% down.
“borrowers with foreclosures in their files will be required to make at least a 10 percent down payment, and will need minimum FICO credit scores of 680.”
Anyone else think that this rule shouldn’t be limited to borrowers with foreclosures on their record? Or is that just me?
I knew lenders were eventually going to fight back in some way when these walkaways started increasing in numbers. The buzz I am hearing from my industry pals is that large numbers of deficiency lawsuits will soon be filed against the walkers, especially if there is any kind of damage to the homes they are leaving. Even though the lenders may eventually lose some cases, they will put the former borrowers through years of litigation, saddling them with huge legal costs to defend these suits.
How dare the serfs walk away from the Fields…I mean, how DARE they?
Yes start the clock now. Credit hit? Please. Thats supposed to scare them into tossing more money away?
In reality though, they did sign the contract. At some level you have to honer what you say you will do, or thats the end of civilized living for us
Isn’t there still the 90 day window? For optional walkers that is. 90 days before a new loan or loan souring shows up on credit? In theory one could buy a second cheaper home as a residence and get locked in as the first is left twisting in the wind. Like a hermit crab changing shells…
If those choice is between:
1. walking away and not being able to get another mortgage for 5 years
2. taking a second or third job, working like a slave, depleting all my savings and retirement funds, struggling for 3, 4, 5 years or more, paycheck to paycheck, repair to repair, tax payment to tax payment, under crushing expenses, until the market recovers, well, guess what … *ding* You’ve Got Mail!
Keeping FBs from getting another mortgage w/in five years is just a way of protecting people from their own bad judgment. There are plenty of stupid sheeple who would turn right around and get themselves in the exact same position again if lenders would let them.
And I agree w/netdance. Everyone should have to make a ten percent down payment and have a FICO score of 680 or higher. Actually, I’d require a 25% down payment if I was lending the money.
Twist -
I still appreciate the work you do, and the numbers, graphs & articles you share here.
It appears the “personal accountability meter” reading has shifted (and dropped) significantly on this blog in the last year or so. (per the posters, not the hostest)
Maybe those who skew the level higher haven’t read this particular topic and posted yet?
Thanks again.
PS: Notice I directed this to Twist.
That means I invite anyone who is offended to keep your flamethrowers pointed at the evil lenders (and other conspirators) who “tricked” all those poor, helpless victims (people) into signing that big stack of papers outlining the promises to pay back all that money and eventually become a homeOWNER.
sorry — “hostess”
I must have been wrong. I always though it takes 20% down and a good credit to buy a house. Damn! I missed the boat!
As of litigation: I’m not sure if that’s worth the trouble. Borrowers don’t really need to hire a high price attorney to drag it on, right? All they need to do is to claim victim of fraud. And worst case, they file bankrupcy protection by the time the lenders have paid a bunch of money to get lawyers to initiate the suit. Lenders’ money is probably more productive in trying to fix up the property and sell it.
Of course, they will try to scare people but we’re in the information age today.
Haha
Asset Hunter – while walking away from a loan arguably isn’t ethical, I can see why someone would do it. If the alternative is draining all your savings first before declaring bankruptcy, its in you best interest to get out now. And at a more personal level, CEO’s lay off thousands of people while
legally embezzling millionsgetting huge bonuses from the company at the same time.. I can see why people wouldn’t be adverse to screwing a company back.At the end of the day, it’s just business. If you’re willing to accept the consequences of a broken contract (ie, the major hit on your credit), then really, what’s wrong with it?
It appears the “personal accountability meter” reading has shifted (and dropped) significantly on this blog in the last year or so. (per the posters, not the hostess)
I don’t understand how it’s “personally responsible” to destroy your future and that of your family when there is a legal way out.
In fact, I regard that as “personally reckless.”
I’m glad to see their are now some requirements to taking out a significant loan amount. It took longer than I thought for the banking cartel to see the light. For awhile I didnt think they even cared wether the seller OR lender was PERSONALLY ACCOUNTABLE or not.
Oh well.., monkey see, monkey do.
It was only a matter of time before this happened – the non-recourse nature of home loans in some states was a part of the problem with the bubble to begin with, and will continue to be for a while to come. If you can walk away and the lender cannot recover the difference, the credit hit alone is not much incentive to keep people from speculating.
Now a deficiency judgment that will chase them, on the other hand, and the prospect of bankruptcy to get away from it, that’s something different. A BK, both procedurally and on your credit, is a lot worse than a foreclosure, methinks, and with the so-called bankruptcy “reform”, a lot of people will be stuck with those judgments. (Think a judge will be real sympathetic about your losses on your second or third speculative home purchase, or withdrawing all your equity to buy that Hummer? Think again – some BK judges may be easy under the circumstances, but others, not so much.)
Time for me to start learning some collections law.
I’m pretty sure we’ll never have agreement on this, but perhaps if I restate the idea as one of these:
1. Fires bust out all over the place, like in the San Diego area recently.
The firefighters decide that it’s just not personally responsible to run in to or stay in a mess like that, and all just drop the hoses and “walk away.”
2. We get invaded by some hostile enemy force.
The service men & women decide that fighting just doesn’t make sense anymore and drop their arms & walk away.
3. Your family is attacked by some crazed maniac. You set yourself to go through the whole legal ordeal, so that justice will be done and other families might be saved from this madman.
Before or during the trial, he makes some threats to both attorneys & the judge.
Legal counsel and the judge decide that it’s not prudent to have this guy coming after their families when he gets out, so they just drop the case and walk away.
~~~~~~~~~
Sure, all of these folks could suffer a bit, and they’ll be a black mark on their service records later, but it’s a small price to pay for not having to fulfill the responsibilities you signed up for when things were “good.”
Heck… just “walk away.”
~~~~~~~~~
With some of the best and the brightest fighting in the desert away from families…
With heros of 911, Katrina, the fires and other tragedies shown rushing INTO places that everyone else is scrambling out of…
With law enforcement officers choosing to stay on beats in the worst parts of the worse cities every night…
With some parents sticking with their vows to each other… or their sick / deformed children, even when it’s tough day after day and year after year…
etc… etc… etc…
I just don’t understand the cavalier “business decision” that has become “walking away” from a house that you promised to pay for.
I guess it might help me understand if someone could just answer this question for me:
Who SHOULD stand up, fight the good fight, and do what they promised to do… even in the face of personal inconvenience or suffering?
(Agnostic knows that I’m just bubbling to bring up Jesus and start quoting verses… but I’ll refrain.)
Asset Hunter -
Excellent points all, I really could not agree more.
The problem here is that we are even having this discussion in the first place. When someone signs a loan doc promising to pay X dollars every month until the loan is paid off that is a legal and moral commitment. And as long as the price of that asset kept going up, everyone was fine and happy.
Now, though, reality is setting in and people are saying why should I continue to pay on something I am certain will lose me money?
An obvious question, and one that deserves an answer.
First off ALL of us should have the same attitiude as the Goodflellas guys did when they took over the restaurant: I don’t care – pay me.
Wife lost her job? F you, pay me.
Didn’t get that raise? F you, pay me.
Think this deal you entered into isn’t so good anymore? F you, pay me.
This action by Freddie and Fannie is a good first step, but unless lenders decide that a foreclosure is too hairy a wart to keep you in contention for homecoming Queen, well, it will all be for naught.
And, to a certain extent, all of us will pay (bailouts, higher nortgage rates, etc.) and that hurts those of us who did not step up to the housing market in the same way a degenerate gambler on a three day meth binge grabs the dice for the first time at the MGM Grands craps table.
And just like line snorting, mullett sporting toothless wonder, all of these new “hoemowners” were certain there was nothing but comped rooms, a $200 hooker and bypassing the line at Studio 54 in their future.
Well, the dice finally stopped, two ugly little snake eyes are staring up and guess what? The croupier just took all your chips and your next stop is the payphone to call the wife and arrange a Western Union Moneygram in the amount for bus fare home.
At any rate, I pray and hope that this is the first step in including “homeowners” for their share of blame for this, I only hope it continues and grows.
Who SHOULD stand up, fight the good fight, and do what they promised to do… even in the face of personal inconvenience or suffering?
YOU! YOU should stand up. Walk the walk!
To use your firefighter analogy, feel free to run right into the fire and risk your life to save a piece of inanimate property.
You can view that as heroism, but I’m free to view that as waste, bravado, even reckless macho stupidity and the wife and kids the dead firefighters leave behind, their lives ruined, to save a piece of property, may agree with me.
Interesting philosophical discussion.
NVmike – I’m curious, you seem to be saying you should never honor your commitments when they’re inconvenient. If it’s completely morally ok to sign up to get paid for danger, to make an agreement to do it and take your benefits from that agreement, and then to decline to face it as you’d agreed, or to sign up to pay for something, and take it, and then decline to pay for it, when do you need to honor your agreements? Ever? In essence, you seem to be saying that a man’s word not only isn’t, but NORMATIVELY SHOULDN’T, be worth anything. Am I reading you wrong?
Only five years? It should be ten years similar to a bankruptcy. I had a friend who had a bankruptcy who had to wait ten years before getting credit in order to buy a house. Make it ten years
I fail to see how walking away from a bad loan has anything to do with personal responsibility. If making a rational, financial decision within your legal rights as defined by a contract and state law is somehow irresponsible then perhaps you need to redefine for yourself what personal responsibility means. Lets remember one thing here. The borrower signed the contract but the contract was written by the lender. The lender made up the rules. The contract very clearly states what will happen should the borrower stop making payments. Notice of default, acceleration clause , etc. and eventually the property will be returned to the bank. In non-recourse states such as Arizona, thats game, set and match. There is no personal liability for any deficiency. So if the borrower makes a rational decision that the consequences of breaking the contract are less damaging than the consequences of throwing away good money after bad, the contract has language for such a contingency and will be carried out in accordance with state law. You got a problem with that then take it up with the banks that wrote the contract. Don’t hate the player, hate the game.
Its very easy to pass judgement on others who are forced into making difficult decisions. I suspect those of you against walking away from a bad loan have never been confronted with the dilemma. So be it. Just remember when you are searching the scriptures more moral guidance, or perhaps the moral high ground, you may want to refer to this oldie but goodie:
Judge not lest ye be judged yourself.
Sophodar-
There are those instances where borrowers may have no choice but to walk. If you lose your job, have financial setbacks, your ARM resets, or you have medical problems, etc. it might be all someone can do.
On the other hand, there are people who can afford the payment, and simply walk because they think they can get a better deal elsewhere. It is my understanding that those are the guys the lenders are targeting, and I don’t blame them.
Contracts are broken at times with good reason. I didn’t feel like honoring it any more, however, is not one of them.
I can’t find myself able to offer a blanket judgement either way. There are cases where the blame lies squarely with the lender, others where the blame lies squarely with the borrower- they there are all those shades of grey in the middle.
At the rate things are going, states will need to set up separate “Real Estate Courts” just to sort it all out!
NVmike – I’m curious, you seem to be saying you should never honor your commitments when they’re inconvenient.
No, Jim, I’m saying if there’s a legal way out, take it. The lenders take full advantage of the law, why shouldn’t their clients?
Maybe this whole “walk away” discussion should have its own theme song.
May I suggest:
Walkaway Joe by Trisha Yearwood
http://youtube.com/watch?v=djdvgAzqRy8
No, Jim, I’m saying if there’s a legal way out, take it. The lenders take full advantage of the law, why shouldn’t their clients?
Actually, I’d go further and say the lenders violate the law all the time, but people commit murders and theft all the time as well, and that doesn’t mean we should strive to emulate them. Back to the point, it’s legal, in many cases, to act immorally (e.g., to have an affair), but that doesn’t mean it’s right. There is morality in keeping your promises, and the fact that someone else breaks theirs does not make it morally right for you to do so, esp. in an unrelated case. (I might think differently about walking away when the lender defrauded you first.)
I suppose you think that there’s nothing wrong with having affairs, because it’s legal? Or returning to the fireman/police example, since it’s dangerous, if an armed lunatic was holding your wife hostage, is it perfectly acceptable for the police to decline to intervene other than from a safe distance while she is raped and murdered, because it’s legal for them to refuse to perform, and they might incur some risk if they had to go in and stop the guy? Even though they got paid in advance to do the job?
Of the three people that I know that are going through foreclosure. They all bought hummers and sequoias and boats with their second. Then when they had an extra baby or she lost her job they couldn’t pay.
They got liar loans that inflated their income. Or they didn’t read their docs. Of these 3 their interest only loans haven’t reset. They just borrowed out all the equity and happily spent it, but now can’t make their 4k a month house payment.
I think that the fact that all these people are walking away is a sad commentary about the commitment people feel in this country.
I’m with surak. I think these “penalties” are surprisingly weak. Not that I might not “walk away” if I were in similar circumstances – but I would have expected to suffer much worse. After leaving a bank stuck with tens (or 100s) of thousands of dollars in losses, I would think any other lender would wait at least 10 years before giving me another shot. And then only with EXCELLENT credit history and a large down payment. Additionally I would expect a judgement against me in the amount that the bank lost. And no new mortgage until that was paid. Might mean I never bought again, or had to find some other creative mean to buy, but thats what I would’ve expected…
Sounds to me like borrowing big money became way to easy, with practically no consequences for not owning up to the responsibilty. What a mess.
The banks are finally realizing why you don’t lend poor people (or people that are poor with their finances), a large amount of money.
No sympathy. They’re getting what they deserve.
“…borrowers with foreclosures in their files will be required to make at least a 10 percent down payment, and will need minimum FICO credit scores of 680.”
Talk about an empty threat!
Wizeone-
“The buzz I am hearing from my industry pals is that large numbers of deficiency lawsuits will soon be filed against the walkers, especially if there is any kind of damage to the homes they are leaving. Even though the lenders may eventually lose some cases, they will put the former borrowers through years of litigation, saddling them with huge legal costs to defend these suits.”
1. The banks have a case with scumbags that strip the houses they’re abandoning. Hopefully the banks have investigators prowling Craigslist and local classifieds looking for “everything must go!” ads. These people absolutely need to be punished.
2. With regards to saddling walkers with huge legal bills: I say good luck with that. You cannot sue poor people. Poor people cannot afford lawyers (but plenty of free ones will be lining up to defend them against the evil banking industry), they cannot settle lawsuits, and it’ll be difficult to garnish wages when the banks didn’t follow due diligence in issuing loans in the first place.
And when a walker did do everything right, and left a house that they’re impossibly underwater with, in a neighborhood infested with drug houses, gang activity, and every other type of scum that these failed neighborhoods attract, good luck in finding a sympathetic jury that will find for the plaintiff.
When it gets right down to it, the bank may find their best success is to write it off as a learning experience, and to permanently blacklist walkers from ever being able to get a loan from that particular institution again, if that can even be done…