Housing Doom

The recourse to defaulting mortgage borrowers. [slide 12] I think we … and I was brought up to date of some recent changes in Alberta that make it even more uniform across Canada. In this country roughly half the States allow recourse, half bar it, but even in the States where recourse is allowed, it doesn't seem to be pursued very often. And I think we've seen in some of the European countries, and Denmark is one that comes to mind, one of the strengths of the Danish system is, not just recourse, but aggressive pursuit of delinquent borrowers. // And that's what's key. It's not just having recourse, but it's making sure you go after them. And I think to some extent this reflects maybe one cultural difference between Canada and the US. And it is that Canada, at least in terms of housing finance, seems to have more of a creditor orientation whereas the US, given its populist history has long had a much more of a bias towards and tilt towards debtors. And I think where you see this particularly is with regard to recourse. – Bert Ely, a couple of paragraphs below the 1:15:00 point of Sub VI Hotel

When the bubble at The World burst last fall, Europeans fled for their lives, famously leaving the keys right in their luxury cars at the airport parking lot.  Could a similar situation be unfolding in slow motion in the American south-west?

It was lucky I spent yesterday finishing up Bert Ely's presentation from Sub VI Hotel, because today twist's old friend Hubble Smith from the LV Review-Journal is lead author on a must read article on strategic default trends in Nevada.  NV's a recourse State, but CA isn't.  Are former Californians going to have to flee back down Route 15 to escape the consequences of their failed flips?  And would those NV judgments be enforceable in CA, creating back-door recourse?  The gang at AEI is pretty hot on federally imposed standards for recourse and they're talking NV standards, not CA.

LV R-J: "Underwater homeowners leave behind mortgages, but lenders can still come calling: Moral, social variables play role in predicting defaults"

A subsidiary of Goldman Sachs Group filed more than 50 lawsuits against Las Vegas homeowners in one month last year. Some experts say the litigation could signal the beginning of a Wall Street backlash against defaulting borrowers.

[bankruptcy attorney Philip] Goldstein expects short-sellers to face a flood of collection actions in the coming few years. Second-mortgage lenders, especially, are aggressively pursuing borrowers.

Perhaps our best hope is to be found in the observation that most Americans still find something morally repugnant in strategic defaults, and in the evidence that our collective willingness to set aside our moral convictions may be held in check if enough people remember the Ten Commandments at the right moment and think: Thou shalt make thy mortgage payment. – Kevin Hassett¹

Click the pic to go to the Amazon & the following info (you can't make this stuff up):

3 new from $30.00 … 22 used from $0.95 … 1 collectible from $5.00
…

AEI Senior Fellow Kevin Hassett's article¹ and it's tortured logic is a must-read.  All I've got to say is that the academic research community has some pretty weird ideas about this issue.  Fortunately Igor's got a secret survey that suggests 71.07 percent of underwater subprime and Alt-A borrowers also own the above 1999 classic which Hassett co-authored with retired US propaganda chief James K. Glassman so it's pretty unlikely they,² at least, would ever be able to get their heads around anything as complicated as "strategic default" to begin with

But that being said we really don't have to worry that there will be massive amounts of unforced jingle mail from private persons.  The moment the authorities suspect that such a trend is in the offing every feuding party within America's establishment will come together and squelch it faster than you can say "Federal Recourse Standards Act of 2010."

UPDATE (2/26): And if you think I'm just whistling Dixie here, check out this article⁴ that comes out of the American Enterprise Institute (indeed the charts it uses come right out of Sub VI Hotel, so perhaps I should scurry off to the dungeon and continue working on the thing )

Almost all Canadian mortgages are “full recourse” loans, meaning that the borrower remains fully responsible for the mortgage even in the case of foreclosure. If a bank in Canada forecloses on a home with negative equity, it can file a deficiency judgment against the borrower, which allows it to attach the borrower’s other assets and even take legal action to garnish the borrower’s future wages. In the United States, we have a mix of recourse and non-recourse laws that vary by state, but even in recourse states, the use of deficiency judgments to attach assets and garnish wages is infrequent. The full recourse feature of Canadian mortgages results in more responsible borrowing, fewer delinquencies, and significantly fewer foreclosures than in the United States.

……………….

Wow, but it's getting tough out there. This⁵ just in from a MarketWatch RE agony column.

Q: … Where did I go wrong? I want to move on with my life but this property is not letting me to do so. [reader moved from MI to AR in '08, hasn't sold MI house] I have contacted a number of real estate professionals, attorneys and lenders for possible loss mitigation options. The options are uncharted waters for me and very scary with no clear definition of the consequences. I am in desperate need for your help and direction.
A:… As you suspect, though, the consequences are rather grave, whichever path you choose. Your credit record is going to take a severe hit, not to mention your psyche. So before you do anything, I suggest you speak with a certified housing counselor about your situation. …

… but on the other hand, Tyler noted⁶ today (hat tip twist) that the Administration is threatening to give the lenders no recourse whatsoever, not even allowing them to pull the plug.  Is there no middle ground?  John Ryskamp, I know you're out there somewhere.  Whatever you're doing, could you please just cut it out?

Yesterday it was announced that the government is taking the first step in a plan to virtually ban foreclosures – a step that can only be classified as capital markets suicide. …

The real problem comes when tens of millions of sheep wake up and realize that their moral convictions are being exploited by a financial elite that itself has none.³

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Seller may be asked to sign a note for the deficiency at closing – Newnan Times-Herald¹

But wherever you are in America, just be careful out there and get professional advice as appropriate.  Recourse has a thousand faces.

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Even the Mortgage Bankers Association, long a critic of individual homeowners walking away from their mortgages, announced last week it was defaulting on its headquarters, a Washington, D.C., building it opted to sell in a short sale when it fell underwater. ABC¹

**WARNING** volume hog — find your system volume control and crank it way down before you start …

UPDATE: Doomers can click on the Recourse Mortgages topic at the bottom of this post to see our previous coverage.  Even the WSJ² is taking this issue seriously now.

State laws vary immensely on the powers lenders have to pursue deficiency judgments. (The deficiency is the gap between the amount the lender can recover through foreclosure and the loan balance.) In some states, such as Florida, state law gives lenders lots of room to pursue such judgments, and for up to 20 years. In Arizona, the law protects almost all homeowners from such actions.

The appendix to this report gives some details on how states treat this issue.

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What a sweetheart deal for One West Bank courtesy the American taxpayer:

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What is the biggest debate in the world of real estate today?  To paraphrase the Bard, To walk or not to walk, that is the question.  Interestingly, Matt Koppenheffer over at Motley Fool makes the case for not only walking away, but walking away now:

While strategic defaulters may force us to deal with increased foreclosures now, they save us from having to swallow the problem over a longer period of time.

One of the key reasons that it may make sense for some severely underwater homeowners to default is because they can't rationally hope to have equity in their home for many years to come. If circumstances dictate that these homeowners need to move, or no longer have the means to pay for their mortgage a few years down the road, they will likely still be in a position where they will have to foreclose or short-sell, rather than sell their house on the open market through the normal process.

Even if these homeowners remain in a position to pay their mortgage for years to come, the lack of equity in their home will keep them out of the homebuyer pool, even if, under normal circumstances, they'd like to move up to a larger home. These factors could help keep the housing market stumbling along for some years.

Additionally, for the housing market to truly find itself on a sustainable path, we'd need to see home prices fall back into line with historical norms. One widely used gauge of home prices involves comparing housing prices with prevailing rental rates. Between 1988 and 2000, the average home in the U.S. sold for 14.6 times the average annual rental rate. Though this multiple has fallen significantly since its high of 25 in mid-2007, it was still at 18 during the third quarter of 2009. Strategic foreclosures could help bring this multiple down further, allowing more potential buyers to be able to afford a home, and putting the market back on a sustainable path.

And though my colleagues and I have poked some fun at the extraordinarily low interest rates that the Fed has been providing for banks, this highly accommodative stance from the Fed gives the banks additional ability to absorb hits from their mortgage portfolios now. Prolonging the process risks the possibility that the banks will have to keep limping along when interest rates are not there to cushion the blow.

Finally, as one reader pointed out to me in an email, homeowners who walk away from a hefty mortgage in favor of a lower rent payment suddenly end up with more money in their pockets at the end of every month. This money can be pumped back into the economy if they decide to spend it at Wal-Mart or Costco, for instance, or it can be pumped back into the stock markets as these folks rebuild their retirement nest egg. Read the rest of this entry »

Considering a short sale in Arizona?  It pays to be careful.  M forwarded me the following information that he received, which came from a discussion with Tom Farley, CEO of the Arizona Association of Realtors. It stated:
 

One issue that Tim made perfectly clear, and we all felt was important to get out to those of you who may not have attended, is this.  In Arizona, there is anti-deficiency protection for a large number of property owners who go through foreclosure, however, there is no statute that proves anti-deficiency protection to any property owner in the case of a short sale.  Our anti-deficiency laws only cover foreclosure.

Tom Farley stressed that it is important that we not make incorrect representations to the sellers in this regard.  The deficiency protection they may be able to receive is only found in the terms of the short sale approval letter provided by the lender. If the lender does not fully release them from the lien, but only releases the property to close and transfer, there is not any guarantee that the lender will not pursue the seller for the remainder of the unpaid balance on the note.

One popular myth that was dispelled at yesterday's meeting is that there was protection if it was purchase money.  This is not true.  While some lenders are providing the release in these cases they are not obligated to do so.  Tom stressed the importance of legal counsel for sellers facing short sale with regards to this issue once again. Read the rest of this entry »

Opponents say it's a way for banks to take people's houses without legal safeguards built into the court system – even when a lender's claim to foreclose is shaky. – News-Press¹

Reporter Dick Hogan does a pretty good job laying out all aspects of the story, and Doomers could do worse than clicking through to the whole piece.

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There are many underwater borrowers who are asking themselves why they bother staying in a home that's worth less than they owe.  One reason is that, in some states, walking can be really expensive: [Hat tip L!]

Jan. 28 (Bloomberg) — When John King stopped making payments on his home in Coral Gables, Florida, two years ago, he assumed the foreclosure ended his mortgage contract, he said. Last month, a Miami-Dade County court gave collectors permission to pursue him for $44,000 stemming from the default.

King is among a rising number of borrowers who are learning that they can be on the hook for years after losing their homes. Amid a crisis that stripped $6.4 trillion, or 28 percent, from the value of U.S. residential real estate since the 2006 peak, lenders are exercising their rights to pursue unpaid mortgage balances. To get their money, they can seize wages, tap bank accounts and put liens on other assets held by debtors.

“The big dogs get a bailout, and the little man gets no mercy,” said King, 39, referring to the U.S. government’s rescue of banks and other financial institutions.

While there are no statistics on the number of deficiency judgments approved by courts, the Federal Deposit Insurance Corp. tracks the amount banks collect after defaulted loans were written off.

These mortgage recoveries rose 48 percent to a record $1.01 billion in the first nine months of last year compared with the year-earlier period, according to the Washington-based regulator. Recoveries on defaulted home-equity loans almost doubled to $392 million, the FDIC data shows.
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Yesterday Lingling Wei and Mike Spector reported on a $4.4 billion dollar default in New York City:

A group led by Tishman Speyer Properties has decided to give up the sprawling Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan to its creditors in the collapse of one of the most high-profile deals of the real-estate boom.

The decision comes after the venture between Tishman and BlackRock Inc. defaulted on the $4.4 billion debt used to help finance the deal. The venture acquired the 56-building, 11,000-unit property for $5.4 billion in 2006—the most ever paid for a single residential property in the U.S. The venture had been struggling for months to restructure the debt but capitulated facing a massive debt load and a weak New York City economy that has undercut rents and demand for high-priced apartments.

So does Tishman Speyer need to mail back the keys to survive?

The Stuyvesant Town deal is one of several Tishman Speyer did at the top of the market that the company is trying to save. But the company itself isn't threatened. It took advantage of easy credit and investors' eagerness to buy into real estate during the good times. As a result, it didn't put much of its own cash into deals.

Here's where I think the story gets funny.  There has been a lot of controversy over the morality of "strategic default".  Note how much nicer it sounds when a major company does it:

"It has become clear to us through this process that the only viable alternative to bankruptcy would be to transfer control and operation of the property, in an orderly manner, to the lenders and their representatives," the venture said in a statement to The Wall Street Journal. "We make this decision as we feel a battle over the property or a contested bankruptcy proceeding is not in the long-term interest of the property, its residents, our partnership or the city."

Are these guys selfless, or what?

MORE (John M): Big hat tip [oops! not "big hat", unless we start awarding prizes for tips -- which would just annoy Cass anyway ] to Doomer arizonaslim for showing us that HuffyPo's on the same page¹ with the Two-Tier Morality story

On Wall Street, it's okay to walk away from your mortgage.

"We basically walked away from it," said Clark McKinley, a spokesman for the California Public Employees' Retirement System [CalPERS], the nation's biggest municipal pension fund. CalPERS, one of several investors in the venture, wrote off its $500 million investment, McKinley said.

"It's underwater, anyway, so we've lost it," he added. "We took our medicine, and we're learning from it."
…

So if Wall Street can do it, why can't homeowners?

Two and a half years ago super-bear investor Kyle Bass saw this coming and suggested leveling the playing field by treating Joe Sixpack more like Tishman and BlackRock.  Doom covered that at the time in post "Personal Chapter 11 — The K-BASS Proposal" (Aug 25, '07), and my then-objections to the plan seem to have (**ahem**) largely evaporated since then

What little has emerged about Bass’ Personal Chapter 11 proposal leaves more questions than answers. How can the big GSEs possibly shoulder this burden with their huge, but still limited capitalization? Wouldn’t the present implicit guarantee on their senior debt need to be strengthened to full faith and credit? And would this further imply a closer relationship with the government, even up to F&F reverting back to the US agencies they once were? Housing Doom is waiting with anticipation for further details filling out the proposal, whether supplied in parts of the newsletter that haven’t yet come to light, or in further discussion by Mr. Bass.

AEI's banking analysts have been worried for years that the general public would discover and reject this two-tier morality.  This concern is well documented in posts under Doom's Recourse Mortgages category.  In Doom's Sub IV transcript you'll see where UBS' Tom Zimmerman is concerned about Augustine home sales, a particularly egregious practice where some home buyers were actually flipping out of their existing places into similar homes just down the street with (since the crash) lower prices.  Tactically strategic default?

But the rubber really hit the road a half year later with this late question (by someone who I'm pretty sure is an Elizabeth Warren protegé) in Sub V, and especially Chris' reply.

…

Nick Smyth: … yes, so the question is about why you think that we can have bankruptcy for Chapter 11 for AIG, but you see it as an unfair breaking of a contract for a homeowner. I just … I don’t get why we should have bankruptcy for corporations, but not for individuals.
…

Chris Whalen: If that legislation is passed, you will never have a securitization market in this country again. The other issue you have to understand is that most loans, you cannot legally get control of them so you can modify them.

I have a loan that was originated by Bank of New York. It was bought by Lehman Brothers. It was sold into a securitization. I know where it is. I know where it is. I can’t get to it, though.

Lehman cannot modify my loan. I’ve already asked them. They can’t. It’s legally impossible, so this is a — it’s an absolute illusion that comes out of a city where every day is Halloween … [laughter] … All right? That you can modify existing State Law contracts. You can refinance them, but remember you have an agency structure here. If you were the banker, and I was your borrower, and you were servicing the loan, then yes, we could do it. But not in a disaggregated agency.

… so the bottom line is that this is one awful mess.  Before her untimely death from cancer, Calculated Risk's Tanta had a number of articles discussing how to modify securitized loans.  However, I don't think even she made very much progress on the issue.

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