What would you do in this situation?

[hedgehog]

A caller to Dianne Rehm this morning presented himself as associated with a small, local bank. According to him, people who were properly vetted for mortgages, and who are still well able to make the payments, have been coming in and insisting that the bank write off the bulk of the debt on the grounds that the value of the house has fallen.

So, assuming the situation is as described, what do you think? If a bank makes a good faith loan, is it the bank's fault if the collateral drops in value, and should the bank be responsible for taking the hit?

[CBGLuthier]

1. Probably not, but I will be damned if I will feel sympathy for a fucking bank.

[ljm2002]

2. Given the scope of the situation...

...I think there should be a national program to make adjustments across the board, that acknowledge the huge devaluation that has occurred and give homebuyers some relief.

But that, of course, will never happen.

[dmallind]

11. The problem is the majority ARE OK.

...not even the most ardent doomer can point to numbers showing > 50% underwater or in foeclosure. I'm not either - I paid my mortgage on time even without work for ten months, and I have a low fixed rate loan with lots of equity because that's the sensible thing to do.

But my house has lost some value too just like most anyone else's. Not hugely and I still have equity, but market value does not depend on my sensible loan choices. I was willing to pay my monthly payment to live there when I bought it, what grounds do I have to say I don't want to pay the same now. Because it's worth less? Tough shit - so is my car, my TV, my computer and every other big ticket item that many people finance.

Any remedy to homeowners would have to include the majority who like me can and do keep paying. The alternative is both politically suicidal and logically stupid - rewarding people who did NOT meet their obligations over those who did, when the latter are far greater in number. This would be a waste of money to do, and deeply antagonistic to restrict to those who failed to pay. Where would be my incentive to keep paying if I could get a discount by stopping? "To each according to his need" in this case is a guarantee that you will create more needy people who will suddenly find themselves unable to keep up with their payments.

[ljm2002]

18. In my state...

...more than 50% of homebuyers are underwater on their mortgages. In my city, Las Vegas, the number is considerably higher.

[dmallind]

22. But that is not representative. Some areas have seen prices increase too - neither are they. nt

[ljm2002]

23. Handy handwave, that...

...given we are talking about an entire state.

Also, do tell about all the places where housing prices have gone up. From what I've been seeing that is not at all representative.

In addition, much value has been lost even for people who are not underwater on their mortgages.

The fact is, the banks engineered a disaster for which they have yet to pay. They pumped up the "value", then when it all collapsed the government paid them 100 cents on the dollar, while the rest of us took a bath. Hundreds of billions of value were wiped out just like that, but not for the banksters who continue to live high on the hog and receive their large bonuses.'

Here is an interesting link:

http://moneywatch.bnet.com/saving-money/blog/home-equity/home-value-loss-reaches-9-trillion/3424/

"...the total loss since the market peaked in June 2006 to $9 trillion. To put this in perspective, $9 trillion is:

* 12 times the cost of the war in Iraq
...
* a little over 9 times the GDP of Australia."

(added on edit)

"In the third quarter of 2010, 23.2 percent of single-family homeowners who had a mortgage were in negative equity, up from 21.8 percent in 2009."

So over one in 5 homeowners nationwide are underwater, but you think it ain't no thang... okay.

(end edit)

Remember, the banks were made whole, while the little people got to absorb that $9 trillion loss.

Not that I am expecting to convince you. It seems a lot of folks just don't want to see the extent of the problem.

[dmallind]

25. Nope just correct.

It is no more reasonable to base national policy on LV's dramatic losses than it is on, say, DC's gains

Here's a cite for that one btw. YOY gain is exact mirror of LV loss, and the population in the metro area is about double all of Nevada

http://blogs.wsj.com/economics/2011/01/25/a-look-at-case-shiller-by-metro-area-january-update-2/

The rest of your post is pure strawman - you seem to be arguing against some non-existent claim that all is well and nobody has lost any value. Instead what I actually claimed is that a majority are neither underwater nor in foreclosure. It's a simple sentence. A majority, not "a majority in some highly specific area".

Here is a cite supporting my actual claim. Either prove THAT wrong or accept I am correct, even though I have no hope you'll admit it based on the demonstrated inability to even distinguish what I said from what you want to oppose.

http://articles.moneycentral.msn.com/Banking/HomeFinancing/nearly-1-in-6-homeowners-underwater.aspx

[notesdev]

3. If the bank did the right thing

then the borrowers are stuck with what they signed for. If they don't like the deal most of them can freely mail the keys to the bank and evacuate the property.

The real problem are all the lenders who committed various forms of fraud - and these are largely the bigger banks (or companies absorbed by the bigger banks as a result of the bailouts in 2008).

Now there is arguably a larger issue, that the valuations themselves were fraudulent, but the lending bank is not responsible for that IF they did their paperwork properly, dotted their i's and crossed their t's.

[LostInAnomie]

4. I couldn't give a shit less if banks get fucked.

Karmically banks and bankers deserve anything bad that can happen to them.

[leveymg]

5. The bank has the choice: modify the mortgage or pay the cost of foreclosure.

The problem isn't really people able to continue paying the full note who threaten to "walk away". The bigger problem is the refusal of lenders to modify mortgages for borrowers in distress, and refusal of Obama and Congress to make adequate measures to help middle-class families stay in their homes.

[Shagbark Hickory]

6. Sadly, no. The banks don't negotiate the sales price. The buyers do. OTOH...

OTOH... if the buyer is barely hanging on and is likely to foreclose, it would be a good business decision, IMO to try to let the buyer do a short sale, first and foremost, sharing the loss with the owner.

I sure would like to see the cost of housing controlled by the government to prevent these bubbles and make housing affordable for all, but that comment never wins me any friends.

[MineralMan]

7. Nope. That's not the bank's responsibility.

Buying a home or other property is an investment that carries with it some risks, just like any other investment. As long as the loan wasn't made under fraudulent conditions and the borrower understood and accepted the terms of the loan, the borrower is responsible for repaying that loan. To claim anything else just doesn't wash, as far as I'm concerned. Now, if the loan was misrepresented, that's another story.

The value of real estate fluctuates. A lot of people bought on the high side of that market and then experienced a drop in the value of their property. The answer is to keep paying and wait. Odds are the value will stabilize and increase. That's the historical pattern.

When my wife and I bought our house in Saint Paul, we did buy on the high side of the market. We paid cash for it, after selling our home in California - also on the high side of the market. We've lost some value over the past couple of years, but it's starting to creep back up. In a few more years, assuming the economy recovers, we'll recover that lost value. I'm not concerned, but, then again, I bought a house to live in and it's unencumbered at this point, so there's no particular risk for me.

I really understand the frustration of people who are underwater in their mortgage. If they can make the payments, they'll end up recovering.

[MineralMan]

13. To extend my comments a little:

Everyone who invests in real property puts something at risk. The buyer and borrower is betting that the value of the home will not go down, but up, over time. The bank bets the same, and bets that the buyer will make the payments as specified in the note. The bank's also betting that the value of the property will stay at the level it had when they made the loan, and ostensibly gets an accurate assessment of its value before handing over the money.

The buyer is supposed to be fully informed of the terms of the loan and, in the case of variable interest loans, how the interest rate is set over time. Those things do not change during the term of the loan, although payment amounts may change if the interest rate changes, as agreed to by the borrower (buyer). If either side makes a mistake in the process, problems may ensue, as we've seen.

The buyer may make a mistake in assessing his or her potential income. If it goes down, he or she may not be able to make the payments. The buyer may also guess wrong about future interest rates or have an unrealistic expectation that the home can be refinanced at some future time. The buyer may think that the house or property will be worth more later, as well. If any of those things changes, the buyer is in trouble, and may have to default on the loan or try to renegotiate terms. Both are negative outcomes.

For the lender, the risks are similar. Again, if any of the factors fails, the lender also faces a loss. If the borrower defaults, the lender gets the property. If the value of the property is less than the principal still outstanding, then the banker's in trouble with that loan. But, the banker has ownership of the property, which was part of the terms of the loan. The details vary from jurisdiction to jurisdiction on what happens in a default, but it's never good for the bank, overall. That's especially true if property values have dropped and the housing market is stagnant. Losses to the lender ensue. The borrower can become bankrupt and the lender just has the devalued property.

It's a lose lose situation for both, but those are the risks in real property transactions. Everyone assumes part of the risk and suffers if conditions deteriorate. So it goes.

Now, if shady lending practices occur or other factors mean that the buyer did not really agree to what was signed, then the buyer may have a case. If not, everyone loses and things go on from there. Investing is risky stuff. Sometimes you come out ahead. Sometimes you do not.

[jdlh8894]

8. No

You buy a new car. As you drive it of the lot,it has dropped 20 to 25% allready.
This has been known for years.You took out a loan for a certain ammount-you pay that ammount plus intrest. Not the banks fault!

[alphafemale]

21. This.

Thank you for saving me having to type out the obvious.

You're supposed to teach kids before the age of eight that "It's not fair!" is never a legitimate excuse for getting out of your responsibilities.

[Tansy_Gold]

9. Some observations from Arizona

Where the housing boom/bubble affected a lot of people.

1. Even small banks should have people knowledgeable about the housing market. That this was a bubble was no secret -- many, many, many people saw it coming. The fact that the loan officers at the bank didn't see it -- or chose not to see it -- is not evidence that it wasn't there.

2. The bank made a choice to make the loan. There were never any guarantees that the loan would be paid back. Promises, yes. Agreements, yes. But in the absence of mortgage life insurance, the death of the borrower(s) would have resulted in foreclosure or something similar.

3. The bank made a choice to gamble on the loan. Giving anyone money and expected it to be repaid always carries some risk. The bank could have avoided this risk by not making the loan.

4. The borrower also made a choice. There was no guarantee the borrower would continue to have sufficient income to pay back the loan. There was no guarantee the house would retain its value. Therefore the borrow also took risks.

5. Both the bank and the borrower are now faced with choices. The borrower can continue to pay on the loan and eventually end up with clear title to a property that cost them many times its value. But they will own it nonetheless. The borrow can "strategically default" and walk away, leaving the house to the bank. The borrow risks ruined credit and the loss of whatever money they've already invested in the property, but that may be less than the loss of continuing to pay on the house. The borrower can ask the bank to renegotiate the loan, either by writing down a portion of the principal or setting a lower interest rate. The bank does not have to renegotiate if they don't want to, but then they risk a strategic default, in which case they get back an asset that is probably not worth the amount of the mortgage. And in the absence of any other collateral, they may not be able to get anything else out of the borrower anyway.

Too many banks seem to have taken the attitude that everyone else should pay for their (the banks') gambling losses. In my estimation, that's part of the cost of doing business. The banks made a whole shit pile of money when the housing market was booming and now they're crying because it's not quite so booming any more.

Tough shit, says



Tansy Gold

[damntexdem]

10. My home's value has undoubtedly dropped below what I still owe.

But I am able to make my mortgage payments and don't plan to move soon.

The write-offs are for those in bad situations, unable to make mortgage payments at the very least. They should be reserved for those in such situations. Even if I wished to move and couldn't sell the house for what I still owe, even though I would feel horrible about that, I am not in the dire situation of others for which the special programs should be reserved.

[hedgehog]

12. Thinking about it, I've twice sold a house for less than the money I had in it.

In each case, I owned the property free and clear. In each case, I had put money in improvements but had to sell during a down time.

[MineralMan]

14. It happens.

[The Green Manalishi]

16. Thank you for making sense

A house isn't an "investment", it's a place to live.

[TreasonousBastard]

15. A deal is a deal, no matter how much one may hate the banks. My usual suggestion is...

to go after the person you bought the house FROM and who is the one who happily walked away with the most ill gotten gains out of the bubble-- but that's not going anywhere, nor is the suggestion that real estate agents, assessors, or mortgage brokers ante up.

It's impossible to break out who's who, but plenty of people out there bought and borrowed on the wrong end of the bubble thinking they could cash out at a profit in a few years. They try suing their stockbrokers when the market goes down and I even heard of a couple of assholes suing their car dealers because they paid extra for some year's hot model but couldn't flip the cars.

If you bit off more than you could chew and you bet doesn't work, you either pay up or go bankrupt-- blaming someone else for your mistake only works when there's someone else to blame.

[hedgehog]

17. I think the hard part is deciding when someone else is to blame.

In this case, when major banks comes into a market and starts a bubble in housing prices by loaning out larger and larger amount of money, how do you allocate the blame when the bubble bursts? I blame the major banks for causing the bubble because if they refused to loan the money, people wouldn't be able to bid up the price of housing. I say the major banks because local banks don't have the assets or market influence to hold the line against a bubble.

[Vickers]

19. As long as they are willing to pay MORE when the home value goes up.

:eyes:

I'm no friend of the banks, but JFC...

[RedCloud]

20. I'd get in that vault and make off with the loot!

[treestar]

24. That was a risk they took.

Just like the buyers. Everyone assumed housing values would always go up.

Maybe in the long term they do.

The bank chose to make the loan on that collateral and knew its value could change (along with the risk it took the borrower could not make the payments). And the change not always be for it to be worth more and more.