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The Foreclosure Monster Isn’t Going Away

By JLP | February 26, 2010

The foreclosure monster isn’t going away. We are two years into our rescue plans and people are still facing foreclosure. How many?

Foreclosures may reach as many as 7 million mortgages, and an additional 5 million are at risk of default because borrowers owe more than the property is worth, Laurie Goodman, senior managing director at Amherst Securities Group LP in New York, said in a Feb. 17 interview.

“This is a problem of mammoth proportions,” Goodman said. “You can’t throw 12 million people out of their homes, so you need a successful modification program. My fear is that this isn’t it, but I’m highly confident that the administration will continue to iterate until they succeed.”

You can’t throw 12 million people out of their homes? Why not?

Now the Obama administration is looking at banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program (this is the article from which the above quote was taken). This doesn’t seem like a good idea to me. How long would it take for a homeowner to get screened for such a program? In the meantime, what happens to the loan? What happens to the missed payments?

I would like to see the statistics on how many people, who got help avoiding foreclosure, still ended up in foreclosure. Give us the hard numbers. That’s the only way we can see if these programs are working or not. I’m pretty sure we wouldn’t like what we found out.

I’m curious. Have you been through the foreclosure process? How did it work? Have you been through the government’s programs to help you stay out of foreclosure? How did that work out? Please leave a comment. I’d like to hear your thoughts?

Topics: Credit Crisis, Housing Market | 24 Comments »


24 Responses to “The Foreclosure Monster Isn’t Going Away”

  1. Mike Says:
    February 26th, 2010 at 11:44 am

    I’m positive I will get berated for sharing my story, but here it is nonetheless. My wife and I were married in early 2007 and bought a small 2br condo in Silicon Valley for $499K. We were not required to put any money down. We were somewhat apprehensive at the time but our parents, friends and support network all insisted that “home values never go down in the Bay Area”. The plan was to stay here 2-3 years and then move up to a small home and have kids. Well, 3 years later our place is currently worth $260K. Even if home prices were to increase 5% annually, it would take us 14 years to be above water again. We analyzed the situation, talked to several people in real estate and finance and made the decision to walk away. We made our last payment in July 2009 and have seen little to no consequences since. We get maybe 1 automated call from the bank per month and yet to receive anything by mail. At this point we are in limbo just waiting for the other shoe to drop. My situation and millions of others just like me (I know of several in my building alone) are the reason not to believe the market is coming back. We are a false bottom and it will take years to work through all the shadow inventory.

  2. rubin pham Says:
    February 26th, 2010 at 11:59 am

    in my neighborhood, the foreclosure rate is about 25%. my mexican neighbor told me he tried to talk to his bank about loan modification without success. so his family moved out during chrismas.
    as far as i know most banks are unwilling to work with loan modification program for apparent financial reason.
    the decline of the american empire is here to stay. housing will take a long time(10-20 years) to go back to the peak of summer 2007.

  3. Stacey Says:
    February 26th, 2010 at 12:08 pm

    Thanks for being brave and sharing your story, Mike. I’m sure it wasn’t an easy decision. We’ve berated others, but we’ll leave you alone :)

  4. Sam Says:
    February 26th, 2010 at 12:29 pm

    I don’t have a foreclosure story. We have been paying our mortgage down for the last several years, against the advice of some on this blog. At this point we have less than three years before it is paid off. Underwater? You could bulldoze our house and the lot would still be worth more than we owe.

    Debt is slavery.

  5. Lucas Says:
    February 26th, 2010 at 12:37 pm

    JLP,

    You really seem to make have some type of moral judgment about people and foreclosure. Corporations declare bankruptcy ALL THE TIME and walk on leases and loans. Investors take the risk to loan them the money and simply lose some (generally not all) of their investment if the funds are not repaid. Why the outrage?

    Seriously, what would happen to YOUR business (and income)if 12 million people were tossed from their homes. How would that help you? It was be a national disaster.

    I just don’t get your moral outrage. Now if your local community bank had loaned the funds, and your neighbor just skated, different story. But then your local bank wouldn’t have likely written a sub prime, variable rate, balloon note, they KNEW couldn’t be repaid just to get a fee.

    Best,

    Lucas

  6. JLP Says:
    February 26th, 2010 at 12:43 pm

    Moral outrage? Show me where I expressed moral outrage in this post? I’m questioning the validity of the program.

  7. Lucas Says:
    February 26th, 2010 at 1:25 pm

    This statement:

    “You can’t throw 12 million people out of their homes? Why not?”

    That comment has nothing to do with the program and is a judgment of individuals. You’re a good guy and I like your blog. I just think your comment represents a short sighted perspective. We know you borrowed what you could afford, and have been paying it back on a timely basis.

    Remember, this bailout has been for the banks, not individuals. Investment banks who sold billions of mortgage back securities to pensions, municipalities, and individuals and at the same time bought derivatives (credit default swaps) betting that what they sold was garbage. They made money BOTH ways.

  8. Lucas Says:
    February 26th, 2010 at 1:28 pm

    Correction: They made money betting on the bubble bursting and when their partner(s) (AIG) couldn’t make those default payments the Fed (we taxpayers) stepped and made them whole.

    Be outraged with that.

  9. Kirk Kinder Says:
    February 26th, 2010 at 1:52 pm

    I don’t think this is a moral issue. It is one of reality. The reality is the government cannot keep this problem from reaching its logical end. They can delay it, but that costs other parties money (banks, taxpayers, states (loss of property tax revenue), realtors, mortgage brokers, etc.) so it ends up not helping the situation.

    There are stats out there about the HAMP program. So far only 10% of the people that had the temporary assistance have qualified for a permanent modification. So we have spent $75 billion to fund a program that is a ninety percent failure. Why not save that $75 billion and let 100% fail.

    As far as Mike’s comments about his foreclosure, I tell him not to feel bad. We need to get past this “I gave my word to pay my mortgage” mentality. That is nothing more than propaganda from the banks. They want to be sure that they don’t lose any money on a deal that will take Mike 20 years to break even. This is not a moral issue; it is a contract. The banks know this. They walk away all the time. Morgan Stanley walked out on a $7 billion commercial complex when it lost value. Obviously, MS can make the mortgage payment. They just decided the investment was no longer worth it. The Mortgage Bankers Association just short saled their headquarters in DC. Of course, here is a quote from their current Prez:

    “Mortgage borrowers should keep paying their loans even if that no longer seemed to be in their economic interest…. Paying off a mortgage isn’t only a matter of personal interest. Defaults hurt neighborhoods by lowering property values. What about the message they will send to their family and their kids and their friends?”

    ~John Courson, President – Mortgage Bankers Association

    What a hypocrite! Even in default, the borrower is living up to the mortgage contract. The contract has essentially two options: one, the borrower pays the principal and interest according to the contract and receives full title once the contract is fulfilled, and two, the borrower does not pay the interest and principal and the bank reclaims the property from the borrower. So, even in default, the contract is being followed so long as the borrower leaves the premise.

    Now, I have a real beef with people who destroy a home after a foreclosure. That is a violation of the contract and is unethical. However, walking away (and leaving the home in a cared for condition) is not unethical. In Mike’s case it was smart.

    One last point, the banks are responsible for hiring the property appraiser. They also force the borrower to pay for the appraisal. So shouldn’t they endure some economic pain for their mistake? I think so.

  10. JT Says:
    February 26th, 2010 at 2:00 pm

    Mike,

    Thanks for sharing. I’m certainly not going to berate you. I think you made a sound financial decision in order to best protect your family.

    JLP,

    I agree that the administration’s program to ban all foreclosures, until they go through a review process, is a bad idea. This will lead to two outcomes:

    First, banks will love the fact that they get to keep playing “pretend and extend,” not having to realize the true losses on their books.

    Second, all borrowers who are underwater, or close to underwater, would be crazy to continue paying their mortgages. There will be an incentive to intentionally default as you cannot be foreclosed upon until a board reviews your situation. Given enough people, which is very likely, this process could takes years, allowing borrowers to live rent free the entire time.

    Even if they don’t meet the guidelines for a modification it would still likely be in their interest to do so as they could save tens of thousands of dollars in principle and interest. Call me crazy but I’d take seven years of bad credit and renting in order to live mortgage free for 18 months (which is now the average btw) and save $25,000 dollars or more.

    That second part is the part the banks really won’t like though so, while they’ll be happy that they can continue lying about their balance sheets, they’ll be mad if their borrowers don’t pay. Guess they can’t have their cake and eat it too!

  11. Dirac Says:
    February 26th, 2010 at 2:33 pm

    I am stunned that anyone would have bought a house between 2003 to 2008. There was a housing bubble. It was public knowledge. The only force pushing people to buy these overpriced houses was psychological and nothing else.

    The thing that kills me is that if you were (1) reasonable, (2) understood that the skyrocketing home values could not be sustained, and (3) could not be swayed by peer pressure and did not buy a house, there is no reward for being reasonable and disciplined. Now my tax dollars are going to bail out people who bought way more than they should have and the idiot mortgage companies who lent them the money.

    I am so glad that we are rewarding stupidity in this country.

  12. JT Says:
    February 26th, 2010 at 2:38 pm

    Kirk Kinder,

    I really like your post; you touched on some really great points.

    I’d like to add that it’s naive to think that the banks were completely ignorant of the bubble. Most of them knew all along, as even the FBI warned of a housing price epidemic in 2004. They willfully chose to ignore it and, in many cases, committed fraud by helping borrowers lie about their capacity to pay. Yet we have not seen one indictment, let alone conviction, from anyone in the mortgage industry.

    For every dollar that was lost, a dollar was made by someone else. Every default, foreclosure, and short sale is only possible because the person before them found one more idiot to sell to.

  13. Advice on Loan Modifications Says:
    February 26th, 2010 at 7:37 pm

    There are still many people out there who are in need of a loan modification way more than who have done it already.
    There are couple “problems” though;

    – You can modify your loan even if you are not behind with your payment. But, which bank would modify your loan and give you a lower payment option when you are still paying for it?

    – You have to be basically behind with your mortgage payment to do that.

    – I have many friends who called, e-mailed banks for 2-3 months and they did not even get a phone call back from them.

    – People have heard many scams about these loan modifications and they are afraid to do the first step to start the process.

    – The longer you wait the harder to fix your challenge.

    – It takes time and correspondence, but you can win a “significant” amount of money if it goes through

    Do your research, shop around and talk to experts to see if you qualify and to see what options you have in order to save your home.

  14. Tim Says:
    February 26th, 2010 at 11:25 pm

    I think if you walk away from a mortgage you should get slammed, like 15 years negative on your credit report…ok, maybe not that extreme, but it should have the same consequences as a bankruptcy. I don’t understand why Mike walked away from the mortgage. Just because you are upside down doesn’t mean you should walk away. There are too many people walking away because at this moment in time they are upside down. So what, keep the house longer. If you aren’t being forced to move, then stay in the house and keep living life. i just do not comprehend the justification to walk away from an underwater house unless there are extenuating circumstances.

    I also don’t believe you should be able to walk away from a house simply because you made a bad decision and knowingly went into a mortgage ignoring the ramifications or the responsibility. forget about the mortgage lenders, banks, congress, it’s also about personal responsibility.

    as far as numbers, the Treasury said that more than 25% of the borrowers in the govt program were already delinquent again as of mid-december 2009. 650k borrowers were enrolled in the program. this despite the program reducing average borrower’s payments over 40%. JP Morgan Chase said out 178k of their borrowers were enrolled in the program as of mid-dec 09 and over 22% were behind. Considering the program really didn’t start rolling until mid-summer ’09 (despite the program actually starting in March 2009), that’s a terrible, but expected, performance over 6 months.

    I’m not sure what the govt thought. I mean it isn’t rocket science to believe that people who couldn’t afford the home to begin with wouldn’t be able to afford the house short of forgiving the mortgage. Treasury forecasts over 40% redefault rate for the program. I guess if you are a glass half full kind of person, you would consider the 60% not redefaulting successful. If you are a glass half empty, you would consider 40% redefault rate not successful.

  15. Kirk Kinder Says:
    February 27th, 2010 at 10:58 am

    @Tim

    First, I think you are listening too much to the government regarding their stats on the HAMP. Ninety percent of the folks don’t even get a permanent modification. So 90% don’t qualify. Essentially, we gave 90% of the applicants a taxpayer funded reduction for five months to find out they couldn’t afford the home. So the 40% redefault sounds too optimistic to me. Is that 40% of the 10% who qualify for the permanent or 40% of permanent and temporary.

    Second, I totally disagree with your view on walking away. Mike made a sound decision. He didn’t plan on staying in the condo for the next 20 years since it was not conducive to raising a family in it. It would take him at least 14 years to break even if real estate appreciated 5% per year (highly unlikely). He wouldn’t be able to rent it to cover his costs since people can purchase condos for a lower cost than his overhead. His ultimate responsibility is to his family, not the bank. The bank signed a contract that stated if Mike did not pay the bank would have the right to reclaim the property. The contract was fulfilled.

    Ultimately, real estate is an asset just like stocks or bonds. If a stock lost 50% of its value, then the investor might be better served getting out. Why not for a home?

    If someone is living in their ideal home, then they don’t need to sell. After all, we all need a place to live. If you are happy with your home, then keep paying the mortgage.

    However, if you are paying more for a mortgage than it costs to rent an equivalent home in your neighborhood, and it will take you a couple decades just to break even on your investment, then the wise choice for you and your family is to rent for a few years, save the extra money, and eventually buy at a much lower price point.

    The banks have no problem increasing their net worth by raising credit card rates or charging fees that are written in the contract in fine, legalese print. Mike, and other like him, can increase their net worth (or stop it from dropping) by executing the written language in their mortgage contract.

  16. Mike Says:
    February 27th, 2010 at 3:04 pm

    I’m a different Mike.

    I don’t care if people choose to walk away or not. What bothers me are the people that are behind or underwater and feel entitled to have the terms of their loans modified. Or they don’t feel like they have to pay since the were “taken advantage of by a greedy banker.”

    Pay your mortgage as agreed or get the hell out!

  17. Stacey Says:
    February 27th, 2010 at 3:36 pm

    Amen #16!

  18. TJM Says:
    February 28th, 2010 at 2:46 pm

    I agree with # 16 as well. There should be a HUGE price to pay for walking away. On the other hand, if you want to walk away, that is certainly your right.

    Mortgage modification will not work for 90% of the outstanding mortgages because banks don’t own them any more. Conforming mortgages are securitized almost immediately. The banks are servicers at that point. Calling your bank and asking them to modify your mortgage is like complaining to the paper boy about the content of your New York Times. He’s just the delivery guy. He can’t do anything for you.

    I think Laurie Goodman’s analysis is a little extreme. Yes there are a lot of underwater mortgages but there are a lot of people that will faithfully continue to pay and not default. Mike is an extreme case in an area that was very overheated. I think Warren has it right. Within a year, housing will be growing again unless you are in areas like CA, NV, and FL where housing prices went to the extreme. High priced homes will also continue to suffer until the securitization market for jumbo mortgages reopens. Most are requiring 50% LTV to borrow for jumbo at the moment. Banks know that they will not be able to pass the loans off to investors so they are being extremely conservative.

  19. BG Says:
    March 1st, 2010 at 11:29 am

    I was reading a different blog, and one of the posters was in the middle of a ‘strategic-default’ — they could afford the mortgage, but just refused to pay it.

    They were still living in the house, even though they were not making payments, and saving the cash for themselves. The poster’s plan was to pull off his little scheme for as long as possible (until the sheriff evicts him), and by the time that happens, he says he should have enough money saved to buy a new home in cash.

  20. BG Says:
    March 1st, 2010 at 11:31 am

    Oops clicked ‘submit’ accidentally. Basically, I’m with JP — if these people are ‘strategically-defaulting’, then they should be evicted immediately from their homes. If the homeowners are defaulting (not strategically), and if they have any hope of paying off the debt eventually, then it would be nice if the lender’s worked with the people.

    For the ‘screening’ process — the government needs to step-up and speed this process along. It shouldn’t require 6 months for the screening process.

  21. BG Says:
    March 1st, 2010 at 11:41 am

    Mike #1) You say you haven’t made a payment since July (8-9 months ago) — where have you been living since then? Are you still living in the condo which you are not paying for?

    If you are, then that is theft, plain and simple.

  22. Independent George Says:
    March 10th, 2010 at 1:44 pm

    One last point, the banks are responsible for hiring the property appraiser. They also force the borrower to pay for the appraisal. So shouldn’t they endure some economic pain for their mistake? I think so.

    I agree with the sentiment, but… banks lose money on the foreclosure, too. In the places where the bubble inflated the most, they lose a LOT of money. And when the original loan was far in exccess of the value of the home, they tend to lose a lot. Restricting foreclosures actually benefits the weaker banks, because they can continue to operate despite their impossible finances, competing against the stronger banks who can handle the foreclosure losses.

    Foreclosures are a symptom of a deeper problem, not the cause; limiting foreclosure basically just allows you to paint a pretty picture while your finances rot from within. What we need is an accelerated foreclosure/bankruptcy process. Force everyone – homeowners and lenders – to take large a short-term loss in exchange for wiping out most of their long-term debts.

  23. Anthony Garcia Says:
    November 15th, 2010 at 9:18 pm

    It never ceases to amaze me the number of people that has been Brain Washed by the Banks that the borrowers has a moral responsibility to pay the
    mortgage. The banks has no ethics and no morals whatsoever.
    As to the Bank’s losing money, baloney as soon as they wrote the mortgages they sold it to Wall Street. They got paid twice: first by the investors that purchased the security and then by the American
    Tax Payers that bailed them out.

  24. Josh in Nashville, TN Says:
    December 30th, 2010 at 8:59 pm

    The latest report from National Asociation of Realtors is that the shadow inventory is roughly 2.4 mil. which might be low in my opinion as there are more than 130 million households in the country. If this figure is accurate it might not be as horrible as it is only roughly 2% of the nations homes.

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