Tuesday, June 1, 2010

There's No Such Thing As Free Rent


Another guest post by Dana


... or is there?

According to a recent article in the New York Times, Owners Stop Paying Mortgage ... and Stop Fretting About It, foreclosure is becoming a way of life for some folks.

We've all heard the stories of the increase in foreclosures throughout the U.S. due to a combination of the housing market crash, poor lending practices and poor borrowing practices. Usually those stories end discussing the impact of those vacant - often vandalized homes - on the the homeowners who remain in the neighborhood.

But for a growing number of people whose homes are in foreclosure, rather than loading up the moving truck in the middle of the night, they are opting for their own mortgage modification - one that brings their payments all the way down to zero.

Of course, this modification is not one worked on with the lender, but one that is delivered as an ultimatum: Force me out if you can. Homeowners justify their position by claiming the banks created the crises by duping borrowers into taking loans that put them in debt over their heads.

The numbers? Foreclosure procedures have been initiated against 1.7 million homeowners. Resolving these defaulted loans is a slow process, and getting slower due to legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with the sheer number of mortgages gone bad.

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted. More than 650,000 households have not paid on their mortgage in 18 months. In 19 percent of those homes, the lender had not even begun to take action to repossess the property. In Florida, the average property spends 518 days in foreclosure, second only to New York’s 561 days.

In states that require judicial proceedings to finalize foreclosure, defense attorneys are keeping this number high.
According to the New York Times article, one local Florida attorney claims he now has 350 clients in foreclosure (10 new clients each week), each of whom pays $1,500 a year for a maximum of six hours of attorney time to “... just do as much as needs to be done to force the bank to prove its case.”

Lenders claim people who stay in their homes without paying the mortgage or actively trying to work out some other solution, like selling it, are “milking the process.”

What do you think? Are banks and other lenders getting what they deserve for poor lending practices? Is there a moral obligation of borrowers to make good faith efforts to resolve their bad debt?



Charlene said...

Is there no guilt!

It is immoral to not pay your obligations, if you have the means to do so. It means you are gaming the system as it exists and those that suffer are all the other home owners whose largest capital asset is impacted.

Karen said...

Some homes have lost 60% or more of their value. It is equally immoral of the banks not to acknowledge that fact and renegotiate with people who owe more money on their homes than the home is worth.

When banks were in trouble American came to their rescue. Can't they return the favor?

furiousBall said...

my little town is small 225 homes. there was a plea sent out by the township at Xmas time asking for folks to try and get current with their property taxes. It said that 85 homes are behind. Quite a percentage if you think about that probably 90% have their property taxes paid via their mortgage.

Dana said...

Charlene, these people argue that they DON'T have the means to pay, nor did they ever, that the banks are at fault for loaning them too much money when refinancing.

Karen, I see home ownership like any other investment - there is a chance you'll lose on that investment. If I were to have invested in BP stocks a year ago and watched them go up an up in value, then see them plummet over the past week, I wouldn't be asking BP to cover that gap *shrugs*

I think where many people got in trouble was thinking they "deserved" a home and then not taking into consideration if they could afford the offer the bank made.

I'm not ignoring the group of folks who have lost their jobs, experienced catastrophic medical expenses, etc. - they fall somewhere else on the spectrum.

furiousBall, I hadn't even considered the implications on property taxes, being that they are often rolled up into the mortgage payment. Does anyone know if lenders are still required to pay those?

Jay said...

It used to be that bankruptcy judges could force banks to accept changes in the terms of home loans. Thanks to the Bankruptcy Bill a few years ago (principally authored by Joe Biden) that's no longer possible. When they passed the useless mortgage relief bill last year they took out the part that would give judges that power back. Why? Because the banks were opposed to it.

That's because our government is mostly focuses on protecting corporations from the public, rather than the other way around.

A combination of people believing they were entitled to a HUGE house and all that shit, and banks taking advantage of people with dreams bigger than their earning power are to blame. And a tax code that encourages people to buy homes a out of their reach.

I have a friend who makes less than $30,000 a year (and had some life savings) and the bank told her she could afford a $300,000 condo. Seriously. Her monthly payment would have been more than 50% of her monthly take home. She laughed at them and kept her monthly payment under 30% of her income.

Vinny "Bond" Marini said...

What about when the bank decides that a short-sale is not what they want and force the owners into foreclosure..instead of taking some money ( a good 75% of what is owed), they decide to push for the foreclosure and then end up with nothing.

The banks need to get smarter...reduce or restructure the payment plan so the owners can stay and the bank can get their money back.

It is a shameless position right now.

Vinny "Bond" Marini said...

And I can tell you from personal experience...many bought homes and could afford them only to have work situations cause them to be unemployed and put in financial hardship. I went to my mortgage company and told them I wanted to send in payments each week to make it easier --- they denied me that and told me I had to pay full payments!

Charlene said...

RLL: I read the NY Times story after my comment earlier.

I know there are those who did loose their jobs and have no money. People who cannot find a job, and have unemployment need to pay their mortgage or make the necessary downsize and rent a smaller place. When they get a good job they can work toward their goals again. If they cannot find a good job, they may need to find more than one job to feed their families, etc. This is happening all over the country by people who are in the same situation.

It is not moral to live in a home that is owned by anyone other than them and not pay the expenses to live there.

From your post and then confirmed by the newspaper story, the people who are featured are employed and socking the money they should be paying to the bank, either for future use or to invest in other things. They have made a pragmatic decision to game the current situation for their own purposes.

The featured lawyer, who brags about having 350 clients paying him $1500 a year to stall the foreclosure is also a pragmatic operative.

The banks who hired people to talk the home buyers into borrowing money on their "equity" so they could make a commission were pragmatic in using the heated real estate market to make loans when it wasn't good banking to do so.

The banks then sold those bundled loans as AAA investments. That was the pragmatic thing to do at the time.

At that time the borrowers were also pragmatically taking advantage of the easy money to borrow what they could not afford.

As long as the worthless investments could be passed on to some other sucker, the whole thing worked!

The morality of the situation is pragmatism is not always good. If any of these people had thought about the fact that the economy was fragile and all things had to work 100% for these deals to work out, no one would be in this situation.

Someone acting badly is not an excuse for acting badly.

And, yes, I agree that since the banks took the citizen's money, they should rework every single loan. Then when someone defaults, they would have no "reason" to do so.

And and.... YES the person whose name the home is in owes the taxes on it.

Dana said...

Jay, I found it odd that the way current laws are written, one id better off NOT paying the mortgage while keeping other debt current. That way they have a place to live while reducing their debt load. I continue to be amazed at how short-sighted many (all?) of our lawmakers are.

Vinny "Bond" Marini, I think many banks are finally starting to realize that there is a reason they aren't in the real estate market and much of what wasn't considered in the past is now becoming an option.

Charlene, one of the people referenced in the article had extenuating circumstances (medical expenses due to a lung cancer diagnosis), but you are right - the others are making a conscientious lifestyle choice to live in a house without paying for it. I find that disturbing.

Evil Twin's Wife said...

The whole housing thing is a mess. My one client is being foreclosed on his home, even though he makes *some* payment every month. I'm working with him and all his debtors to get things "right". I would never skimp on my mortgage. People need to pay at least portion of their obligation or work out a new payment plan to get things in order.

we're doomed said...

The banks are guilty of many evil and immoral acts. However, when someone buys a house they are making a business deal with the bank or lender. I have seen many people making less then I do buy a home selling for couple 100,000 dollars more than I paid for my house. I try to live my life so I can pay my bills if I lose my job. If I have to work at Mickey D's and pick up tin cans to make a living that's what I am prepared to do. We live in an entitlement society now. The helping hand we seek is not at the end of our own arm, but belongs to Uncle Sugar. WE'RE DOOMED!

Micky-T said...

doomed.....THAT'S RIGHT!

Jaimey said...

Great post Dana. After closing our business, hubby was out of work for the better part of 18 months, making it impossible to pay our $2400 mortgage, much less anything else after a while. (I was a SAHM, and went to work retail and childcare until the week I gave birth) We have been trying for a modification and have been in process since October of last year. We were approved too only to have them call last week and say we have to START OVER because they changed the processes because the current ones are not working (duh) and we had not solidified it yet.

le sigh.

Just wanted to put a face on those currently "living for free" (though I am trying to keep my home- DESPERATELY- and they keep jerking the chain)

Sabrae Carter said...

I don't know what to say to this post. On one had I agree and the other I don't. Those who are 'living rent free' shouldn't have signed the loan papers in the first place! But I'm a rent to owner...much easier! And cheaper!

Dana said...

Evil Twin's Wife, it is a mess, and one that cannot be blamed on any single person or entity, and one that *WILL* repeat itself unless everyone changes their perception of what is right and just (IMHO).

we're doomed, I am frequently reminded of that saying, "Just because you can, doesn't mean you should." I think that is appropriate for most of society these days.

Micky-T, Doomed is a wise man *wink*

Dana said...

Jaimey, I think there is a HUGE difference between being unable to afford your house and actively seeking a resolution to make it "right," and being unable to afford your house and actively seeking a way to "get over" on the bank. And thank you for putting a face on this!

Sabrae Carter, there is a "rental" side to this as well. The owner of my apartment complex went into foreclosure a year ago after refinancing to borrow the down payment for a new home. There was a period of time there when six renters were wondering if they would be looking for a new place to live in a very small town with few rental units. Fortunately, someone else purchased the property and my landlord didn't just let it go now that she was out.

nitebyrd said...

My Florida home is now worth less than half of what I paid for it over 10 years ago. My ex-husband refinance it at the start of his doomed business venture. The bank knew he was leaving his job to start a business but let him refinance anyway. Now we are in the midst of trying to work out a modification with Bank of America. Or, The Bank From Hell. We want to pay the morgtage, we don't want to shirk our responsibility, we just what some help. Because we are now both working and make barely enough money to cover the morgtage and living expenses, the bank has been dicking us around since July 2009. Do banks get what they deserve when people walk away? If the people are treated the way I've been, they sure do.

Little T said...

I worked in the mortgage industry during the boom from 2002-2005. Predatory lending was rampant. There were loan officers selling programs that they new nothing about. ARMs, Neg Am loans and LTV's in excess of 100% were all the banks errors. Borrowers who never learned anything about finance let the bank tell them what they could afford. There is fault on everyone's part in my opinion. Starting with the regulators that allowed loan programs like those to be born, trickling right down to each mommy and daddy who doesn't prepare their kids for the real world. I have 4 friends that have recently let their homes go back to the bank. Not one of them is happy or proud of it but you do what you have to do to eat and survive. They also did not sit back and wait for the bank to spend thousands to kick them out.