Thursday, February 04, 2010

The danger of walking away

Apparently, thirty states—including Virginia—are recourse states. CNN Money has an interesting article about banks pursuing people who have lost their homes. If you walk away from your home, you better be poor:
Sometimes lenders go after borrowers walking away from their homes if they have other assets, according to Florida real estate attorney Larry Tolchinsky.

"Banks are pulling credit reports to see if it's a strategic default," he said. "If you're behind on all your other payments, you're okay. But if you're not, they'll come after you."
And:
What can be scary is that the judgments don't have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.
Again, there's a big difference between a strategic defaulter and someone in actual financial trouble. Because they have jobs, decent salaries, and personal savings, strategic defaulters are ideal targets for banks to go after in order to get their money back.

31 comments:

  1. Absolutely true. And with all of the un/underemployed lawyers out there, I can guarantee you that someone will come after you. I walked from a coop in Manhattan in the early 1990s, losing $50,000 of down payment and improvements. About 5 years later, I got a letter from a law firm saying I owed $70,000 more! Understand that they will pile all kinds of fees and penalties on top of the original deficiency.

    I'm not saying you shouldn't walk, just understand that you will be pursued later. Of course, you can do a lot in the interim to move assets, but that is an imperfect solution.

    If you are in a non-recourse state, the easy answer is WALK AWAY!

    p.s. I wound up settling for $20,000. Good luck!

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  2. Funny that for all the outrageous ideas being pushed around out there about how we need to stop strategic defaults by lowering the principal balances on them, harsh consequences and word of mouth about them will do way more and cost way less.

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  3. I don't know. I sense some legal shenanigans in this whole process. Don't get me wrong. I'm sure its all legal. But a big I-bank or some corporation holding these securities going after a homeowner seems flawed, whether it be a small time flipper or a simple family.

    I really think this economy needs to go to hell in a handbasket in order to truly learn its lesson. Tax payers have to think more broadly than just the housing market. Its all networked. These recourse concerns may be mere peanuts to the bigger issues at hand.

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  4. Taxpayers aren't sophisticated enough to vote according to what's financially sensible, at least not beyond how the economy effects them.

    I think what you have are a whole lot of loans that were refis from back in 2005-2007, and the banks sense that the equity that was sucked out of them still exists somewhere. I think that in many cases, they are right, and should pursue these people as if they were actual bank robbers.

    At the very least, this will hopefully scare the deadbeats into paying back what they owe. I'm not sympathetic to the banks, but it kind of pisses me off that some bubble-buying jackass can just walk away without recourse. It's like going to Vegas, losing $200k, then getting it back on your way out the door.

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  5. How many people out of the thousands that are defaulting are the banks pursuing? I bet it's a very insignificant number.

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  6. I think what you have are a whole lot of loans that were refis from back in 2005-2007, and the banks sense that the equity that was sucked out of them still exists somewhere. I think that in many cases, they are right, and should pursue these people as if they were actual bank robbers.

    I don't know how the actual data looks, but judging from the changing property values in CA, I don't agree. A bank should be under no illusions that someone who bought for $700K, now worth $350K, has some equity stocked away somewhere. Going after only that one person (instead of all the hands that took a bit out of this till) is profiteering by the bank (or investors) at the expense of the public, pure and simple.

    On the other hand, you might be right if someone bought for $500K is now set to return $400K. That difference seems more reasonable and is perhaps a more prevalent example. But then again, people who would walk away in this scenario deserve to be pursued anyway.

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  7. Let the collection agencies comes after you, and then sue them into the ground. Most cannot perform the task of collecting without violating your rights.

    Read the article at --
    http://www.dallasobserver.com/2010-01-21/news/better-off-deadbeat-craig-cunningham-has-a-simple-solution-for-getting-bill-collectors-off-his-back-he-sues-them

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  8. I dont really care whats "moral" or who owes who what. I dont care that the banks go after the people walking away or that the banks take the hit on people walking away.

    I just want the homes to drop another 30% so that prices are back to what they were before the banks loaned all these assholes money. At this rate, I wont be buying a home until 2030 cause thats when the bottom will finally get here. I mean why should I take the loss cause of the idiot banks, flippers and falsified document borrowers? So I sit here with my thumb up my ass.

    At least rents have been going down and will through this whole fiasco!

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  9. How many people out of the thousands that are defaulting are the banks pursuing? I bet it's a very insignificant number.

    It's like tax-dodgers and audits. Doesn't really matter if they don't get them all so long as they stop the other potential defaulters from joining in.

    Going after only that one person (instead of all the hands that took a bit out of this till) is profiteering by the bank (or investors) at the expense of the public, pure and simple.

    Well if the banks continue to get sacked by losses they weren't expecting, then that's a danger to the taxpayers.

    Again, it's more about the principle of the matter more than anything else. So you bought at the market's peak and ignored the fact that the prices shot up 100% in just a few years, or that it would cost half as much to rent the identical property. It sucks that people can get away with such irresponsible decisions. Better to scare them into manning up and taking accountability for their actions.

    On the other hand, as a prospective home buyer, I wouldn't mind seeing more REO's hitting the market. Take it either way I guess.

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  10. Let's not forget that strategic default often involves purchasing a new home at current market value before walking away from your obligation on your bubble-home or bubble-refi. Bankruptcy is the only way to truly hit the reset button. You just have to be willing to start over at zero.

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  11. I wouldn't say it "often" involves the buy-and-bail scheme you're describing, but that is certainly happening too. The people doing that ought to be publicly flogged. It's reward enough to just walk away and go rent for cheap like the rest of us schmucks. Buy-and-bailers are true pieces of shit.

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  12. Even in non-recourse states like Minnesota - - Junior lien holders can seek judgment. There's also an issue of timing: lenders in Minnesota can take up to THREE YEARS after a Sheriff's Sale to decide to seek judgment or not. Walking away in a non-recourse state may have consequences.

    More info on our blog here:
    http://bit.ly/bYZHK0

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  13. My car is now less than the value than I owe on it. Oh, I can afford the payments, but I don't want to pay because it is inconvenient to do so.

    So I am going to "strategic default" on it since no one told me when I bought it the value would probably go down.

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  14. Anon 6:47, you should default on your car loan because Big Corporations do that all the time. They see that the car isn't worth as much as the loan, so as a regular business practice these profit-seeking Big Corporations always default on car loans. If anyone tries to tell you differently, just keep saying "Big Corporations" to them until they believe you.

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  15. You have to love assholes like James: "Since this entity does this, you should too".

    The same sort of bullshit that these anti-capitalist cretins would be crying about if it ever became reality. Yeah, set your moral compass based on what some p.o.s. bank would do.

    Dipshits like this would tell a neighborhood kid to go molest a girl down the block, since that's what local molesters do.

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  16. If you default on the car loan they will repossess the car, sell it and get a judgement against you for the difference. In a buy and bail scheme, a bankruptcy judge may not appreciate such shrewd work and force the sale of the new house. (I know, in bankruptcy a homeowner is able to keep the house, but there are options available to the court)
    "Moral" of the story: Don't F*ck with the banksters.

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  17. Keep in mind, the world has changed and "moral" rules are different. Because of TARP, TALF, TALP and all that other nonsense, we are effectively bank-rolling the loans that the banksters get at nearly 0% interest. They then lend the money out and pocket the spread. Only problem is that right now, they are serving themselves by sending that $$ overseas (fueling other bubbles that will ultimately hurt us on the way down) than helping the very people who are underwriting the risk of those loans. The underwriting standards are also asymmetric (very tight for US home buyers while very loose for overseas banks loaning to their respective home buyers) which speaks to the fairness of it all.

    The analogy with molesting is poor. Molestation is bad in whichever context you choose. But profiteering is good in almost every context. Again, in light of all the changes to the economy, I have nothing against homeowners who have weighed the economic costs of bankruptcy or strategic default and come away with the conclusion that they will be more profitable to go through with it.

    In fact, as a contrarian, my hope is that more than a trivial percentage of home owners default. This will be the fastest way to bring the whole system into equilibrium.

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  18. Okay that was a bad analogy. But the point is that it's disgusting to say that people should base their own immorality on that of the most hideous corporations and banks that exist. Only a worthless cock would repeat such a message.

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  19. kevin said...
    You have to love assholes like James: "Since this entity does this, you should too".

    I wonder if Kevin didn't get my sarcasm or if he's one-upping my sarcasm with even greater sarcasm.

    I hate all you free-marketers who think it's OK for Big Corporations and Wall Street Bankers* to molest children!


    * For the record, Bank of America and Wells Fargo aren't Wall Street banks. They are headquartered in Charlotte, NC and San Francisco, CA, respectively.

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  20. James, sorry about that. I was a bit drunk when I wrote it. That's my excuse for the poor analogy. I guess I've been inundated with such logic that I was just letting off some steam. Practically half the links that have shown up on patrick.net lately are to some writer saying that people should walk away because shady companies lack dignity too. I understand the argument from a financial perspective, but it obviously irks me that people are being urged to model their behavior after the nastiest of companies out there.

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  21. The child molestation analogy is not a bad one. Strategic defaulters are taking someone else's money and then refusing to pay it back. That's bad behavior no matter who does it.

    People who argue in favor of strategic default employ a variety of lame excuses to justify this unethical behavior. The first excuse they use is the "other people do it" excuse. In this case, "other people" is "Big Corporations". As with other "other people do it" excuses, they drastically overstate the extent to which other people do it. Even if other people do it, it doesn't make the behavior ethical.

    The second excuse they use is the "they should have known better" excuse. This excuse is often used to justify theft. "The homeowner left his house unlocked when he wasn't home. He should have known better. Therefore, it's OK for me to burglarize his home." Yes, people and businesses often do stupid things when they should have known better. That doesn't mean it's ethical for you to take advantage of them. If a bank was stupid with its lending, it doesn't make strategic default ethical.

    A third common excuse is to conflate strategic defaulters and people in actual financial trouble. Since I oppose strategic default, one commenter a while back asked me if I oppose bankruptcy too. Somehow, by opposing strategic default it meant I wanted to hurt people who are poor or broke, even though STRATEGIC DEFAULTERS ARE NOT POOR OR BROKE.

    A fourth common excuse is to pretend that mortgage agreements have two repayment options: pay back the money with interest or give the house to the bank. In truth, they only have one option: pay back the money with interest. It is a fact of life that not everyone will make good on their agreements. Therefore, foreclosure is simply a process for banks to recoup some of the lost money when the borrower is unwilling or unable to make good on the agreed terms. Likewise, the law doesn't give you a choice between molesting children and going to jail or not molesting children and staying free, as if either of the two options is acceptable. Instead, our prison system is just a way of dealing with people who insist on engaging in unacceptable behavior.

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  22. Keep in mind, the only REAL difference between recourse and non-recourse is whether the FB needs to go through bankruptcy to discharge the debt. I live in MD, a full recourse state and I don't think that it is a bad thing for those who are stiffing their creditors to the tune of 100k or greater to have to go through bankruptcy.

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  23. lmao @ James comparing breaking a mortgage contract to committing a crime. Bravo James, such impeccable logic.

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  24. He didn't say they were breaking the law. He pointed out that ditching the banks with a loss isn't part of the "terms" in the contract, like it's an acceptable alternative to not fucking them over.

    Anybody that bails because they don't like the way the housing market has turned is a fucking deadbeat, plain and simple. Lots of regular folks saw this coming a mile away and didn't make a half million dollar gamble with someone else's money.

    Regardless of the lending institutions' horrible standards that helped create this mess, it doesn't entitle the equally-stupid bubble-buyers to just walk away. Sure, it's legal. But they're deadbeats nonetheless.

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  25. "Instead, our prison system is just a way of dealing with people who insist on engaging in unacceptable behavior."

    Yep, and people dont go to prison for handing their keys back to the lender. I guess its acceptable behavior to general society after all! Even if you don't think so.

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  26. The whole problem to begin with was the banks themselves. You're all right that the many people saw this coming, so why didn't the banks? Aren't they supposed to be watching the economy very closely at all times?? and not give loans to people who could barely pay them back when the economy was good? Sure it boosted the economy, bank money was being pumped into the system... how was it ever going to get paid back... was the economy going to rocket so high that every person who took out a loan was to get a promotion and a raise? It doesn't work that way.

    JR McGee
    http://www.jrmcgee.com

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  27. JR, regarding the banks' responsibilities, yeah they deserve a lot of blame. But no, they aren't supposed to be "watching the economy". That's the federal reserve, the same bunch of clowns that keep rates down, promote ARM loans, and couldn't see the massive bubble for all the years it was building.

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  28. Its sad how our economy has gotten to this point. So many people had their mortgages fall right out from under them. We want to say it is these owners fault but we as a whole nation are to blame. The banks were giving mortgages that should have never been created and housing prices just never seemed to fall. Hopefully we can pull through and all learn a valuable lesson.

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  29. Anybody that bails because they don't like the way the housing market has turned is a fucking deadbeat, plain and simple.

    Just to point this out in short, easy to understand words: it's not "plain and simple" otherwise we wouldn't be debating the point.

    Some folks understand that contract law isn't some kind of Holy covenant with God. And shaking your tiny fists and stamping your tiny feet is unlikely to persuade anyone.

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  30. oboe, just pointing out the obvious that if you make a gamble and it doesn't give you an instant win, you shouldn't get some kind of redo like a child's game. Hence, these people walking away are deadbeats.

    And it is plain and simple. It's the opinion of myself and every other responsible person out there that pays their bills and doesn't stick their problems to taxpayers or those who lent us the money.

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  31. I am interested to know about the difference for all the people who bought mortgage insurance.

    If you walk away from a house when defaulting on the loan was insured, how does that work?

    I mean it can't be the case that this would be the same as when there was no PMI, otherwise what was the point of the premium?

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