Currently, the United States has seen more than 5 million foreclosures completed. My expectations is that we are about halfway through the working off of the ill-advised and financially untenable home purchases of the past decade. Meaning, we likely have another 5 million foreclosures to go.

Some other housing analysts think that number is too modest, and forecast millions more foreclosures. Housing expert Laurie Goodman, for example, noted in April that we maybe could have12 million more foreclosures before the housing cycle has run its course.

However, that was before a policy change at certain lenders. It seems some banks have realized that they have made it too easy for borrowers to wash their hands of a bad home purchase, and they are pushing back. Many are pursuing borrowers in recourse states for any short falls after a Foreclosure or Short Sale. (NOTE: In nonrecourse states, banks can pursue individuals for enabling purchase loans; They can go after 2nd mortgages or refis that were not for the purpose of the initial purchase).

This may make some of the marginal walkaways and short sales that much less desirable — and hence less likely to occur.

Here is the Washington Post:

“Over the past year, lenders have become much more aggressive in trying to recoup money lost in foreclosures and other distressed sales, creating more grief for people who thought their real estate headaches were far behind.

In many localities — including Virginia, Maryland and the District — lenders have the right to pursue borrowers whose homes have sold at a loss to collect the difference between what the property sold for and what the borrower owed on it, also called a deficiency.

Before the housing bust, when the volume of foreclosures was relatively low, lenders seldom bothered to chase after deficiencies because borrowers had few remaining assets to claim and doing so involved hassles and costs. But with foreclosures soaring, lenders are more determined to get their money back, especially if they suspect borrowers are skipping out on loan they could afford, an increasingly common practice in areas where home values have tanked.”

Don’t be surprised if this becomes a national trend. The next leg down in Housing is upon us, and banks do not want to take the full hit for the losses.

Note also that second lien holders are another major issue. My pal Josh Rosner has been discussing this for a while, and it is an ongoing issue. 2nd lenders are next in line to get paid after a distressed property is sold — and there is never any cash left over in a short sale or foreclosure. Expect to see more of these holders using the courts to pursue larger deficiencies in the future . . .

>
Source:
Lenders go after money lost in foreclosures
Dina ElBoghdady
Washington Post, June 16, 2010
http://www.washingtonpost.com/wp-dyn/content/article/2010/06/15/AR2010061505428.html

Category: Credit, Legal, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

33 Responses to “Walkaway? Not So Fast . . .”

  1. In many states, lenders can go after deficiencies, though laws vary widely.

    Some states limit how long the banks have to file a claim or collect the debt. Others may calculate deficiencies based on the fair-market value of the house.

    Borrowers should get a waiver in writing from their lenders to protect themselves. Nobody should assume any deficiency is forgiven.

  2. JustinTheSkeptic says:

    I wouldn’t expect less from old Potter? Sell it to you at rediculously high prices and pretend to be the innocent one.

  3. Mike in Nola says:

    Are there no prisons? Are there no workhouses?

  4. Niskyboy says:

    @ JustinTheSkeptic — Yeah, you’re right, there’s no such thing as free will and individual responsibility, we’re all just victims, all of us so stupid that we can’t take care of ourselves. Are you a politician, by chance?

  5. Marcus Aurelius says:

    Bankruptcies will soar.

  6. call me ahab says:

    BR-

    the Washington Post article is very misleading. In a non-recourse state w/ a purchase money first or second- there is no recourse for the lender to get a deficiency judgment- by definition they can only take back their collateral. This must be happening (in non-recourse states) to those who secured and used a home equity line- that would be the only situation where a deficiency judgment would be possible.

    Also- why someone would pursue a short sale in a non-recourse state is beyond me.

  7. rktbrkr says:

    As I understand it generally banks/lenders get one bite at the apple in recourse states where foreclosure is judicial but in the non-recourse states where it is an administrative process they can come after the foreclosed later.

    This could be especially exciting in situations where there are second mortgages, HELOCs etc and where there are multiple lenders claiming ownership.

    Anyone contemplating foreclosure definitely needs good legal advice and really should stick it out and make the apparent owner prove their ownership with “wet ink” documentation. Force the bank to shit or get off the pot.

    Yes, lots of personal bankruptcies, time for the banks to lobby and “tweak” the bankruptcy law some more to get more favorable treatment. Maybe reopen the workhouses and treadmills.

  8. rktbrkr says:

    I think we need to read up on terminology that might be appearing in Financial Reform legislation!

    treadmill – kind of like today’s StairMaster. Prisoners climbed steps along a rotating cylinder designed to keep them mindlessly occupied and wear them out physically. Outlawed in 1898.

    workhouses – also known as the union, poorhouse, or simply “the house.” Publicly supported institutions to which the sick, destitute, aged, and otherwise impoverished went for food and shelter. After the New Poor Law was passed in 1834 the workhouse became little more than a prison for the poor. Civil liberties were denied, families were separated, and human dignity was destroyed. The meager diet instituted in the workhouse prompted Dickens to quip that the poor were offered the choice of “being starved by a gradual process in the house, or by a quick one out of it.”

  9. rktbrkr says:

    the lender appears to have backed off after Cortez argued that that the loan officer falsely qualified him and his wife for a home-equity line by fabricating key details about their finances.

    Homeowers need to go on the offensive in dealing with these despicable lenders (and brokers, appraisers and rating agencies!)

  10. seanpj says:

    Does anybody know if the “Mortgage Forgiveness Debt Relief Act of 2007″ has expiration?

  11. seanpj says:

    Sorry, my bad, I found it already
    >
    Mortgage Forgiveness Debt Relief Act of 2007
    The federal law was initially set to expire at the end of 2009. However, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (H.R. 1424) extended the federal period through 2012.
    >

  12. DD123 says:

    Barry writes: “Many are pursuing borrowers in non recourse states for any short falls after a Foreclosure or Short Sale. ”

    Don’t you mean “recourse states”? In non-recourse state, the lender’s rights are essentially limited to the property itself. It’s in the recourse states that the lender can pursue deficiencies.

    Tangentially related to the post, is the recent wave of refis, courtesy of our federal government. I wonder how many of these newly refi’d borrowers (in non-recourse states) were told that once they refinanced their mortgage, they would be converted from a non-recourse borrower (no personal liability) into a recourse borrower (with personal liability). [I doubt this nugget was part of the loan disclosures.]

    It really is kind of shitty: The borrower buys a house, gets into trouble. He gets “thrown a lifeline” in the form of a refinance, which just stalls the inevitable. He doesn’t know that by doing the refinance, he’s made a switch into taking on “recourse” debt.

    Eventually, the house is foreclosed upon anyways, only now the borrower–while still losing his home—could now be on the hook for a deficiency judgment.

  13. Opps! Good catch — I will fix that above!

    I will also add:

    “In nonrecourse states, banks can pursue individuals for enabling purchase loans; They can go after 2nd mortgages or refis that were not for the purpose of the initial purchase.”

  14. Transor Z says:

    I love the smell of lien stripping in the morning.

    Zero sympathy for HELOCs. Loaned into the asset bubble so people could consolidate credit card debt in their homes. No better than a cc balance transfer at a lower rate.

    I love stripping those puppies and converting the banks into unsecured creditors. Here’s your 15 cents on the dollar. Schmucks.

  15. The Curmudgeon says:

    It’s a nice idea for banks to pursue people out of foreclosure in recourse states. But I betcha it’s got more to do w/ postponing the realization of losses than it does with any real chance at recovery. Trade a $300,000 mortgage note for a $200,000 house and the chance to recover the balance owed. Then in their opaque accounting methodologies, they haven’t lost a dime, except that they’ll never recover anything of the balance.

    And like TZ says, all these Helocs are just crap, not worth the paper they’re printed on. It’s not that hard to make yourself effectively judgment-proof. If nothing else, move all your money to a now much more reasonably-priced house in Florida.

  16. gordo365 says:

    Just stop paying your mortgage and live rent free until they kick you out. Easy money right?

    When it’s all said and done – who do you think will have the upper hand? Wall street or Main street?

    I bet on wall street – since they control everything.

  17. louis says:

    Most loans in California were of the 80/20 – 80/15/5 variety and both loans were made at the time of purchase therefore non recourse.

    Civil Code 580b provides the protection and only applies to purchase money loans

    “California Code of Civil Procedure 580b protects a California homeowner from a deficiency judgment when the homeowners purchase-money lender forecloses upon the home after default. In other words, if the price the lender realized at the foreclosure sale is less than the outstanding amount of the debt, the homeowner will not be liable for the deficiency. Section 580b was enacted to discourage the purchase money lenders from over-valuing real property by requiring a lender to look solely to the collateral value for recovery in the event of foreclosure, and to prevent the aggravation of an economic downturn caused by increased debt exposure to homeowners during a depression. Section 580B protection cannot be contractually waived by the borrower. ”

    The over-valuing part is important for attorney’s who are looking at the appraisal process when the loan was granted.

  18. boratsagdiyev says:

    If you already ruined your credit due to foreclosure, why not file bankruptcy to protect against deficiency.

  19. vader says:

    Case 1: You are broke or nearly so when the foreclosure happens, you have the ultimate defense in a civil action: poverty. You can do bankruptcy also but it time consuming and expensive.

    Case 2: You have assets, you can be sued. Bankruptcy is not an option.

    Still to sue, the plaintiffs have to find you and they have to serve you. The assets must be sufficient to cover the costs of the action.

  20. S Brennan says:

    I know nobody in the US is serious about solving real problem of real people, but I’ll chuck this in anyway.

    Rather than wring hands over the future that “could be” why not provide jobs and prevent about 35-50% of the foreclosures to come.

    Barry you’ve pointed this out before, re-fi’s get in trouble because they’re from economically unstable households, nothing stabilizes a household like a steady income from a decent job.

    Focus on jobs and the rest will follow.

  21. Casual Onlooker says:

    Just as many people got into these loans without understanding the long term consequences of signing on the bottom line, many people are probably making similar mistakes in thinking they are getting out of the loan? There is a lot of misinformation and misconceptions out there.

    Many people don’t understand for example that the non-recourse laws don’t apply in a short sale, and the the bank does have tools at it’s disposal to go after the borrower, including that promissory note slipped into the paperwork that you didn’t know you signed, or suing later to recoup losses. Even with foreclosure in a non-recourse state, how many people do you think consulted a lawyer to insure that the bank couldn’t come after them walking away from their mortgage? How many people assume they can just declare bankruptcy to walk away free and clear, only to find they don’t qualify?

    I had to refinance at the top of the bubble due to a divorce, I had never even heard of the concept of non-recourse until after the bubble collapsed. One thing I have taken away from all of this ongoing disaster is that when you make the biggest purchase of your life, it is well worth the cost of a lawyer to look over the documents before you sign, and let you understand what the consequences are. The mortgage writer has no incentive to be an impartial party.

    To mangle a well known computer idiom, “Ignorance going in, Ignorance going out”. There is still a lot more of this story to be written unfortunately.

  22. clued13 says:

    BR-

    You wrote -”The next leg down in Housing is upon us, and banks do not want to take the full hit for the losses.”

    But Cramer has stated very clearly that housing bottomed in June 09. What do you say to this?

    We know Cramer has an amazing record of stock picking and also saw all of the calamity that ensued before it came, so I just want to know why people think another leg down is upon up in housing when Cramer says that is ridiculous.

    Thanks.

  23. wngoju says:

    “Expect to see more of these holders using the courts to pursue larger deficiencies in the future . . .”

    Good luck suing a bunch of people with no jobs and now no houses and, basically, not a pot to p–s in.

  24. Casual Onlooker says:

    @wngoju stated:

    “Good luck suing a bunch of people with no jobs and now no houses and, basically, not a pot to p–s in.”

    There are some assumptions in your statement that may not be born out. One assumption is that all deficiencies are made by poor out of work people. This won’t always be the case, there are a number of “strategic defaults” that do have jobs and a means to pay, many probably made by people that don’t really understand the potential pitfalls of such an action.

    The other assumption is that these people without jobs will always be people without jobs. If the person thought they were free and clear by doing a short sale, consider the following from http://www.keytlaw.com/blog/2009/11/confusion-about-short-sales-and-anti-deficiency/

    “…It is also important to note that the 90 day limitation after a trustee’s sale for filing the deficiency action against the borrower/home owner does not apply in a short sale situation. Normal statutes of limitation apply and can run for up to 6 years in cases where the bank has the right to sue.”

  25. Transor Z says:

    Case 1: You are broke or nearly so when the foreclosure happens, you have the ultimate defense in a civil action: poverty. You can do bankruptcy also but it time consuming and expensive.

    Case 2: You have assets, you can be sued. Bankruptcy is not an option.

    Vader, can you explain what you mean when you say bankruptcy is not an option for people with assets? You know that’s not true, right?

  26. FrancoisT says:

    “The next leg down in Housing is upon us, and banks do not want to take the full hit for the losses.”

    Several posters are suggesting the banks should go all in against those who default. Reading stuff like “workhouse” and “prison” is kinda funny.

    It’s the numbers, stupid!

    Should we get 12 million more foreclosures, and say, 3-4 million can be sued, does anyone in his sane mind think the banks would go down that route? How about the time, lawyers, money and unbelievable bad PR this would cost. It’s not because the banks were bailed out this time that the govermin will have free hand to let the banksters do whatever the fuck they want in the future.

    They’d better recognize the losses and swallow the Blue Pill if they don’t want a much worse fate. Financial reform can be reopened under much worse sociopolitical conditions for the financial whore lobbyists and their pet slaves in Congress.

  27. formerlawyer says:

    Casual Onlooker

    I agree. You may be surprised at how inexpensive it is to obtain the services of a lawyer.

    The advice I used to give,* in both the acquisition of a home** and any re-financing, was to firstly read the frickin loan documents. Often I would have to wait. while the clients would read the documents usually for the first time in my office! Secondly understand all of the documents and the consequences. There are no stupid questions, if you don’t understand the documents – ask! Some proper questions could include:

    1. What is the loan amount? What is the nature of the loan – mortgage, term mortgage, demand loan etc.?
    2. What is the loan secured against? Your home only? Your property generally? HELOC, Promissory Note, collateral mortgage. Agreement for Sale etc. for example
    3. What is the interest (including potential penalties etc.) that you will pay? At the start? After some time? Over the entire loan period?
    4. What is the term? What is the amortization period? How much will be due at the end of the loan, if any?
    5. What are your payments? When are they due? Can the due date be moved? What is included in your payments: property taxes, insurance?
    6. What happens if you cannot make a loan payment? Is there any provision for payment holidays and if so what does that do to your loan balance/amortization/interest?
    7. What happens if you cannot make your loan payments in the short term? Can you re-negotiate/re-finance for a lower payment? Are there pre-payment penalties if you move before the expiry of the term?
    8. What happens if you cannot make your loan payments for the foreseeable future either having lost your job or as a result of disability? (1/3 of North Americans will become disabled at some time in their life)
    9. What loan insurance is available? Can you buy term insurance for the loan amount so that you could get the difference in the event of disability/death? Do you have the discipline to make separate payments?
    10. Who is liable in the event of a default? You or you and your co-signor/gurarantor? Does your co-signor/guarantor need independent legal advice? Do you, if you are dealing with a bank or loan company lawyer require independent advice?
    11. What are the rules governing recourse in the form of personal judgement? What are your personal exemptions?
    12. Can your loan be assumed by a purchaser of the asset? If so how long does your liability remain? Are there any pre-payment penalties such as “due on sale clauses”?

    If your lawyer (you do have a lawyer right?) cannot answer these basic questions – try another lawyer.

    *This is intended as general business advice and not specific legal advice. Contact a lawyer, licensed in your jurisdiction, for advice.
    **Investment loans are a different kettle of fish.

  28. Casual Onlooker says:

    @FrancoisT stated:

    “Should we get 12 million more foreclosures, and say, 3-4 million can be sued, does anyone in his sane mind think the banks would go down that route? How about the time, lawyers, money and unbelievable bad PR this would cost.”

    I think it is probable that the banks will increase the number of people they go after deficiencies, and here is why. There is a segment of society that is advocating “strategic defaults”, even to those who have the ability to pay. They fact that this phrase is even in the everyday lexicon is a testament as to how pervasive the sentiment is. Given enough people who decide it is in their financial best interest to default on the loan because the house is underwater, then the banks will in turn decide that it is in their best financial interest to push back.

    A problem with the idea that public sentiment will dissuade the banks from taking action doesn’t take into account the flip side of that argument. While everyone generally agrees that banks going after people in genuine financial distress is reprehensible, I doubt that people hold those who try to game the system in the same regard. The banks will try to point out that they are only going after those people that just try to walk away from their debt because their houses are worth less. Also if the government swings more conservative as the pendulum seems to suggest, the likelihood of legislative action against businesses (like it or not banks are businesses) is increasingly less likely.

    I’m not a fan of the banks, by no means, but I do think there will continue to be a lot of volatility in terms of what some in society try to do to undo the housing situation they are in, and how much push-back comes from the banks.

  29. formerlawyer says:

    Sorry, I should have added a 13th question:

    13. What happens if I don’t sign the documents now? Can my loan commitment be extended? Can the asset transfer ie. the home purchase be deferred or delayed as a result? If I can get a deferral – what interest/penalties might I incure.

  30. [...] their hands of a bad home purchase, and they are pushing back,” FusionIQ CEO Barry Ritholtz says. “Don’t be surprised if this becomes a national trend. The next leg down in housing is [...]

  31. nemo says:

    “Yeah, you’re right, there’s no such thing as free will and individual responsibility, we’re all just victims, all of us so stupid that we can’t take care of ourselves. Are you a politician, by chance?”

    You’re right. Those bankers should have exercised a lot more responsibility when they went out and made those foolish loans. Let’s hope those bankers take it in the neck and up the a$$ for their stupidity and their failure to take responsibility.

  32. louis says:

    “Many people don’t understand for example that the non-recourse laws don’t apply in a short sale”

    Which is why that is the latest lifeline being floated to those underwater. Banks are approving more short-sales. The banks are still in charge of the fix. Today we have the govt mandating a 20 billion fund for those affected by the worst environmental disaster but we still have nothing for those in the worst housing disaster of all time. I know the comeback is no one told those people to buy houses, but no one told people to be a shrimp boat captain either. (except Forrest and Bubba)

    It’s about how we value our citizen’s.

  33. hammerandtong2001 says:

    Who holds the paper on YOUR mortgage?

    YOUR mortgage.

    Odds are north of 80% that the poeple you write the check to every month DON’T HOLD YOUR PAPER.

    Ask them to produce the paper and see what happens.

    And make sure you video and record it.

    Bring that to your lawyer for safekeeping.

    Can’t walk away? From whom and do you wanna bet on that?

    .