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"Intentional Foreclosure":

CBS News:

For Karen Traynor, buying a condo closer to her job in San Francisco seemed like a sound financial decision. But in the last year, this home seemed to drop in value by the day - forcing Traynor to make a much more devastating decision, CBS News correspondent Sandra Hughes reports.

"It would be an intentional foreclosure," Traynor said.

Her adjustable-rate mortgage will be reset in June. And although she can afford the $900 increase in payments, she doesn't think it makes financial sense. "I am not doing anything illegal. I am not scamming anybody," she said.

When real estate was booming, Traynor bought her 2-bedroom condo for $505,000 after it appraised for $520,000. Although she took out a 100 percent loan, she figured she had some equity. Now, she would be lucky to unload her property for $340,000. That's a $165,000 loss.

"'Everything is negotiable in business," Traynor said. "And so this is just another business decision. I just don't see why this is anything different."

Someone who can afford to pay her 100% mortgage simply walking away from it to avoid a six-figure loss? At the height of the housing boom in '04-'05, who would have predicted such things?

SDProsecutor:
A move such as Ms. Traynor's remains "just another business decision" until there are tangible consequences for gambling and losing on real estate.
2.14.2008 12:01pm
autolykos:
Well, there are intangible consequences. It might sound like a good idea now, but good luck getting financing next time you want to buy a house. This stuff doesn't just disappear into the ether.
2.14.2008 12:05pm
Alan P (mail):
What makes her think she won't still be liable for the deficiency?
2.14.2008 12:06pm
33yearprof:
She can do it because she lives in California. IIRC, California has a Depression-era statute that, in effect, makes all residential mortgages "non recourse." She just drops a quitclaim deed and the keys off at the mortgage company office.
2.14.2008 12:07pm
autolykos:
Good question Alan. According to foreclosures.com, California law allows deficiency judgments in judicial foreclosures only.



I'd be interested to hear a CA real estate law expert weigh in, but I don't see a reason the bank couldn't seek a judgment. If the loss is in the 6 figures, it would seem to be worth it from a financial perspective. Of course, she could always declare bk and whether it's worth going after her depends on what kind of assets she has.

What I find more interesting is (i) her rationalizing of her decision and (ii) the number of people siding with her.

While it's true that "everything is negotiable in business" a negotiation involves 2 parties resolving a disputed issue and coming to an agreement, not one party deciding they don't want to pay and walking away from a signed contract.
2.14.2008 12:16pm
autolykos:
In addition, even if she does walk away, she's going to have $160,000 in taxable income.

I'd pay a decent amount of money to be in the room when she opens the 1099 and sees that she has an additional 6 figures of taxable income (that should knock out her "rebate" as well).

I'll bet an honest dollar that she's not withholding against that income either.
2.14.2008 12:23pm
New World Dan (www):
While it's true that "everything is negotiable in business" a negotiation involves 2 parties resolving a disputed issue and coming to an agreement, not one party deciding they don't want to pay and walking away from a signed contract.

It's all a question of the contract, I suppose. There's also the position that if it's legal, it's ethical. My biggest surprise in all of this is the number of lenders and real estate professionals that didn't see it comming. I saw it comming long before I ever read a post by Mr. Bernstein, and I have no special training in this area.
2.14.2008 12:25pm
Mike S.:
If by law the note is a non-recourse note, and the lender didn't price the loan to account for the risk of a default in the event of a downturn in prices, the lender was foolish. It is not as though California real estate, especially condos, hasn't declined in recent years--there was a drop in the early 1980's and another in the early 1990's. I hope some of those bankers who decided 100% loans were an easy way to make money find their proper role in our economy as minimum wage unskilled labor, but I suppose that is asking for too much.
2.14.2008 12:28pm
Mr. Liberal:

While it's true that "everything is negotiable in business" a negotiation involves 2 parties resolving a disputed issue and coming to an agreement, not one party deciding they don't want to pay and walking away from a signed contract.


Of course this is a perfectly rational and defensible business decision. Traynor should be celebrated for exhibiting basic business rationality in a situation where many individuals would be guided by self-destructive emotion.

And as Posner would say, breaking a business contract is a business decision. There is a reason we award only expectation damages and not a more onerous penalty. And in California, it appears the mortgagor will not get even that, but they knew that was a risk and still chose to enter into the contract.

Now, I would say that there are some contracts that one should not break as a matter of honor. But I would not class impersonal business contracts in that category.

Guess what, if you go into business, sometimes you are going to lose money. Signing a contract with someone does not mean you own that person.
2.14.2008 12:30pm
Dan Hamilton:

She can do it because she lives in California. IIRC, California has a Depression-era statute that, in effect, makes all residential mortgages "non recourse."


Could it be argueed that the law only covers those who CAN'T pay the mortgage payments? It shouldn't cover those who just don't want to. Whould not Contract Law enforce the mortgage as long as she can make the payments?

She should be reviled. She is dishonest. She made a Contract she should be held to it. Just ecause she wants out of it she shouldn't be able to break it.

Poor little thing she is sooo incompenent that she should't have to do anything she doesn't want to. Just slap her upside the head and remind her that she made the contract. Nobody forced her. She wanted to make the contract. The greeded little fool. Her gamble didn't work out. To *(*&$#)(%^ Bad.
2.14.2008 12:32pm
common sense (www):
If its a rational breach, there's nothing wrong in this from a purely legal standpoint. I question, though, whether she's weighed the long term consequences, whether they be harder loan terms later or the tax hit she will take. It could well be that this is not a rational break, and she will end up in a much worse position in the end. This is fine as well, as long as the state doesn't intercede to help her out.
2.14.2008 12:35pm
Adam J:
And here I though efficient breach was something that only happened in law school theoretical discussions.

autolykos- Is it income? I forgot how non-recourse tax liabilities work. It doesn't seem like she really has a gain- only avoided a loss. Avoiding the loss seems to put her back at zero income from the transaction- no gain or loss.
2.14.2008 12:36pm
autolykos:
The more I think about it, the more I'm coming around to Mike's view. While different than contract law generally, it's not like non-recourse law as it applies to mortgages has recently changed and if anyone should know the law and act accordingly, it's the lenders.

They chose to issue the loan given this legal construct and assume the risk that the borrower would just walk away. It's a little silly of them now to whine about breach of contract when they knew the contract wasn't enforceable. Whether the law should or shouldn't be the way it is is irrelevant. It is what it is, the lenders know what it is and should act accordingly.
2.14.2008 12:37pm
Adam J:
That is to say, her gain in avoiding loan liability is offset by her loss in her homes value.
2.14.2008 12:38pm
Mr. Liberal:

She should be reviled. She is dishonest. She made a Contract she should be held to it. Just ecause she wants out of it she shouldn't be able to break it.


This is amusing. This idea is really advocating a sort of slavery.

Are we really supposed to have tears in our eyes for the lender? Was the lender too unsophisticated to understand the nature of California law and insure against precisely this sort of risk?

Of course you should be able to break business contracts when better opportunities arise and the opportunity cost of staying with the current arrangement is too high. To suggest otherwise is to enslave individuals in positions where they are less productive when opportunities for them to better contribute arise.


Just slap her upside the head and remind her that she made the contract. Nobody forced her. She wanted to make the contract. The greeded little fool. Her gamble didn't work out. To *(*&$#)(%^ Bad.


No one forced the lender either. And, it turns out that this was a permissible, possible, and predictable move under California law when that contract was signed. And the lender voluntarily entered into this contract, knowing that was the case.

That greedy little lender. The lender's gamble didn't work out. Too bad... It turns out that this sort of risk is shifted to the lender under California law, and they should buy insurance and/or price their mortgages accordingly.
2.14.2008 12:40pm
CheckEnclosed (mail):
One purpose of California's anti-deficiency judgment statutes is to provide lenders with an incentive not to lend too much without adequate security. A purchase money loan secured by a deed of trust on a single family residence will not yield a deficiency judgment, whether foreclosed judicially or non-judicially. Lenders know this, and price accordingly. Presumably, if deficiency judgments were available, interest rates &other fees would be slightly lower because part of the default risk would be shifted from lenders to borrowers. If Ms Traynor paid a marginally higher rate because of the anti-deficiency judgement statutes, no opprobrium should attach to her decision to walk away form the property.
2.14.2008 12:43pm
J.McFaul (mail) (www):
Yeah, California has an anti deficiency statute.

Convoluted, and with exceptions, but the anit deficiency statutes and the one action rule must be analyzed together on a case by case basis: Code of Civil Procedure sections 726, and 580a through 580d must all be analyzed.

CCP726

CCP 580a-580d


In a typical situation (with exceptions), the lender cannot obtian a deficiency for a loan used to purchase the property. Typically (again with exceptions) the lender can obtain a deficiency for refinanced loans. Since the vast majority are eventually refinanced, there is homeowner exposure to a deficiency in many cases.

If the lender does not carefully follow procedures, then the lender will be limited by the one-action rule to any equity in the property itself, even if it could have otherwise obtained a deficency.

Of course these are rules for "little people." Big time real estate players simply leave the empty shell LLC to pay any potential judgments if the real estate deal has gone bad.
2.14.2008 12:43pm
Jon Rowe (mail) (www):
If she has assets the bank may be able to go after her. The big problem is the "subprime" market where the folks are judgment proof and where if such a def. jugdment is levied against them, bankruptcy is the smart choice. Chances are the banks wouldn't litigate because you can't get blood from a turnip.

It's kinda intuitive -- people with assets, something to lose, are the one's who tend to act more responsibly because they have something to lose.

A lot of the subprime folks have their homes to lose (which they may owe more $$ on than it's worth, and which payments they can't afford to pay) but that's it.

This reminds me of how many auto insurance companies "credit score" that is they have found people with better credit scores are better drivers. It sorta makes sense if you think about it. If you hurt someone real bad in an auto accident, even a big insurance policy won't cover the whole thing; you can lose your house. If you have no house or nothing to go after, you may be less careful on the road. Once insurance company I dealt with (I can't name them) informed me that they charge a HIGHER rate for folks who buy LESS insurance coverage for the same reason. Someone who buys the minimum liability coverage probably doesn't have many assets to protect, hence will be a riskier driver.
2.14.2008 12:44pm
Dave Hardy (mail) (www):
Here in AZ they have a similar statute (applicable only to residential mortgages/deeds of trust), and in the last real estate bust the same thing happened. Homeowners who were really investors just walked away. One guy who went on to become a high official in Resolution Trust Corp. was one of them.

Every single S&L in AZ went bust. They were up to their necks in mortages that were wildly speculative and could only have been justified by a belief that the real estate bubble would never pop. Duh....

It's the downside of a statute that has an appreciable upside: someone who loses their house isn't bankrupted atop it. And given the nature of a foreclosure sale in an ordinary market, they'd wind up with a massive debt when the bank in fact made a tidy profit on the foreclosure.
2.14.2008 12:47pm
Adam J:
Dan Hamilton- it is a business transaction. The borrower is behaving rationally here, avoiding a huge loss. Any business would do the same here and no one would blink an eye- in fact the business would be using bad judgment if it didn't breach the contract. The bank accepted this risk, it agreed to make the loan and it knew the loan was non-recourse.

That said, I think its ridiculous to have the law in the first place, but I have little pity for the bank. It can always sell its loans elsewhere or not sell them at all if it doesn't like the law, or it can convince the legislature to change the law.
2.14.2008 12:48pm
Cactus Jack:

In addition, even if she does walk away, she's going to have $160,000 in taxable income.


I lost track of the status, but IIRC this was changed (or at least proposed to be changed) in the mortgage legislation that Congress was considering not long ago.
2.14.2008 12:48pm
Mike& (mail):
She should be reviled. She is dishonest. She made a Contract she should be held to it. Just because she wants out of it she shouldn't be able to break it.


The law allows her to walk away. She is going to make an efficient breach. The banks knew about the law at the time of the mortgage. They have armies of lawyers. Lenders got greedy and made a costly mistake.

I feel no sympathy for the banks; nor outrage for the borrower. The borrower is merely behaving as a rational economic actor.

I do agree that it's unlikely she realized that relief from debt is a taxable event. Depending on her other income, she should be paying 25-28% on that $160,000.

But who wouldn't pay $40,000 to avoid having to pay $120,000? So her action still makes sense.
2.14.2008 12:51pm
Dave G:
California lenders are perfectly aware of this risk, and price their products accordingly. In the jargon, it's called "jingle mail", referring to envelopes arriving with keys and quitclaims in them. It happened quite a bit in the early 80's. I'm not sure why anyone thinks of this as breach, rather than borrower exercising a (possibly implicit) option clause in her contract (to default and forefeit her security) which she had already been paying a premium for.
2.14.2008 12:51pm
DiverDan (mail):
While I am not licensed in California, it seems to me that, as a basic matter of real estate law, a Deed in Lieu of Foreclosure still requires acceptance by the Mortgage Holder -- she can's simply sign &record a Deed to the Mortgagee without the Lender's consent (well, she could, but it wouldn't be binding on the Lender &the Lender can file an instrument rejecting the Deed in Lieu of Foreclosure). Also, from my limited experience with California transactions (all commercial transactions), the Anti-Deficiency Statute can be avoided by the Lender simply filing suit on the debt and adding in a claim for judicial foreclosure; yes, it takes longer than a non-judicial foreclosure, but the Lender can keep the borrower on the hook for interest, taxes, and insurance on the condo until the actual sale. And, if she can afford the "extra $900" per month on the Condo (and a $500K mortgage), then she can afford a Chapter 13 Plan, so filing a Chapter 7 could well result in conversion or dismissal under the "substantial abuse" provision of Section 706 of the Bankruptcy Code.
2.14.2008 12:55pm
Happylee (mail):

Someone who can afford to pay her 100% mortgage simply walking away from it to avoid a six-figure loss? At the height of the housing boom in '04-'05, who would have predicted such things?


Ole! Someone give the good professor a prize. As an old boss of mine used to say "even a blind pig will find a truffle once in a while."

Bernstein was, of course, right about the bubble. Sadly, the feds will figure out a way to make things worse. The only "solution" to the problem is let liquidation take place. Traynor out; new buyer (at significantly lower price) in.
2.14.2008 1:00pm
Tony Tutins (mail):
I can't picture where in the Bay Area this $500K condo was. Even at the peak of the boom, single family homes in decent areas could be bought for $600K. When you take into account the condo maintenance assessment, the monthly payments would be the same.
2.14.2008 1:01pm
Ted Frank (www):
Dave G has it precisely right. So long as the rules haven't been changed mid-contract, each party got what it contracted for. Ms. Traynor may find future lenders unwilling to deal with her (perhaps even irrationally), but that's a separate issue. The lender made a bad investment in a situation where it was bearing the financial risk of a decline in real-estate prices.

Now, perhaps California consumers would prefer it if they had the option to permit recourse for deficiency judgments in residential loans, and wouldn't have to pay the premium to permit the sort of walkaway Traynor is doing. But that's also a separate issue.
2.14.2008 1:02pm
More importantly...:
How is this even being debated as a questionable call (tax and future loan application issues aside)? Assuming that, like any sane mortgagee, she got a mortgage that is non-recourse, the bank loaned her money on the condition that should she fail to pay, they get the house instead. She's simply exercising the less commonly chosen option under her contract, to repay the loan with the deed to the security, rather than in cash. That's the contract the bank made; she's hardly breaching it.
2.14.2008 1:03pm
Another Commenter (mail):
If indeed CA has a law that allows Ms. Traynor to walk away from an upside-down mortgage, then perhaps we should view that law as being an additional term in the mortgage contract. If walking away is a term in the contract, then she does not "breach" the contract when she walks away. If she has not breached the contract, then we should not revile her for walking away under a theory that it is immoral to break your promises. Now it is quite possible that the law was never intended to protect people in a situation like Ms. Traynor is in, but that complaint should be levied at the CA legislature and not at Ms. Traynor.
2.14.2008 1:03pm
TerrencePhilip:
She might not have thought her cunning plan all the way through. How does ruining your credit factor into this?

If she can pay, isn't she better off selling, and slowly paying off the $165,000 she would owe?

The "strategy" of intentionally stiffing your creditors despite sufficient resources should backfire; this makes a mockery of the legal system. I hope that (a) California law allows a deficiency judgment here, and (b) she cannot bankrupt out of this (and hopefully, telling the national media you are intentionally refusing to pay a debt will not work in her favor).
2.14.2008 1:06pm
FantasiaWHT:
I don't see her as having taxable income...

Her basis in the home was its purchase price, $505k. We don't have enough facts to assume any adjustments, so we'll leave it there. Her amount realized from the "sale" of the property was forgiveness in the amount of remaining debt. Again, we aren't given any information on the outstanding balance of the loan, or whether it was for the full amount of the house. For simplicity sake, I'll assume it was for the entire amount of the house purchase, $505k

If it was just interest-only payments, the loan amount would be the same, so the amount realized would equal the adjusted basis, so no gain.

If she wasn't making her payments, and P+I has increased above the amount of the original loan, then her amount realized would be higher than her basis and she'd have some small taxable gain.

If she made principal payments as well, her amount realized is going to decrease by that much, so she would actually experience a recognizable loss from the transaction.

It doesn't matter if the fair market value is below the amount of the debt, the amount realized is still the amount of the debt. Commissioner v. Tufts, 461 U.S. 300 (1983)
2.14.2008 1:08pm
Cactus Jack:
Pursuant to the Mortgage Forgiveness Debt Relief Act, discharge of indebtedness on a principal residence is excluded from gross income.

IANATL, so am curious what's included as "discharge" under the tax code.

Note also that new 26 USC 108(g) contains exceptions to the new exclusion, but arguably exceptions don't apply because this situation is "directly related to a decline in the value of the residence."

California is apparently considering similar legislation.
2.14.2008 1:12pm
More importantly...:
Businessmen raise sum of capital X, incorporate as A Corp., and proceed to conduct business for 3 years. During this time, they expend their capital as downpayments on loans secured by the operating equipment the loans were used to buy. At the end of Y-3, the businessmen who own and run A Corp. realize that they're not making much money, find that they could raise sum Y on the prospects of doing a different business as B Corp., and thus wind up A Corp. The creditors of A Corp. are, due to a downturn in the market for A Corp.'s operating equipment, undersecured and lose millions of dollars on their investment. Meanwhile, the businessmen, now merrily running B Corp. at a much higher profit, never think of those poor creditors again.

Notice the general lack of moral outrage at the behavior of our hypothetical businessmen described above.
2.14.2008 1:13pm
Yankev (mail):

Big time real estate players simply leave the empty shell LLC to pay any potential judgments if the real estate deal has gone bad.
Let me know which lenders you are using. Around here, lenders who lend money to a shell
LLC require a guaranty either from a warm body or from a related entity with substantial assets.
2.14.2008 1:16pm
Yankev (mail):
Efficient breach is legal. Efficient breach makes economic sense. Efficient breach is encouraged by the law.

None of those facts makes efficient breach the ethical thing to do.
2.14.2008 1:17pm
More importantly...:

Efficient breach is legal. Efficient breach makes economic sense. Efficient breach is encouraged by the law.

None of those facts makes efficient breach the ethical thing to do.



Thanks to that stunning bit of logic, Yankev, somewhere there's a Russian-American author spinning in her grave.
2.14.2008 1:20pm
Dave G:
<i>If she can pay, isn't she better off selling, and slowly paying off the $165,000 she would owe? </i>

I understand that good credit is important, but outside of some extremely unusual circumstances, I would imagine that the difference between a good credit rating and a bad one has a NPV of <i>considerably</i> less than $165,000. That money would cover the increased interest and down-payments on a lot more loans than most people ever take out.
2.14.2008 1:21pm
Blue:
I don't get the moral outrage. The mortgage contract, and the extant laws binding the interpretation of said contract, were well known to those financing the purchase. They should have fully priced in a proportion of those contracts going bad. If they did not do so, that was a poor business decision. If they did do so then arguing after the fact for a restrictive change in laws amounts to unjust enrichment...exactly the unjust enrichment that credit card companies recieved under bankruptcy "reform."

In any event, ethics do not enter into it. I have no more moral obligation to fulill the terms of a mortgage contract outside of the binding documents then I do to not cancel a cell phone plan or rental agreement.
2.14.2008 1:26pm
Mark P. (mail):
The thing that I don't understand is the circumstances under which lenders lend for residential mortgages in California. Even more, I don't understand why there's not more fraud in that market. So I can own a house, sell it to someone for a high price who gets a mortgage, and the buyer can walk away in three months with the lender holding the bag for my profit? And it's all legal? I want a piece of that action.

An anti-deficiency statute sounds foolish to me. But the rational response to such a system is for the lenders to adapt by requiring a very substantial down-payment, personal guarantees, mortgage insurance to be paid by the borrower, etc. Why were such measures not in place here?
2.14.2008 1:31pm
autolykos:
Is a loss on a residence deductible against ordinary income (as opposed to capital gains)? I don't think it's enough to just say that the loss is equal to the gain, otherwise the statute referenced above wouldn't be necessary.

By the way, thanks to Cactus Jack for pointing out the statute. Note that this isn't her primary residence, so I don't think that the exception would be applicable.
2.14.2008 1:34pm
Jeff S. (mail):
" And given the nature of a foreclosure sale in an ordinary market, they'd wind up with a massive debt when the bank in fact made a tidy profit on the foreclosure."

Dave Hardy,

How can the math possibly work on this? The only way the bank can make a profit through a foreclosure sale is if it recovers more than what it's owed by the debtor at auction. In that case, the is no "massive debt" owed by the debtor--it's all been paid off. Or did I miss something?
2.14.2008 1:36pm
Bpbatista (mail):
Law and economics anyone?

The lenders should have priced this possibility into their rates. Would anyone be surprised if they didn't?
2.14.2008 1:38pm
PersonFromPorlock:
This is not something she's done, it's something she says she's going to do in June. It's entirely possible that the whole thing is a ploy to get the lender to renegotiate the terms of the loan.
2.14.2008 1:50pm
Another Commenter (mail):
I don't understand why there's not more fraud in that market


The lender will generally look at the appraised value of the house when deciding how much to lend. You are right that if the lender doesn't look at the appraised value prior to issuing the loan, this would lead to massive fraud. The bank is essentially gambling, as are many buyers, that the house's value will stay flat or increase rather than decrease. In the present case, the house value dropped from the original appraised value, which leaves either the bank or the buyer stuck holding the bag.
2.14.2008 1:54pm
Calvin Wiggs (mail):
California law is part of the contract, and the law is that on a note and deed of trust used to pay the purchase price, the lender is limited to taking the security through a trustee's sale under the deed of trust. At the sale, the trustee typically bids the amount of the debt plus costs. If no one makes a higher bid, the lender gets the house. The debtor giving the lender a deed in lieu of foreclosure simply shortens and simplifies the process.

Add to this a rising market and loose lending practices and its pretty hard not to understand why people were buying houses like Beanie Babys. All they had to risk was a credit rating, and the more people who walk away, the less likely it is that walking away will be seen as permanently damaging.
2.14.2008 1:55pm
Bored Lawyer:
It's been a very long time since I studied tax law, but IIRC, on a non-recourse mortgage, there is no taxable income for forgiveness of debt, because the individual never owed that money -- there was no personal liability to start with. (This is apart from the separate exclusion referenced by Cactus Jack).

Am I missing something?
2.14.2008 1:58pm
gasman (mail):

While it's true that "everything is negotiable in business" a negotiation involves 2 parties resolving a disputed issue and coming to an agreement, not one party deciding they don't want to pay and walking away from a signed contract.

While from the fiscally conservative midwest her actions seem deplorable. A loan, even to an entity without a loan officer you've ever met, is still a debt that stains the soul if not repaid. But that's just salt of the earth folk in flyover land here.
From the just business standpoint there is nothing unilateral about it. The contract no doubt stipulates how the current situation is handled, and thus it is bilateral; all the details were worked out in advance in the form of the content of the contract plus the exisiting state law. Even if she burns the place, there is a clause that addresses what happens when the borrower fails to keep up the property in marketable manner. So while I find that her personal integrity would not induce me to trust her, she has 'negotiated' already with the bank. No morals clause means they have no recourse merely because she has no integrity.
2.14.2008 2:00pm
Alan Gunn (mail):
autolykos:

Is a loss on a residence deductible against ordinary income (as opposed to capital gains)?

A loss on the sale of one's residence is not deductible at all.
2.14.2008 2:04pm
CrazyTrain (mail):
As someone who is very familiar with California real estate law, there is no question that she can legally do this. All residential real estate mortgages in California are non-recourse, which means that the bank's only recourse is against the property. There is nothing unfair about this to the banks -- they know this when they finance these transactions, and is why they shouldn't be giving out 100 percent financing. For all the people who think it's unfair to the bank, it's called the free-market and this woman is absolutely right that she is making a legitimate business decision. This is how it works. As someone else noted, however, she will likely have problems getting financing in the future. She knows this and is making the conscious decision that those costs outweigh the benefits of walking away. Again, free market. The banks can whine all they want, but there's nothing wrong with it.
2.14.2008 2:14pm
Brian Mac:
Somehow, I told you so just doesn't say it...
2.14.2008 2:14pm
Dave G:
A loan, even to an entity without a loan officer you've ever met, is still a debt that stains the soul if not repaid.

Per the contract terms, the loan is being repaid, by the buyer handing the deed over to the lender. The lender explicitly accepted this as a possible mode of repayment when they issued the loan, and presumably charged the buyer a premium to cover that risk. This is no different than the contract being written to cover the possibility that the buyer will repay the loan early, something which can also cause significant financial cost to the borrower, in certain debt market conditions.

"Stain on your soul"? Both parties agreed to terms voluntarily, knew all of the relevant risks, and are abiding by them fully. There are no moral issues here at all.
2.14.2008 2:17pm
Adam J:
CrazyTrain - good analysis, except it isn't exactly free market when a law requires all mortgages to be non-recourse. Free market would let the lender and borrower decide for themselves if the loan should be recourse or non-recourse.
2.14.2008 2:19pm
Dave G:
that should read "something which can also cause significant financial cost to the lender, in certain debt market conditions".
2.14.2008 2:20pm
Corkie the Dog (mail) (www):
33yearprof:

' California has a Depression-era statute that, in effect, makes all residential mortgages "non recourse." '

Except for refinancing. Refinanced mortgages are not "non recourse".

Sincerely,
Corkie the Dog
2.14.2008 2:25pm
anonymous_bob (mail):
I find it pretty ironic to see all these harsh judgments of her on this supposedly libertarian blog. Both she and the bank entered into a contract with the clear knowledge that she had the right to walk away. Yes, the right. How is this not a legit business decision on her part?

Whenever a business makes a similar business-related decision (such as exercising a put), no one bats an eye. When an individual does it, it's no longer a simple business decision. Of course, maybe everyone condemning her would rather she suffers some consequences for making a purchase which turned out not to have value. But seriously, if she's not breaking her contract, what's the issue? And you don't get to get moral here. This is a business decision, the same as when a company lays off employees (they all say "hey, this is business, not personal").
2.14.2008 2:34pm
Philistine (mail):
Do those asserting the woman was "immoral" think that a "moral" California lender should repay to its borrower the premium they've charged the borrower once he pays off his mortgage?
2.14.2008 2:35pm
Mike S.:
Well, if there were a free and function market that allowed both recourse and none recourse loans for home purchase, the premium would be explicit. I expect it would be quite high as well because, given a choice, the people agreeing to the higher premium would be far more likely to hand over the keys.
2.14.2008 2:38pm
Roach (mail) (www):
First, David, props to you for your excellent, well-reasoned, and ultimately correct predictions in 2005.

Second, my experience in business litigation is that 90% of negotiations involve "one party deciding they don't want to pay and walking away from a signed contract."
2.14.2008 2:41pm
Houston Lawyer:
A more interesting tax question would be whether she would have forgiveness of indebtedness income. If she's $165,000 upside down on her mortgage and walks away, she's got that much forgiveness of indebtedness income. That's about a $55,000 tax bill from Uncle Sam.
2.14.2008 2:43pm
Roach (mail) (www):
Isn't it better for the economy, economic growth, system-wide rationality, and predictability if we have some moral outrage at "efficient breaches" and bankruptcies?

For a long time these non-economic motivations--in which I would include a notion of honor, secondary social consequences of bad acts/judgments/bankruptcies--kept people's spending and behavior in check. To simply reduce the matter to mere economics and treat living, breathing, moral agents as mere "rational, economic actors" who can breach at will, misses something important about the law and its purposes, as well as the economy.

The law exists to put teeth in people's moral instincts. By providing what looks like a fair deal or punishment, it prevents recourse to private violence. Most of what it prohibits is also wrong. Just because the remedy for breach is expectation damages, does not mean morality has nothing to do with it. Just ask anyone who has been screwed by someone who breaches a contract and says "sue me." After all in most jurisdictions, the suing party has to eat the attorneys' fees.

Part of what the law is supposed to do is reward good (i.e., socially efficient) behavior and punish bad behavior. This kind of heads I wan, tails-the-bank-loses calculation by the mortgagor here is wrong. It's greedy. It's dishonest. The law loses narrative integrity if blatantly wrong behavior that is allowed without punishment. Between two flesh and blood people, it might lead to private violence is not punished.

Second, as I imply above, the economy functions more efficiently if people are bound not just by law, but also by a sense of personal honor, trust, shame, and ostracism for engaging in predatory, selfish, dishonest, or otherwise uncool behavior. This is why economic transactions with extended kinship groups work well; if you screw Cousin Vinny (or Shmuel or Chen or Nikolas or whoever), no one will talk to you anymore within the family.

In other words, without some moral outrage here and in other cases of selfish, narrowly rational economic behavior, all of us will have to impound higher costs at the front-end of mortgage and other transactions.
2.14.2008 2:50pm
Orielbean (mail):
I propose...Lender's Prison!
2.14.2008 2:50pm
pete (mail) (www):

I understand that good credit is important, but outside of some extremely unusual circumstances, I would imagine that the difference between a good credit rating and a bad one has a NPV of considerably less than $165,000.


I would gladly trade my good credit for $165,000. If I had an extra $165,000 lying around would I even need credit for anything other than to buy a nice house?

I would never have gotten into the situation this woman is, but do not consider her unethical. She abided by the terms of the law and the contract. The bank was foolish to lend her the money without requiring a larger down payment.

I do feel some sympathy for the people who have neighbors like this and who are trying to sell their house in a neighborhood full of foreclosures.
2.14.2008 2:53pm
ruralcounsel (mail) (www):
There's already a ton of comments, and I don't have time to read them all ahead of time, so I apologize if this repeats what someone else has posted ...

The choice is between the lendee taking a hosing or the lender.

Since the lender is a professional sophisticated business entity, able to spread losses across many transactions, and presumably set their interest rate for the loan in order to compensate themselves for the risks they took making the loan, and took a lien on the property in order to secure their interest, I fail to see why any lendee should feel guilty about walking away ... as the lady said, it's merely a financial business decision. No different from a company closing a plant, or chosing to breach a contract and pay the liquidated damages.

This is why banks charge interest! At least one of the reasons, anyway. They're big boys and girls, they can take care of themselves. If they wanted her to have more equity in the property, they should have insisted on it when they made the loan.

Trying to use statute to allow them to try and recover their business loses is insane. The whole point of the ballon mortgage is the bank gambling that property values are going to keep rising, making a future higher rate tolerable to the buyer.

Moral outrage? For making it easier to do business? Who in their right mind would ever take out a mortgage if they thought they'd get indentured to the loan? Efficient breech and bankruptcy is what allows people to take risks, which is the essence of a vibrant and viable economy.
2.14.2008 3:09pm
AnneS:
I don't know where you live ruralcounsel, but most of us in the U.S. do take out purchase money mortgages that allow deficiency judgments. California and a few other states only permit non-recourse purchase money mortgages for primary residences, but most states aren't that restrictive and banks certainly don't go out of their way to create attractive non-recourse products.

That doesn't address the moral issue, of course, but it should answer the question of who in their "right mind" would take out mortgages that aren't non-recourse.
2.14.2008 3:17pm
LM (mail):
PersonFromPorlock:

This is not something she's done, it's something she says she's going to do in June. It's entirely possible that the whole thing is a ploy to get the lender to renegotiate the terms of the loan.

I heard her on NPR (or the local affiliate -- I'm not sure which). She said she contacted the lender and asked about re-negotiating the deal. She was cheerfully told they don't do that, and she's welcome to send the jingle mail. The general counsel for another large mortgage lender said his company rarely seeks judicial foreclosure in such cases.

In that regard, what does a judicial foreclosure mean if the contract allows the borrower to surrender the deed in satisfaction of the debt? Does the lender have to show any breach other than the failure to pay? If not, why aren't judicial foreclosures routine in California? Why are California mortgages generally considered non-recourse if the extent of action necessary to obtain recourse is just getting a court to enforce the lender's rights? Isn't that judgment and enforcement a routine part of what most people would consider "recourse?" Don't non-California lenders have to go to court to get judgment and enforcement of deficiencies?
2.14.2008 3:23pm
A. Zarkov (mail):
California code of civil procedure §586b provides immunity from deficiency judgments for purchase money mortgages and deeds of trust including (in some cases) second mortgages to purchase a primary residence. Then we have §580b of the CCP, which provides protection for HELOCs, but only for non-judicial foreclosures. You can read all about “jingle mail” at Greg’s Law and economics blog. Before Traynor walks away from her property, she should get good legal and tax advice. Sometimes walking away is not so simple as just sending the keys to the bank.

On the ethics of defaulting on your loan. Businesses use “strategic bankruptcy” all the time to stiff creditors. Why should it be immoral for an individual, but not for a business? If the law allows your bank to screw you, don’t you think it would do it? Governments are also willing to stiff their creditors. In 1975 New York City defaulted on its bonds, calling it a “moratorium.” A few years later, in 1978, Cleveland under Mayor Dennis Kucinich went into default on $14 million in short term notes to six local banks. Of course he claimed he did this in the interests of a greater good.
2.14.2008 3:24pm
LM (mail):
Roach,

Second, as I imply above, the economy functions more efficiently if people are bound not just by law, but also by a sense of personal honor, trust, shame, and ostracism for engaging in predatory, selfish, dishonest, or otherwise uncool behavior.

Doesn't that beg the question of what's "predatory, selfish, dishonest...?" Remember, we're not talking about individuals lending other individuals money. The individuals on the lending side are all protected by limited liability entities. The California non-recourse provision essentially puts both parties into a limited liability posture. If business goes bad for the lenders, they will fold the business, and the investers (i.e., the individual lenders) will walk away, losing only their investment in that business. This is just the analogous case for borrowers. Their house-buying business went bad, so they're folding that business and walking away. Is one any more predatory, selfish or dishonest than the other?
2.14.2008 3:39pm
Jon Rowe (mail) (www):
On a side note, I'd like to know more about how this "debt relief is taxable income" thing works. I understand someone "loans" you $100,000 you pay back 10,000 and keep the rest. And they don't bother to sue you but discharge the debt, that is like a $90,000 gain on your end. However I DON'T see how for instance, you spend 2,000 on a credit card, lose your job and stop making payments and late fees, over the limit fees and default 30+% interest rates compounds to give you a $10,000 debt which subsequently gets charged off that you should have to pay taxes on the $10,000. Any answers?
2.14.2008 3:42pm
A. Zarkov (mail):
Traynor made a poor financial decision. She bought a condo appraised at $520,000 for a two bedroom condo. The opportunity cost on that purchase is about $35,000. Allowing about another $10,000 for property tax, insurance, maintenance and other fees, you get a monthly cost of $3,750. How much does it cost to rent a two-bedroom apartment in San Francisco? That depends on where. But here is a two bedroom remodeled apartment (with free parking) in lower Pacific Heights for $2795. Thus she was betting that the property would indefinitely appreciate at more than 2.3% per year assuming $2,795 buys equivalent space. To an uninformed buyer at her time of purchase, that seemed like a good bet. It was certainly a better bet than buying in San Diego or Stockton, but a little research would have revealed that she made an extremely unwise decision.
2.14.2008 3:44pm
A. Zarkov (mail):
Whoops hit the wrong key. The link for the apartment is here.
2.14.2008 3:45pm
SDProsecutor:
Great comment thread. Re. the 'free market' discussion: wouldn't a truly free market also allow the lender to assert its 'option' to take the property in lieu of twenty-seven more years of payments when the property value increases three years into a 30-year mortgage?
2.14.2008 3:45pm
CrazyTrain (mail):
CrazyTrain - good analysis, except it isn't exactly free market when a law requires all mortgages to be non-recourse. Free market would let the lender and borrower decide for themselves if the loan should be recourse or non-recourse.

Well, yes that's true but there is no pure free market anywhere in the United States. We have economic regulations. California chose, for good policy reasons I believe, to make the rule that loans are non-recourse. Without that rule the "free-market" would have worked so that all loans would be recourse because the banking industry would essentially conspire to make that the rule. Regardless, the point I am making is that with that California background rule in place, there is a free market that should be operating efficiently. Part of that efficient operation is that borrowers such as this woman will default when it makes economic sense. There is nothing at all unfair about that, and the interest rates should (stress should) reflect that risk. However, the banks were not taking into account that risk, and they were lending outrageously to people when it made no sense. I have no sympathy for those banks. Just as I have no sympathy for people who borrowed too much and will have to downgrade their homes and have their credit hurt when they default on loans.
2.14.2008 3:57pm
CrazyTrain (mail):
Wow. I agree 100 percent with Ted Frank.
2.14.2008 3:58pm
Dan Weber (www):
I've asked this in other threads on other blogs, but...

where the heck is PMI in all of this?
2.14.2008 4:09pm
Roach (mail) (www):
The law defines legal obligations. But a contract is also a promise to pay; she is saying that she doesn't want to anymore. That is wrong, but we're all pretending that she's a big girl and so is the bank and indulding in quasi-nihilist rhetoric about impounded costs.

To me one important principle of a free society and its legal system is that we don't treat big corporations and their rights as expendable, nor do we treat them in our public rhetoric as being expendable and unimportant. This is the rhetoric of socialists and teenage anarchists, who rationalize their theft as something the big company and its fat cat owners won't miss. Look, if she did this to your mom or dad or you, you'd be pissed off and rightly so. And if you watched her do it to some other living human being, you'd think: selfish, anti-social schmuck. So why should we not bring the same hammer of ostracism and moral suasion upon her in a case like this where the victim is an allegedly morally irrelevant big bank.
2.14.2008 4:09pm
Dan Weber (www):
Some more comments as I catch up

wouldn't a truly free market also allow the lender to assert its 'option' to take the property in lieu of twenty-seven more years of payments when the property value increases three years into a 30-year mortgage?

Where is this "option"?

Also, on the subject of her credit report: remember that the bankruptcy is only on her file for seven years. That's plenty of time to rent.

Of course, since she announced her intentions on national radio, she's probably going into some private bank database file marked "DO NOT LEND TO EVER."
2.14.2008 4:16pm
A. Zarkov (mail):
“To me one important principle of a free society and its legal system is that we don't treat big corporations and their rights as expendable, …”

That’s true, but law and contract limit their rights. If you buy a corporate bond you know it might default and you should demand a premium to compensate you for bearing that risk. Of course Hillary proposes exactly what you condemn. She wants a five-year moratorium on foreclosures and a freeze on ARM interest rates so they won’t reset on schedule. Isn’t this exactly making their rights expendable?
2.14.2008 4:21pm
Jon Rowe (mail) (www):

Second, my experience in business litigation is that 90% of negotiations involve "one party deciding they don't want to pay and walking away from a signed contract."


I consider myself a free marketer as much as anyone here. However, I can't feel sympathy for lenders screwed by debtors who walk away from signed contracts because these are most contracts of adhesion where the creditors write all of the terms favorable to their side, the borrowers don't know what they are signing, and some borrowers would sign away their souls.

If a debtor walks away from a bad deal they learn their lesson by having their credit ruined or are sacked with the limitations of bankruptcy. That's punishment enough.

The more I see of these contracts of adhesion with fine print, the less I see contracts as "sacrosanct." But I say this while still supporting contract law as it stands and the free market. Let the predatory lenders live with the threat of efficient breachers or deadbeats to whom they shouldn't be lending.
2.14.2008 4:23pm
Dave N (mail):
Wow. I agree 100% with CrazyTrain and Ted Frank. The stars certainly must be in some kind of weird alignment.
2.14.2008 4:34pm
Roach (mail) (www):
Why would anyone think I have any love for Hillary? I agree with you Mr. Zarkov. I think all these bail out plans, whether for lenders or lendees, are ridiculous. Things need to shake out. Foreclosures need to happen; banks need to fail, and prices need to drop. We've had artificial inflation driven by short-sighted Fed Policy; this recession will drag out longer if prices can't drop as quickly as possible so money on the sidelines can reinvigorate the economy.
2.14.2008 4:47pm
jmo (mail):
So question re: " Mortgage Forgiveness Debt Relief Act, discharge of indebtedness on a principal residence is excluded from gross income."

If my company offers to finace my home as part of a relocation package (as some companies do for senior executives) When bonus time came arround they could just forgive my loan, thus resulting in a tax free payment to me?

Is their any language in the law to prevent that?
2.14.2008 4:51pm
TomH (mail):
Roach -

The contract also said, if you don't pay, you can wait for us to bring you to court for a foreclosure proceeding, or you can just give us the keys.

Why is paying so much better and option. On a related note, non-recourse debt keeps more liquidity in the market, as people will be more willing to sell or walk away from properties that lose value. Give someone else a chance to own and move the property back to a more current market value.
2.14.2008 4:53pm
DavidBernstein (mail):
According to the news story, she has another house, apparently her primary residence, so she's not worried about her credit rating much.
2.14.2008 5:06pm
xxx:
A more interesting tax question would be whether she would have forgiveness of indebtedness income. If she's $165,000 upside down on her mortgage and walks away, she's got that much forgiveness of indebtedness income. That's about a $55,000 tax bill from Uncle Sam.



No. This is the old law. Congress changed it recently. It is not income anymore.
2.14.2008 5:32pm
theobromophile (www):
Great comment thread. Re. the 'free market' discussion: wouldn't a truly free market also allow the lender to assert its 'option' to take the property in lieu of twenty-seven more years of payments when the property value increases three years into a 30-year mortgage?

Okay, property was a while ago, but I seem to recall that some jurisdictions give title over to the lendee and some let the lender retain title. If it is the latter, it makes perfect sense for the lender to exercise this option. Of course, it's not in the real estate business, so buying a home, kicking her out, and selling it probably aren't among its goals. As a practical matter, it would never happen, but I wonder what would happen if a lender put that into a contract.

Efficient breach ought to go both ways.
2.14.2008 6:05pm
Meh (mail):
I am really, really not trying to be a jerk here, but can David Bernstein stop, for bloody crying out loud, trying to play the prescient part with respect to the real estate bust? It was obvious to A LOT of people, not just David's self-congratulatory take "who would have predicted such things." For the sake of the damn children??? Please, I'm begging here.
2.14.2008 6:52pm
David Schwartz (mail):
Assuming she signs over the house when she is current on her mortgage, and the law makes the house full payment for the mortgage, why would this affect her credit rating? The house is full payment, just as a check for the balance is.

It is not, under both the law and her contract, her problem that the security no longer covers the loan. The mortgage company chose to accept the house and the price, gambling that the house would cover the loan into the future. They lost on their gamble -- that's not her fault.
2.14.2008 6:55pm
Sua Tremendita (mail):
The power move by the gal would be to walk away from the home, let the bank foreclose and then bid and buy at the auction for $165k less than her previous balance. Now that would be tremendous!

tremendo
2.14.2008 7:22pm
Andy Freeman (mail):
> And given the nature of a foreclosure sale in an ordinary market, they'd wind up with a massive debt when the bank in fact made a tidy profit on the foreclosure.

Huh? If the house sells for more than is owed, doesn't the foreclosed homeowner get the excess?

If the homeowner gets the excess, there's no "tidy profit" in foreclosure.

I'd be very surprised if any state allowed lenders to keep the excess.
2.14.2008 7:45pm
The General:
considering where it is located, does the condo stand to increase in value over the long term?
2.14.2008 7:57pm
LM (mail):
Roach,

Look, if she did this to your mom or dad or you, you'd be pissed off and rightly so.

If she was my sister or a friend my dad was helping out with financing she couldn't obtain commercially, yes, I'd be pissed off at her. But if my dad was in the lending business, and she was an arms-length borrower, I might be pissed off at him for not anticipating the adequacy of the loan security, but I certainly wouldn't be pissed off at her.

You can avoid the issue with all the ad hominems and straw men you like, but the fact remains that efficient breach was developed to a state of the art by businesses, the principles of which are shielded from recourse to their assets. So what offends my sense of propriety is when someone untroubled by the routine practice of efficient breach by these businesses hollers "foul" when a rare individual consumer with limited liability plays the game by the big guys' rules.
2.14.2008 7:59pm
DavidBernstein (mail):
Meh, where were you when all the VC commenters were claiming I was just a bitter renter who didn't understand the real dynamics of the modern housing market?
2.14.2008 8:41pm
DeezRightWingNutz:
I reserve my moral outrage for those similarly situated to the lady here that stop making payments, wait nine months to go through the eviction/foreclosure process, then turn over the keys to the house (which has been removed of fixtures, wiring, etc., etc.)
2.14.2008 9:12pm
DeezRightWingNutz:
David,

What has the market done since you first started crying bubble? Were you like me in the tech stock runup? I lost a lot of money by seeing the bubble in 1997 and missing three years of growth before it popped. Well, not a lot of money, but a high percentage return.
2.14.2008 9:17pm
ReaderY:
She made a contract that specified certain agreed-upon consequences that would occur if she didn't pay. She seems perfectly willing to accept them. Since the contract gives her the option of doing either, why shouldn't she take whichever one is in her best business interest?

A business with a contract that specified the agreed-on penalty for nonperformance would be foolish to continue performing if the cost of performance began to exceed the value of performance. An corporate executive who foolishly made judgments based on some sort of misguided sense of personal integrity could be hauled into court and be held liable for breach of fiduciary duty by being guided by personal passion rather than the rational interests of the shareholders.

Why should an individual behave differently or be held to a different standard? The women is presumably acting not out of self-interest, she has a fiduciary duty to her family that similarly requires making economically rational business judgments rather than acting purely out of passion.
2.14.2008 9:43pm
Jon Rowe (mail) (www):

Huh? If the house sells for more than is owed, doesn't the foreclosed homeowner get the excess?


In principle, yes. But I'd imagine that the bank would nickel and dime the foreclosed homeowner with so many fees that little if anything would be left.
2.14.2008 10:12pm
Jon Rowe (mail) (www):

Huh? If the house sells for more than is owed, doesn't the foreclosed homeowner get the excess?


In principle, yes. But I'd imagine that the bank would nickel and dime the foreclosed homeowner with so many fees that little if anything would be left.
2.14.2008 10:12pm
davidbernstein (mail):
"What has the market done since you first started crying bubble?"

I was single until I got engaged in 2004, and up until then I paid next to no attention to the housing market, because I didn't have any personal reason to buy (I had a nice place at a very reasonable rent), and had no interest in being a real estate speculator. I do remember The Economist warning about overpriced housing in 2002, but then again I think in real terms prices may very well go back to 02 levels before this is over.
2.14.2008 11:05pm
JBL:
Two points.

One: she's not walking away to avoid a $165,000 loss. It was a $165,000 unrealized loss. There's potentially a big difference. Assuming the condo will at some point return to at least $505,000, her loss, ultimately, would have been the opportunity cost - the difference between the loan payments and whatever else she could do with the money. Or something like that. We don't know how that compares to the $165,000. But since she can force the lender to realize the loss instead of taking it herself, it's likely she can justify walking away.

Two: it is true that lenders in California grossly underpriced their risk. The result ought to be that they start correctly pricing it. This will make mortgages in California crazy expensive until the market stabilizes, and very expensive thereafter. Given the relationship between mortgage cost and housing values, that should be fun to watch.

Corollary - the interaction between One and Two is interesting.
2.15.2008 1:36am
theobromophile (www):
Efficient breach is legal. Efficient breach makes economic sense. Efficient breach is encouraged by the law.

None of those facts makes efficient breach the ethical thing to do.


Thanks to that stunning bit of logic, Yankev, somewhere there's a Russian-American author spinning in her grave.

I suspect that said Russian-American author would disapprove of California's law to begin with, and she wasn't necessarily a fan of doing that which was legal if that which was legal was also immoral and involved cheating people. In fact, if memory serves, said Russian-American author devoted several hundred pages to a condemnation of those who used the law to subvert business contracts, and the apotheosis of those who either broke the law in the name of capitalist production or refused to benefit from the laws of the looters.

After all, who can forget Dagny's vilification of the looter's plan to allow Taggart Transcontinental to use Atlantic Southern's rails without payment?

--

Back to foreclosure: if the California law were not in existence, this would be an efficient breach: the owner could turn the keys over and let the lender either sell it for the value of the outstanding loan, or sell it for as much as it can get and go after her for the rest. After all, one element of an efficient breach of contract is that the one who breaches pays damages in the amount of the value of the contract.
2.15.2008 2:24am
Tony Tutins (mail):
considering where it is located, does the condo stand to increase in value over the long term?

In the past 20 years in the Bay Area, the only significant dip was Clinton's peace dividend dip in the early 90s. (Military contractors plus military bases meant California used to be a net importer of Federal tax dollars.)If you bought your house at the absolute peak, you caught up five years later.
2.15.2008 4:33am
Meh (mail):
I'm not going to play a silly "where were you" game with you, David. My point is that two plus years later, you're STILL tripping all over yourself to congratulate yourself and pretend that you were some type of lone voice in the wilderness. Maybe you should just write a post titled "HAHA, SUCKERS, I WAS RIGHT AND YOU WERE WRONG!!!!" and crow about how you were right and those people who apparently mocked you were wrong. If you did that, could you then move on?
2.15.2008 9:38am
Andy Freeman (mail):
>> Huh? If the house sells for more than is owed, doesn't the foreclosed homeowner get the excess?

> In principle, yes. But I'd imagine that the bank would nickel and dime the foreclosed homeowner with so many fees that little if anything would be left.

However, many/most of those fees go to third parties, so they don't benefit the bank.

Is there any actual evidence that the profit the banks make on the fees that they receive during foreclosure exceed their losses on the loans? Or, is this going to simply go away like Obam's "people get foreclosed when their lender fails" bogosity did when pushed?

Note that "in principle" gets the plaintiff's bar past the bank's motion for summary judgement. Excess bank fees, which these would be, have been a common topic for class-action lawsuits. Foreclosures provide extremely sympathetic clients, so either the plaintiff's bar is ignoring a large pile of money or it isn't actually there. If the latter, the claim is wrong.
2.15.2008 10:09am
Dan Weber (www):
Predicting a fall in prices is nothing. People do it all the times.

There's even a joke for this. "Economists have correctly predicted 12 of the last 5 recessions."

I know people that have been screaming "HOUSING BUBBLE" since 1998. Prices still haven't fallen to what they were then, and they probably never will.

Predicting a fall in prices is not impressive in any way whatsoever. Having a track record of correctly saying when prices will go up and when they will go down is.

Both renting and buying involve risks. You should understand which risks you are avoiding and which you are accepting.
2.15.2008 10:27am
Jon Rowe (mail) (www):

so either the plaintiff's bar is ignoring a large pile of money


Or maybe you just gave some lawyers an idea.
2.15.2008 11:06am
DavidBernstein (mail):
But what is fascinating is that the upshot was obvious to me, allegedly to you, and to many others, yet banks etc that pay people millions to predict these things managed to lose billions not foreseeing "the obvious."
2.15.2008 2:15pm
Bleh:
[deleted by editor]
2.15.2008 3:35pm
Steve Harris:
I think there are ethical &legal issues here and they are being mixed. I'm an engineer, not a lawyer but a contract and associated law specifies the legal part of a breech.

I had a contract with a cable company. The signal was terrible so I breeched the contract and went with a satellite company. I sent the cable company a check for the penalty amount specified. Why should I be reviled?

This is of more than casual interest to me. I bought a house in the exurbs south of Denver towards the top of the bubble. It wasn't that strange a contract. I paid 10% down plus closing costs. I later accepted a job offer where I had to move and tried to sell the house. After 6 months empty on the market I couldn't afford it so I rented it. I pay almost $900 a month since the rent didn't cover the mortgage. I was back there recently and the bubble is still deflating big time. Repos and vacant houses everywhere! Walking away is not an option now since I have a renter. Later this year the lease expires and then I have to decide. I just don't see the market recovering enough to where I could sell it without paying large sums to get out. I'd been planning to talk to a lawyer and from comments here I should check with an accountant. I haven't decided what to do yet but I understand the reasoning of the woman.
2.15.2008 3:51pm