It is a shock and outrage that these risky loans were granted in the first place.
As a person with a degree in Finance who has taken classes titled Management of a Financial Institution I know that every bank manager knew or should have known these loans would go bad because the borrowers were not qualified.
When banks give out too many bad loans they are supposed to fail.
The banks, real estate agents, and mortgage loan officers defrauded the public by granting loans they knew would go bad, selling houses to people who they told that the market would never crash, and lying on loan applications.
Strategic default is the right decision in a free market given the circumstances because it allows the market to redetermine the value of the home based on traditional criteria.
Loan modification and other government programs only prevent a recovery and prolong the recession. I applaud all the homeowners who are willing to admit they made a mistake and move on by strategically defaulting.
The next issue will be what happens when the bank that the strategic default was made finds there are assets available? It just depends on if there were deficiency rights or not in the state the person lives.
First Weber Group
Certifed Distressed Property Expert
People are allowed to lend money to deadbeats. Aren't they?
I agree with Dan on TARP. I certainly did not and do not agree with my tax dollars being used to "bail" industries out and still don't, I know this will be unpopular giving the number of realtors on this site, but I also don't agree with the housing stimulus. The government needs to stop the spending and the program creation. It is getting crazy.
Just my two cents,
April Tavares, GR
They're a deliberate rip-off of lenders for the convenience of owners.
There are plenty of legitimate reasons why an owner might face foreclosure: death of a spouse, divorce, loss of job, reduction in pay, illness, and so on.
But when an owner is able to pay but chooses not to, that's unethical. And keep in mind that the owner in this case, and in other cases of strategic foreclosure, voluntarily agreed to the mortgage product, exotic or not. The terms were there. They were spelled out. If the owner is alleging deception on the part of the lender, then the owner should take the lender to court. But there was no deception. There was generally greed and a speculator's mentality that values would continue to rise.
Harsh? Yes. True? Yes.
The owners executing a strategic foreclosure are asking the lenders to absorb the loss of a property's value in a declining market. Let me pose this question: If the property's value had risen and the owners had made a profit, would they have shared the profits with the lenders? If the answer is "no"--and we know it is--then the owners want the best of both possible worlds. They want all the profits for themselves, and they want the lenders to take all the risk for any loss. That's unethical.
The other facts in your question are irrelevant. Ethics has nothing to do with how much the buyer paid the seller. It has nothing to do with whether both Realtors were paid their full commission. It has nothing to do with whether the lender would offer a loan modification. It has nothing to do with whether the mortgage was "exotic" so long as the borrower understood and agreed to its terms.
It all comes down to the individual choosing to eliminate the negative equity by deliberately violating an agreement he willingly made. You tell me: Is that ethical?
The scenario above if carried out (literally) millions of times is just asking for a future financial problem that could be avoided.
Just so you know I am being fair, the banks should not have gotten tarp. They stay afloat on their own or get sold off for debts. This whole situation and solution is screwy and wrong.
Mortgage loans are not a necessity of life. Nobody has to take out an "exotic" loan, and the majority of people who did were, truth be told, bad credit risks.
I'm not exactly sure why any of us believe that a lender should be obligated to renegotiate the terms of the loan, simply because they borrower doesn't feel like paying.
The fact that the loan had insurance on it is irrelevant. Having insurance changes nothing when it comes to the commitments made. Does having insurance and the owner hurting an insurance company instead of a bank make a difference? I think not. A person made a decision to violate a contract they made knowing what they were doing.
The problem is not the financial loss someone on either side of the transaction incurs. The problem is the mindset that led to that loss. After all, once someone decides that their contracts and word mean nothing they will not choose to live up to their other requirements either.
If I choose to violate my promise for $200k what is to stop me from doing the same thing just because I do not feel like it? There is no difference and honest people know it.
p.s. when can I get paid to not be underwater on everything I buy? Nothing has the value after I take it home that it did on the store shelf or dealers lot.
It's not ethics, and you don't have to be jealous.
If it was you - what would you do? Would you really accept many years of suffering because you felt you must be punished? Or would you do the best that you could for you and your family and settle the best you could and move forward with your life?
I feel there is an unbelievable number of people just like this guy out there right now.
Those that wil be in a position to offer seller financing or lease options/purchase will be in a very good spot in the years to come.
It's a changing world.
It's one thing if a bank wants to make loans and keep them on its books, although they are obliged to establish underwriting standards, and the Board has every reason to fire employees who violate those standards.
It's another thing to pass those loans off to a third party as meeting underwriting standards, that's where the "fraud" thing comes in.
And that's really what caused the financial crisis - the loans were not properly priced for resale.
I personally don't find any "ethical" issues associated with a home purchase or default - strategic or not. It's a financial decision, not a test of moral ability. He did what he needed to and lending was available to him. End of story.
For those who feel the borrower should be punished, recognize that there are two sides to every story. We only know that the borrower was under water with the first purchase, but nothing else. (Had they lost their job? Had a death in the family?) Nor do we know the source of the new down payment. (Was it a gift from the borrowerâ€™s parents? Was it an inheritance? Perhaps it was a big signing bonus at a new job?)
As for the new purchase, just like a cheating spouse who marries the mistress (or mister), everybody knows the bargain and how they got there. Sometimes it works out and sometimes it doesnâ€™t; who is anyone else to judge their lives or decisions? (The dumped always an opinion, of course, but they really arenâ€™t objective.)
Moreover, my opinion is that society is better off with people owning homes in which they live. That belief has fueled real estate since the early twentieth century and, hopefully with some market balance, will continue to into the future.
Sothebyâ€™s International Realty
The borrowers are given a set of rules. Sometimes it works for them, and sometimes it doesn't. If they follow the rules and it works to their advantage, where it the immoral conduct?
And asserting the borrowers should be penalized in future for a foreclosure? Its the market that will determine whether, all things considered, including the supply of money and the state to the market, whether these or any other buyers who have gone through a foreclosure should be able to borrow again.
I must say that I am a bit surpised by some of the comments here by professional who make their living at real estate.
So the same instituions that have pushed people to suicide over defaulting on a debt are not worried if they default.
To answer the question I'd say no, there is nothing wrong with the entire scenario. The seller wants to sell and the buyer wants to buy. The seller, as long as they are aware of the risks and are prepared to get the house back if the buyer decides to walk away again life goes on and I don't pass moral judgement on the little people - only on the coprorate people - who now have the right to contribute as much or more than people in campaigns.
Associate Broker ~ Over 27 Years of licensure
Serving Maryland, DC and Northern Virginia
When the borrower executed a Strategic Foreclosure he moved in with his family and stayed there for 18 months, during which he was able to save up a bunch of cash in effort to return to home ownership. This is where he was able to come up with the 20% down payment.
To Barry, the buyer is rebuilding his credit rating because he is making his payment to a note servicer who does report the monthly payments to the three main credit bureaus. You will also all be happy to know that this borrower's credit score is up to 748 already by making his monthly payments and meeting his other obligations with his credit card payments.
The new HAFA program that was introduced this year is voluntary and the banks do not have to participate. It is going to be very difficult for a borrower to short sale a home they live in and move down the street to a less expensive home and obtain immediate institutional financing. The new lender may have overlay guidelines and may not lend to these folks, we will have to see how this program rolls out.
Thanks to everyone for your contributions. I am concerned about the rise in strategic foreclosures that are in the pipeline and trying to wrap my mind around it all.
Strategic Defaults are NOT Strategic. Learn more about exactly why Strategic Defaults are NOT Strategic by visiting our short sale vs. foreclosure website, and clicking on the RESOURCES tab. We have packed our website full of useful pertinent information for homeowners, which includes coverage of the new HAFA program. That's great to hear the seller found owner-financing on their home of choice. Too bad the regular payments won't be reported to the 3 credit bureaus -- yet they could prove a mortgage history on down the road as long as they save their mortgage payment check copies.
That said, the lender sold an exotic mortgage and refused to modify the loan. This shows a basic unwillingness to work with the borrower (bad faith). Depending on the precise terms of the original loan, it may also constitute unethical business practices.
I agree with comments that, if the borrower had 20% to put down on a new house, they could have kept paying the original mortgage. However it also seems that if the lender was unwilling to help the borrower figure out a more affordable mortgage deal, they are at least partly responsible. Overall, a preferable course of action would have been for the borrower to seek legal representation, and push for a more affordable mortgage with the original lender. (I guess the lender had already set their sights on the new house and was finding excuses, ethical or not, to back out of the original deal.)
Overall, it would help to know the original loan terms. Did the borrower understand their exotic mortgage? Were they enticed into a financially unsustainable situation? The point being, was the negative equity the lender's or the borrower's fault? Certainly there is an ethical 'black hole' surrounding the original situation.
Whatever the case, the borrower took an unethical path out of the situation. They should not have retained the 20% down payment on a new house, or been excused from making payments they could have made so soon after a bankruptcy. I can imagine exceptions, such as an inheritance from a parent who died after the bankruptcy, but they are unlikely.
All in all, I'd say the borrower almost certainly acted unethically, but it's very possible the lender also acted unethically.
(Incidentally, this is a prime time for unethical lenders to approach them once again: a) they are not eligible for bankruptcy for another 5 years, and b) they have shown an inability to manage debt - which spells 'quick bucks' to loan sharks.)
Although I enjoy the idea of Realtors(r) getting paid their full commission, and I absolutely agree that if someone is willing to finance a deadbeat, it's their right and privilege, a deadbeat is still a deadbeat.
The former home owner then saved up money and moved into a new property with a 20% down payment and the seller is carrying financing. You will all be happy to know that he has been paying his new mortgage for well over a year and the seller is happy because where else are they going to get a 7.5% return that is secured against a quality asset?
Is it ethics or jealousy?
Maybe what seems questionable now, will become the new normal. Home buying will once again swing up, only to come crashing down because of the "new normal" and the cycle will go on and on. Up and Down..
Laura Reilly- Foreclosure â€œINVESTâ€igator USA
â€œI have a problem with too much money. I can't reinvest it fast enoughâ€ Robert Kiyosaki