When Sharon Sakson was laid off recently from her job as a television writer and producer, she burned through her savings to pay the $2,400 monthly mortgage on her home. But she soon decided it didn’t make sense: Her home was worth thousands less than the mortgage she carried on it.

The home had been appraised at $390,000 when she refinanced in 2006, but she estimates it’s not worth the $320,000 it initially cost in 2004. So Sakson did what a growing number of homeowners are doing today: She stopped paying and decided to let the bank take her home.

“I’m walking away from my house,” says Sakson, 57, who stopped making payments about six months ago on her home in Pennington, N.J. “The bank can have it.”

What Sakson did is called a strategic default, or a voluntary foreclosure, and it’s fast becoming a major challenge to the government’s $75 billion effort to keep distressed borrowers in their homes. Walking away from a mortgage is serious business — it can knock 100 points off your credit score and make you ineligible for a new mortgage for seven years. Yet, about 588,000 borrowers walked away from homes last year, double the number in 2007, according to a recent study by credit-scoring firm Experian and management consultants Oliver Wyman. While home prices are rising, the increases pale compared with overall drops in home prices since 2005 that threaten to push millions more homeowners into Sakson’s predicament, owing more than their homes are worth and seeing little chance of rebuilding equity soon.

The truth is that FHA and other government loan programs will allow you, if you have had a hardship, buy a home in as little as 3 years after a foreclosure.  I think it’s safe to say that someone will come up with a program for walk aways to buy before then, seeing that there are and will be millions of ex-homeowners wanting to buy at the bottom of the market.

Sharon Sakson is a customer of ours at You Walk Away and she is not alone.  Her story like so many others is becoming more and more prevalent today.

USA Today goes on to say:

The number of borrowers who walk away is expected to increase, along with the rise in homeowners who owe more than their homes are worth. An unprecedented 16 million homeowners currently are underwater, according to Moody’s Economy.com. That’s about a third of all homeowners with a first mortgage.

Moody’s Economy.com estimates the number of underwater borrowers will peak at 17.4 million in the third quarter of 2010.

An even higher estimate comes from Deutsche Bank, which predicted in an August study that the number of homeowners underwater will grow from 14 million (or 27% of all homeowners with mortgages) in 2009 to 25 million homeowners, or 48% of all those with a mortgage, by the time home prices stabilize.

Not coincidentally, strategic defaults have been highest where prices have plunged most, such as California and Florida.

From 2005 to 2008, the number of strategic defaulters went up by 68 times in California, according to the Experian-Oliver Wyman study published in September. During that same time period, the median price for existing, single-family homes in California fell from $522,670 in 2005 to $346,410, according to the California Association of Realtors.

In other geographic regions, the increase in strategic defaulters ranged between 3 times and 18 times more.

The Experian-Wyman study found borrowers with higher credit scores when they applied for their loan were 50% more likely than other types of borrowers to walk away from a mortgage only because they were underwater, even though they could afford to pay. The study was based on an analysis of about 12 million borrowers.

So if by the end of 2010 there are around 25 Million people that have underwater mortgages,  How many million of them will go through foreclosure? Or be in default? How many million will wait it out… 5 years… 7 years… 10 years until they have equity again.

The biggest part of homeownership is actually owning a part of your home… Equity.  If there’s no equity, aren’t you worse off than a renter? Renters are typically paying about a third or half of what someone would be paying if they bought a home between 2002-2007.

Conclusion

We clearly have a long way to go before housing recovers.

It’s obvious to me that there is some serious propaganda being pushed into the minds of consumers today.  There are some interesting contradictions in the headlines.  I also came across some news headlines from the Great Depression.  They sound strikingly familiar to this downturn.

Contradictions

1. We are in the country’s worst housing downturn since record-keeping began in the late 19th century  - But the recession is ending…we are seeing a recovery.

Nearly half of recent sales have been attributed to foreclosures or “short sales” at bargain-basement prices. –

2. The Treasury Department’s assistant secretary for financial institutions, recently said more than 6 million families could face foreclosure over the next three years - Realtor.org reported on October 19th that: “All the leading indicators say housing is definitely on the mend.

The truth is that the worst may be on its way.

That spillover effect from foreclosures is one reason why Celia Chen of Moody’s Economy.com says nationwide home prices won’t regain the peak levels they reached in 2006 until 2020.

I say that some homes won’t recover till 2030.  There are homes I have seen that have dropped so far, that it will take at least 20 years to get back to where they were.   I was speaking to a client of YouWalkAway.com and they told me that they bought their home at the peak in the 80’s for around $100k.  He said It’s now worth around 100k and he couldn’t believe that after over 20 years, all his equity was gone.

3. The Center for Responsible Lending says foreclosures are on track to wipe out $502 billion in property values this year. -  Newsweek blog reports Meanwhile, the recovery in stock prices and, to a lesser extent, real-estate values has stabilized households’ net worth (assets minus liabilities). By her estimates, U.S. household net worth will rise 3.7 percent this year and 6.9 percent next year

I recently read a MSN article that said: “Interest-only mortgages were the *standard mortgage in the 1920s*, but they disappeared during the Great Depression…”  - Sounds familiar doesn’t it?

The Great Depression 1929-1932 Headlines mixed in with some recent ones:

September 1929

“There is no cause to worry. The high tide of prosperity will continue.”

- Andrew W. Mellon, Secretary of the Treasury

July 12th, 2007

“This is far and away the strongest global economy I’ve seen in my business lifetime.”-

Henry Paulson, US Treasury Secretary

October 29, 1929

Stock market crash

December 5, 1929

“The Government’s business is in sound condition”

-Andrew W. Mellon, Secretary of the Treasury

July 12, 2008

“These institutions [Fannie and Freddie] are fundamentally sound and strong. There is no reason for the kind of [stock market] reaction we’re getting.”

Christopher Dodd, Chair, Senate Banking Committee, Financial Post

May 1, 1930

“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.”
–

President Hoover

May 7th, 2008

“The worst is likely to be behind us,”-

Henry Paulson, US Treasury Secretary

June 29, 1930

“The worst is over without a doubt.”
–

James J. Davis, Secretary of Labor.

August 29, 1930

“American labor may now look to the future with confidence.”
–

James J. Davis, Secretary of Labor.

March 26, 2009

“We, as a nation, have already begun the critical work that will lead to our economic recovery.”

President Obama

September 12, 1930

“We have hit bottom and are on the upswing.”

James J. Davis, Secretary of Labor.

February 24, 2009

“The US will emerge from this recession, stronger than before…”

President Obama

October 21, 1930

“President Hoover has summoned Colonel Arthur Woods to help place 2,500,000 persons back to work this winter.”
– Washington dispatch.

February 24, 2009

Over the next two years, this plan will save or create 3.5 million jobs…

-President Obama

November 1930

“I see no reason why 1931 should not be an extremely good year.”

Alfred P. Sloan, Jr., General Motors Co.

June 9, 1931

“The depression has ended.”

Dr. Julius Klein, Assistant Secretary of Commerce.

Final thoughts

We are facing the biggest crisis since the Great Depression yet Bank of America reported a $3.2 billion profit for the second quarter of 2009.  They are making all this profit but they are very low on the list of how many loan modifications they’ve done. Only 11% of eligible customers.  Citigroup said it earned a $4.3 billion profit in the 2nd quarter of 2009, but received an enormous bailout.  Are we getting the whole picture?  Are we in a recovery or is there a great facade.  Are these the symptoms of more than a recession?

Strategic Foreclosure

I think it’s time to talk about foreclosure in a raw, brutally honest way.  Yes there are many people who are devastated by foreclosure and losing their home.  That was mostly last year.  This year it seems that more and more people are walking away that could otherwise pay.  What is happening? The phrase comes to mind “Strategic Foreclosure”.  I have been hearing more and more about “Strategic foreclosure” lately and to some people it means buy a new home, then bail on the old one.   The lenders have caught on to this and have changed some of their guidelines to help stave off this problem.  I think of strategic foreclosure as someone who choses to foreclose on their home, because it seems like the best option.  Why would someone do this you ask?  Well there are many reasons.  One being it is severely over leveraged or “underwater” and doesn’t look like it will come back for many years.  One tool you may want to use is here.  This can help you decide if you are losing thousands of dollars by “owning”. The reason I put the word owning in ” ” is because if you have no equity it’s more like leasing for a real long time.   Another reason is that you could be clearly putting good money toward bad.  First thing that comes to mind is giving a homeless person cash when they have a bottle of jack in their hands.  Another reason is that the house has no equity and is unsell-able.  It’s been on the market and no one has made an offer.  You’ve lowered the price over and over and still… no buyer.  Another reason is that you simply cannot afford it.  Your income is not high enough to support the payments and your lifestyle.   Let’s face it, you signed a contract, but the contract has a loophole or an “out”.

I have an iPhone.  I used to be with Verizon wireless and had a 2 year contract with them.  When the iPhone came out, I chose to break my contract so that I could get an iPhone.  I payed a penalty when I did so, because that is what the contract said.  Did I feel bad for breaking the contract?  No. I didn’t think twice, other than I didn’t like what it did to my bank account.  I used to have a membership at LA Fitness.  I realized after several months of non-use, that I was wasting my money every month and that I could save money by working out at home.  The truth is, people break contracts every day, and when they do so, there is something in that contract that says what the penalty will be.  The same goes for foreclosure.  It may just come down to simply assessing your finances, talking it over with a trusted person that knows about the law and your rights and deciding if it makes business sense.   You may be the type of person who says… “I won’t walk away from my house because I am a man/woman of principle and would NEVER do that.  If that’s the case, then thats great, but then don’t complain about your decision. Stand by it and suffer the consequences as well.  If you bought a home for say $300,000 and it’s now worth $80,000.  If just about everyone on your street has either done a short sale or walked away.  If you are one of the last on the street and you’re trying to hold it together because of your decision not to move, then you better be prepared and willing to have your new neighbors be:

1. A family that makes significantly less income than you do.

2. Someone who is paying a mortgage that is less than half of what you are paying.

3. Someone who is excited about getting a house so cheap. Now yours is cheap to, but not to you.

4. Renters and people who don’t have roots or a desire to set down roots in the community.

5. A real estate investor that is taking advantage of the low price to buy, flip it and make a big profit.

If you are this person, and if things persist by getting worse, you may be the last man on the boat.

The Last Man On The Boat

When I started www.YouWalkAway.com almost 2 years ago, I didn’t think that it could get as bad as an entire neighborhood in new communities would be abandoned and have just a few people living there. Now in cities like Riverside and Miami there are entire buildings and entire communities with preposterous occupancy rates.  I mean, one family living in a condo tower in Ft. Meyers, FL? come on.

I recently received a call from a man who because of principle was the last person to go after his entire new community one by one either foreclosed or sold short.  He noticed that there began to be crime in his neighborhood and didn’t feel his kids were safe anymore.  After listing his home for months without success, he finally made the decision to strategically foreclose and let his house go.

I understand if you feel like you made a promise to pay that mortgage and you are going to stand by that promise.  That is admirable and noble.  But do you think it’s smart?  Do you think it’s responsible?  Don’t cut your nose off to spite your face.  Here’s some info thanks to Wikipedia

Ironically, the phrase ” Cut your nose off to spite your face” as understood today does not really apply to Saint Aebbe, since she did not cut off her nose in an effort literally to “spite her face”. The expression has since become a blanket term for (often stupid) self-destructive actions motivated purely by anger or desire for revenge. For example, if a man was angered by his wife, he might burn down their house to punish her; however, burning down her house would also mean burning down his, along with all their combustible personal possessions.

In this case it’s obviously not out of revenge, but it’s out of principle.  But it’s like saying I am not going to break a rental agreement on an apartment when you got a better job in another town because you signed something.  That is ridiculous.  In the contract it clearly states your penalty and guess what….so does your mortgage note.

If you want to stay, stay.  If you need to, have to or want to go, then go.  Don’t let a contract that clearly has an out stand in your way.  Of course, make sure you check and clearly understand what your implications legally and tax wise could potentially be.

If you have watched your neighbors jump out of the sinking boat and jump on to life rafts and it seems like your the last man on the boat.  Unless you put a big down payment down, have a 15 year mortgage on the house or a ridiculously low rate / payment, could it be time to join them.

Please understand that this is only my opinion and is in no way legal advice or foreclosure advice.

Its pretty easy to know if you should buy or not.  The easiest way is to just calculate the cost of rent vs. own.  There are many financial calculators out there that can help with that.  Here is one You also may want to factor in the value of not having to move ever again if you don’t want to.

Deception During Times Of War

War causes people to deceive and mislead.  For instance during WWII in north Africa

In January 1941, General Wavell, commander of British forces in north Africa, created a unit called A-Force, which was dedicated to counter-intelligence and deception.

A-Force created an elaborate operation which diverted German bombers from the port of Alexandria by setting up a fake harbour in a nearby bay; this involved constructing dummy buildings, a dummy lighthouse and even dummy anti-aircraft batteries which fired thunderflashes. He also made it hard for German bombers to locate the Suez Canal by fitting searchlights with a revolving cone of mirrors, producing a dazzling wheel of spinning light beams nine miles across.

The same type of thing is going on now with real estate in America.  The banks and lenders are producing a dazzling wheel of spinning light and deception by creating the illusion that the housing inventory is getting bought up and that there isn’t a massive overstock of homes for sale.  In actuality, they are strategically holding back the inventory from the public to create this illusion…and it’s working.  They are doing this because they cannot possibly afford to lose the great battle of real estate values any longer.  It’s not an lie when your local realtor says “There are multiple offers on this home, you gotta make a good offer”.  The lenders and banks are successfully attempting to fool the American public into believing that somehow values are bottoming out, and they are.  How are they doing it?  It is “price fixing” at its finest.   See Below from Wikipedia:

Price fixing requires a conspiracy between two or more sellers; the purpose is to coordinate pricing for mutual benefit at the expense of buyers. Sellers might agree to sell at a common target price; set a common “minimum” price; buy the product from a supplier at a specified “maximum” price; adhere to a price book or list price; …. purposefully reduce the output or sales in order to charge higher prices; or purposefully share or “pool” markets, territories, or customers.

Generally, price fixing is illegal, but it may nevertheless be tolerated or even sanctioned by some governments at various times, particularly among those whose countries are developing economies.

IstockAnalyst reported that The Shadow Housing Inventory Will Halt A Housing Recovery:

Any optimist talking up a housing recovery might want to pause and look deeper into the housing crisis. Amherst Securities Group analysts believe the market faces about 7 million properties that are likely to be seized by lenders have yet to hit the open market. There are two sources that contribute to a huge shadow housing inventory; ARM mortgages which are due to reset now through 2012 and current home owners who are struggling to make payments.

Assuming no other properties are on the market, it would take 1.35 years to sell this inventory based on the current pace of existing-home sales, analyst Laurie Goodman.

The favorable seasonality will be over come the October housing numbers and the reality of a 7-million-unit housing shadow inventory is likely to set in.

Massive Mortgage Delinquencies

With just our clients at YouWalkAway.com, we see over and over again, lenders postponing auction dates and refusal to take back property.  The combination of the massive glut of homes in default, estimated between 6 and 7 million and the slow drip of REO properties onto the market, you can expect a relatively flat real estate market for at least a decade.   This is actually a very thought out and decisively planned strategy to help the banks avoid further collapse.  I am definitely not condoning or think it is the right thing to do, I just believe the lenders and banks are doing what they always have done…. what’s in their best interest.

The lenders / banks got a HUGE break when the mark to market rules changed.  It enables them to hide the potential losses on their toxic securities. This will make the accurate valuations of their assets very difficult and it creates a great deception to the public.   Just think if you had the ability to go to Las Vegas and play with these rules.  If you win, you win big.  If you lose, well you don’t really have to lose, because you got insurance against losing and also the owner of the casino is your friend and he just gave you a bunch of chips to play with.   It’s been said that “All is fair in love and war”.  I guess the lenders and banks shouldn’t complain then if a homeowner decides to do the same…. what’s in their best interest.

In the interest of clearing up misconceptions and perhaps gaining a more balanced perspective, MortgageOrb spoke with Jon Maddux, CEO of You Walk Away. This San Diego-based firm, according to its posted mission statement, aims to “empower homeowners who purchased their homes at the peak of the real estate market to take control of their financial future.”

Q: One of the elements of your protection plan is a promise that the mortgage servicer will be unable to contact the borrower. Yet from the servicer perspective, borrower communication is considered highly important throughout the entire default/foreclosure process – particularly for workouts and loan modifications. How does your process ensure that a servicer can still work effectively with the borrower and do its job?

Maddux: To clarify, the reason for the stop-calling letter is to stop harassment and collection calls, which are counterproductive. If the lender is open to doing a loan workout or modification, they can send their intentions in writing. Also, we provide the letter to the homeowner, and they are instructed to only send out the letter if they are receiving harassing phone calls. Typically, our customers who send out the letter have tried to do a loan workout with the lender and have not been approved for an affordable payment.

Here is a portion of our letter:

In accordance with the federal FDCPA, now that you have received this ”stop-calling” letter, you may only contact me to inform me that you:

1. are terminating further collection efforts,

2. invoking specified remedies which are ordinarily invoked by you or your company, or

3. intend to invoke a specified remedy.

Q: What is the average profile of a borrower who turns to You Walk Away? You have mentioned that the majority are not investors or speculators. But are these people generally those who can make mortgage payments but seek to leave a losing investment? Or, are they those who genuinely can no longer afford payments?

Maddux: The average profile of our walk-away customer is a family who has tried unsuccessfully to save their home. Some are investors who can no longer afford to pay the negative cashflow.  Most are, in fact, homeowners who have rising adjustable rates and/or some other form of hardship.  We believe foreclosure should be the last resort and that if someone has no other options other than foreclosure, we believe that he or she should have an advocate and a team of people who know the law and how to help the homeowner mitigate losses during the foreclosure process.  We believe the homeowner should not be alone in the most difficult time in his or her life. The lender has hired a legal team to take back the defaulted home, so it can help if the homeowner understands his or her rights and how to use the law for protection.

Q: Based on your recent client research, approximately how many of those who have used You Walk Away are subprime borrowers? What about borrowers with adjustable-rate mortgages? Also, any notable regional trends?

Maddux: It is surprising that many of our customers are not subprime borrowers. We have many clients that had very good credit, but got a home with little or no money down, and now the home is worth much less than they paid. Also, more than 50% of our customers have an adjustable-rate mortgage that is adjusting.

We are seeing more people in Michigan walk away because of layoffs and lack of employment. In Illinois, the flooding has kept people out of work and away from their homes.

In Florida, the cost of insurance is being hiked up due to hurricanes and unpredictable weather, causing people to not have enough money at the end of the month to pay their mortgage.

We are also seeing a lack of jobs in Ohio, causing people to exhaust any savings and walk away. Arizona also has had a rise in unemployment, causing homeowners to move and walk away.

Nationwide, families on a fixed income are finding themselves spending more on necessities – leaving not enough to pay a previously affordable mortgage. A new trend that is spiking is that more couples are getting divorced and cannot afford to pay the mortgage on a single household income.

Q: The costs of foreclosure are well known, and Fannie Mae has even increased its post-foreclosure waiting period from four years to five years in an effort to reduce the incentive to enter foreclosure. What specific steps do you take to help borrowers ease the credit damage and get a mortgage again? What determines whether or not borrowers can have the foreclosure erased from their record?

Maddux: To clarify, Fannie Mae and other lending institutions allow for a borrower who has had a foreclosure in the past buy a home again after three years in the case of a true hardship.  To help ease the credit damage, we provide a borrower with helpful information in our “walk away protection kit” to understand how credit scoring works and what he or she can do to improve or preserve his or her credit.

Additionally, we refer our customers to a law firm that has been successful in the past at legally removing foreclosure from one’s credit.  It is not guaranteed that the foreclosure will be removed. But in many cases, if a homeowner keeps the remainder of his or her credit intact, the foreclosure would become isolated and may only reduce his or her FICO score by approximately 100 points – or sometimes less.

Q: Have you seen an increase in lenders’ pursuing deficiency judgments lately? Do you expect these to become more common as foreclosures increase, or will the costs and time involved still prevent most lenders from going this route?

Maddux: Through our real estate attorney network, we have been informed that the lenders are rarely filing deficiency judgments. Most likely, the action that they take is filing a 1099, and they are writing off the deficiency as a loss. We don’t expect deficiency judgments to become more common. However, it is a changing market, and because the lenders in many states have the right to file these judgments, they could become more prevalent. At the same time, because most of the homeowners in foreclosure are financially strained, the odds of a lender receiving money from a judgment are very low.

Please consider CnnMoney.com article:

After losing their homes, these 4 families thought they’d never recover. They’ve found it difficult to rent and their credit is wrecked, but life is looking up.

Stephanie Thomson

City: Chicago

Price paid: $245,000

Current value: 175,000

Lesson: “My only regret is that … we signed a contract and then we couldn’t fulfill that contract.”

Stephanie Thomson’s troubles began when her husband Rich, a highly regarded hair designer, became disabled with neuropathy and could no longer work.

The income loss made it impossible for the couple to sustain the payments on their home in a Chicago suburb.

When they bought the house, they took out a hybrid ARM mortgage. The original bill was $1,400 a month. But it went to $1,900 after three years and more than $2,000 after the second reset six months later.

“With my husband unable to work, we could have paid the mortgage without the ARM reset but nothing more,” says Stephanie, who tried for months to get help from her lender.

“They told me they would pray for me. That’s an exact quote,” she says.

The Thomsons decided to stop paying their mortgage last July — their first time missing a payment. They didn’t pay for 10 months, during which time www.YouWalkAway.com helped guide them through the foreclosure process.

In April, having saved what they would have paid in mortgage, they relocated to Elyria, Ohio, where Stephanie has relatives. Unfortunately, their credit scores had dropped so low that it was difficult to rent — much less buy — a new place. So Stephanie’s mom bought a house and rents it to them.

“It’s less expensive here; we were able to get a larger house in a wonderful neighborhood,” she says. “My only regret is that I’m a proud person. We signed a contract and then we couldn’t fulfill that contract because of my husband’s illness. It was very difficult.”

Marlene McGuire

City: Northglenn, Colo.

Price paid: $261,000

Current value: $180,000

Lesson: “You have to get out of the house when no one will help you.”

The McGuires purchased their home in 2005 and made the $1,500 a month payments faithfully. When their adjustable-rate loan began to reset, the increaseswere small, just $50 to $75 or so. But they added up, and soon the couple was paying more than $2,100 a month.That was a tough nut for Marlene’s husband, Bill, to manage even though he earns good money as a long-distance trucker.  The tri-level had three bedrooms upstairs and another suite in the basement. “It had all the extras,” says Marlene, a homemaker in Northglenn, Colo.

Getting advice from YouWalkAway.com, a Web site that guides people through the foreclosure process, the McGuires realized that they owed much more than the property was worth and the upkeep costs were beyond what they could pay.

Even though Marlene loved her house, they opted for a short sale and found a buyer at $180,000. The lender approved the deal, and they moved out, free and clear. They continued making their regular payments each month until they left their house.

Because they were not delinquent, their credit didn’t suffer too much at first, but the short sale did hit hard.They now live in a mobile home.

“That’s the best we can do right now,” said Marlene. “But, the stress is over. My husband and I were not getting along; there was conflict. It was making me very sick. You have to get out of the house when no one will help you.”

My Thoughts

There are many others who make it through foreclosure and are very happy they made the decision to walk away.  The time leading up to making the decision to walk away can be so extremely stressful that it can tear families apart.  It’s time that we start thinking of house as something that is replaceable.  A family isn’t.  When a home or finances are starting to tear you apart, step back and decide… Is this house worth it?

Jon Maddux

CEO

YouWalkAway.com

From A USA Today Blog

The main reason for slow progress is that modifications require banks to take write-downs and come clean about the true value of their assets.

Banks, to paraphrase Jack Nicholson in A Few Good Men, can’t handle the truth. That became evident in April when they successfully lobbied to end an accounting rule known as “mark-to-market.” Under that rule, lenders had to value their loan portfolios according to what they were worth at current market prices — not what they thought they should be worth, or what they once were worth, or what they might be worth in the future. Now banks are free to fictionalize their balance sheets in ways they think will help them, at least in the short term.

A Rolling Loan Gathers No Loss

If the lender doesn’t have to take a write down until the loan is either modified, sold in a short sale or foreclosed upon, then why not just keep letting the loan stay delinquent.  Why not delay the short sale, modification or foreclosure.  At You Walk Away, (over 4,000 customers) we see this trend increasing and hear some of our customers saying, “why isn’t the lender filing the foreclosure notice? I want to get this behind me”.

We have clients that have been living in their homes for over 2 years without making a payment.  Most of them are jumbo loans which would make sense why the lender doesn’t want to take the write down.

Some lenders & banks are walking away from some of these properties as well.  We have several cases where the lender gave the property back to the homeowner and cancelled the note all together.  These homes in particular aren’t in the most desirable neighborhoods which is presumably why the lender doesn’t want them.  Needless to say, it creates a pretty big mess for the homeowner.

New York Times reported on July 30th: Lucrative fees may deter efforts to alter loans

“The rules by which servicers are reimbursed for expenses may provide a perverse incentive to foreclose rather than modify,” concluded a recent paper published by the Federal Reserve Bank of Boston.

…“If they do a loan modification, they get a few shekels from the government,” said David Dickey, who led a mortgage sales team at Countrywide and Bank of America, leaving in March to start his own mortgage advisory firm, National Home Loan Advocates. By contrast, he said, the road to foreclosure is lined with fees, especially if it is prolonged. “There’s all sorts of things behind the scenes,” he said.

…”It’s under the radar,” Ms. Golant said.

Ultimately, the benefits of delinquency erode incentives for mortgage companies to dispose of troubled loans quickly, say experts, allowing distressed houses to decay and fall in value – a fact of little interest to the servicer.

A comment on the USA Today blog above said:

The Government through TARP and tax avoidance laws geared to protect and expanded bank reserves and liquidity has provided a major disincentive for a bank to process a “short sale” or “loan modification”.

The new 2008 and 2009 foreclosure laws were complex, hard to implement, clumsy, restrictive, and ultimately provided an indeterminate or worse end situation for the home owner, and are counter to the bank reserves and liquidity goals.

Initially in 2007 and 2008, Bankers and Builders are in a race to the bottom to clear a housing inventory. Banker won the every round by selling foreclosures below replacement cost.

How is it that these banks are all acting and pricing the same way in concert with each other? Is there collusion?

Banks have no incentive to refinance.

2009, the Fed is loaning money to banks at less than 1%, with the government owned AIG paying out the foreclosure insurance, with direct bailout money to cover reserve calls, with tax write offs when they buy securities and no taxes after they hold to sell banks are making money on the backs of the down and out mortgage holders.

Banks have no incentive to refinance.

The way to accomplish that is to delay, delay, and delay and blame the homeowner for some bank paperwork SNAFU.

Business Week report in the June 8th issue that JPMorgan Chase bought Washington Mutual for just $1.9 billion and is looking to pocket $29.1 billion over the life of the loans.

Conclusion

By “extending and pretending”, the responsible parties are ultimately dragging out the crisis and making this mess last a whole lot longer than it should.  In what some would call agony, it would be to inaccurate to say it’s a “slow death” because eventually there will be a real recovery.  It just may not look like everyone is expecting it to…

Jon Maddux

CEO

www.youwalkaway.com

On a typical weekday morning a local Riverside, CA police station receives dozens of complaints about abandoned homes and all that comes along with it. Breaking and entering, squatting, meth labs, teenagers ditching school to do drugs and have sex… all being fueled by the glut of vacant homes in southern California.

In fact, it’s getting so bad that when lenders are asking the local sheriff to carry out the eviction, they refuse.  A sign of the times we live in, where the act of evicting a homeowner is much worse than the risk of another abandoned home.   In my post 2009 Housing False Bottom I talk about the rediculous amount of vacant homes we have in America.

Bloomberg News Published on April 28, 2009

A record 19.1 million homes stood unoccupied in the first quarter, and the U.S. homeownership rate fell as the recession sapped demand for real estate.

In October of 2008 Chicago Headlines read: BANKERS IN Chicago are angry with–of all people–Cook County Sheriff Tom Dart.

Dart announced October 8 that his office would no longer forcibly remove residents from foreclosed properties, essentially imposing a moratorium on any mortgage-related evictions in the third-largest city in the U.S. and a surrounding county, with a total population of 5.3 million people.

Sheriff Jones Refused To Evict Last Winter In Bulter County, Ohio WLWT Reports

Butler County Sheriff Richard Jones said evictions in winter weather and during an economic recession are heartless and those cases should be sent back to the courts and resolved some other way.

This is now happening in Riverside, CA and soon to happen in many other cities if things don’t change.

Surfing the web I found this blog:

Amy Goodman: Squat in your own home

Marcy Kaptur of Ohio is the longest-serving Democratic congresswoman in U.S. history. Her district, stretching from west of Cleveland to Toledo, faces an epidemic of home foreclosures and 11.5 percent unemployment. That heartland region, the Rust Belt, had its heart torn out by the North American Free Trade Agreement, with shuttered factories and struggling family farms. Kaptur led the fight in Congress against NAFTA. Now, she is recommending a radical foreclosure solution from the floor of the U.S. Congress:

“So I say to the American people, you be squatters in your own homes. Don’t you leave.”

She criticizes the bailout’s failure to protect homeowners facing foreclosure. Her advice to “squat” cleverly exploits a legal technicality within the subprime-mortgage crisis. These mortgages were made, then bundled into securities and sold and resold by the very Wall Street banks that are now benefiting from TARP (Troubled Asset Relief Program). The banks foreclosing on families very often can’t locate the actual loan note that binds the homeowner to the bad loan. “Produce the note,” Kaptur recommends those facing foreclosure demands.

“(P)ossession is nine-tenths of the law,” Kaptur told me. “Therefore, stay in your property. Get proper legal representation … (if) Wall Street cannot produce the deed nor the mortgage audit trail … you should stay in your home. … Most people don’t even think about getting representation, because they get a piece of paper from the bank, and they go, ‘Oh, it’s the bank,’ and they become fearful, rather than saying: ‘This is contract law. The mortgage is a contract. I am one party. There is another party. What are my legal rights under the law as a property owner?’

Lenders are relying more and more on “Cash for Keys” programs to get homeowners to leave.

A foreclosure defense law firm that I consult for Home Legal Source, regularly negotiates cash for keys deals for foreclosed homeowners.  The most recent settlement was for a home that had a Zillow value of $145,000.  The Lender gave a hefty sum of $4,000 and 30 days to kindly move and sweep the home clean.

I have spoken to an investor that personally paid as high as $5,000 to entice a homeowner to leave.  However the value of that foreclosed home was north of 600k.

Rental Scams

In a recent discussion about this problem, a friend of mine in the police department said that there also is a large trend of rental scams out there.  A renter thinking they gave their security deposit, first and last months rent to their new landlord comes to find out that the home is in foreclosure and the deposit is long gone with the “fake” landlord.  The real homeowner had no idea.

Jon Maddux

CEO

YouWalkAway.com

******UPDATE******* THIS LAW HAS BEEN REPEALED AS OF SEPTEMBER 4TH, 2009*******************

Laws, rules and guidelines are constantly changing as it relates to foreclosures, short sales and home loan modifications.  Arizona in particular now has an action to recover the balance after sale or foreclosure on property under a trust deed.  How many other states will follow suit?   In a state that had a solid “purchase money” rule, where the lender couldn’t pursue you for a deficiency judgement if you still had the original indebtedness on your mortgage has now changed that law and is saying that if you have not lived in a residence for at least six CONSECUTIVE months in, the lender can pursue you for a deficiency judgment.

You may ask, what does this mean exactly?  Well it means that people who own investment properties that are upside down and have “negative equity” who’ve been hit hard by the ailing housing market, simply have to weather the storm until the market returns or possibly face a hefty deficiency judgment.  The effect of this law is going to be staggering.  One, it may now stave off people looking to buy investment properties in Arizona.  Two, it will cause an enormous wave of bankruptcies to extinguish these judgments.  Three, it may cause other states with anti-deficiency laws to join in, siding with the banks to strip real estate investors of their every last penny.

You may say, well the investors took the risk and shouldn’t be able to just walk away from these properties.  However, this anti-deficiency law was in place to protect the real estate investor and keep the banks from lending irresponsibly.  Now, after lenders acted irresponsibly, to change the law in their favor is a slap in the face and simply betrayal to the investor.

Here is a section of the bill

33-814. Action to recover balance after sale or foreclosure on

property under trust deed

A. Except as provided in subsections F and G of this section, within

ninety days after the date of sale of trust property under a trust deed

pursuant to section 33-807, an action may be maintained to recover a

deficiency judgment against any person directly, indirectly or contingently

liable on the contract for which the trust deed was given as security

including any guarantor of or surety for the contract and any partner of a

trustor or other obligor which is a partnership. In any such action against

such a person, the deficiency judgment shall be for an amount equal to the

sum of the total amount owed the beneficiary as of the date of the sale, as

determined by the court less the fair market value of the trust property on

the date of the sale as determined by the court or the sale price at the

trustee’s sale, whichever is higher.

Also

G. If trust property of two and one-half acres or less which is

limited to and utilized for either a single one-family or a single two-family

dwelling BY THE TRUSTOR UNDER THE DEED OF TRUST FOR AT LEAST SIX CONSECUTIVE

MONTHS AND FOR WHICH A CERTIFICATE OF OCCUPANCY HAS BEEN ISSUED is sold

pursuant to the trustee’s power of sale, no action may be maintained to

recover any difference between the amount obtained by sale and the amount of

the indebtedness and any interest, costs and expenses. THE TRUSTOR IS

RESPONSIBLE FOR DEMONSTRATING THAT THE TRUST PROPERTY WAS USED BY THE TRUSTOR

AS A ONE-FAMILY OR A SINGLE TWO-FAMILY DWELLING FOR AT LEAST SIX CONSECUTIVE

MONTHS.

Deficiency Judgments

Conclusion

CARLSBAD – With the media abuzz over President Obama’s loan modification plan, homeowners are becoming more hopeful that it may be worthwhile to keep their home… or so one might think.

Jason Lane, a Senior Advocate at YouWalkAway.com, said, “One of my clients recently got a loan modification from her lender that would save her over $300 a month, but, at the same time, her property taxes increased about $300 a month making it impossible for her to afford the home even with the modification.  She is now walking away and attempting a short sale.”

Jason went on to say, “Another customer of mine recently received an excellent modification that reduced his mortgage payment by over $800 a month. However, he is now walking away because his employer has cut back his hours and he would be able to rent a house the same size for $1,200 a month less.”

Michelle Dominguez, a customer of YouWalkAway.com, received a modification directly from the lender a few months back in which the interest rate was reduced to 3% for the 1st year and 5% thereafter.   She is now considering walking away because, even though the payments are now more affordable, she lives in a condominium complex where the units are not selling.  The units that are listed are $150,000 less than what Mrs. Dominguez owes.  Beyond this, Dominguez is stuck with incredibly high Home Owners’ Association fees and Mello-roos, an additional property tax.

“We see this over and over,” said Molly Whalen, a Senior Negotiator at Home Legal Source, a law firm that performs loan modifications. “The homeowner wanted a principal reduction and they didn’t get one. Now they are walking away. They just don’t think it makes sense to keep a house that is not worth what they owe especially because they don’t believe the value will go up any time soon. They feel trapped.”

Employees of lenders are feeling the strain as well.  An anonymous employee of Washington Mutual’s loss mitigation department explained to a Home Legal Source negotiator, “We are getting five [loan modification submissions] a minute and our analysts each have 500 to 700 files on their desks. How on Earth are we going to be able to find out who really needs a modification and who doesn’t?”

Many loss mitigation departments are also complaining about slow computers, being significantly understaffed, never receiving documents that have been sent, and of just being completely overwhelmed.

When does it make sense to walk away from a home that isn’t even worth what it would cost to build it?  When would it make sense to walk away from a home if you were forced to choose between your mortgage payment and your car payment or health insurance?  At what point would you break down and say that your house simply is not worth the emotional stress it’s causing? Eventually, something has got to give.

Jon Maddux

CEO

YouWalkAway.com