Defaulting Homeowners Finally Pay the Price

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For years, defaulting homeowners who couldn't repay their mortgages have been portrayed as victims. That mentality is so pervasive, in fact, that when one of the two mortgage lenders of last resort had the audacity to show the smallest bit of backbone last week, it caused a huge controversy. For everyone who's worked hard to repay their debts and grown tired of propping up their less responsible neighbors, the news couldn't have been more welcome.

Fool me twice, shame on me
Last week, Fannie Mae (NYSE: FNM  ) decided that it had had enough of the "strategic default" phenomenon. In an attempt to dissuade homeowners from walking away from their delinquent mortgages, the lender announced that it would bar defaulting borrowers from getting additional Fannie Mae financing for seven years unless they can prove that they didn't have the capacity to pay, or they attempted to negotiate in good faith for a workout alternative in lieu of foreclosure.

In addition, Fannie Mae said that it would seek deficiency judgments where permitted against homeowners who strategically defaulted on their mortgages. This combination of actions is clearly meant to make people think twice before simply walking away from their homes.

Misplaced outrage
Predictably, opponents of the move focused on the damage the measure would do for troubled homeowners. One Reuters columnist argued that Fannie Mae "demonizes the victims of the housing bust" by "putting out press releases which talk airily and moralistically about people who walk away from their mortgages."

Yet is Fannie Mae really asking so much? From the response, you'd think that homeowners somehow have an inalienable right to any and all opportunities to stay in their homes, whether it requires lower monthly payments, interest rate reductions, or even outright writedowns of mortgage principal. Meanwhile, the theory goes, if homeowners decide to give up and walk away, Fannie and Freddie Mac (NYSE: FRE  ) shouldn't hesitate to enable Wells Fargo (NYSE: WFC  ) , Bank of America (NYSE: BAC  ) , and other former beneficiaries of the government's TARP largesse the same ability to give away more money to these homeowners when they try to buy another home -- leaving you with the bill, again.

Another housing bust?
The better argument against the move is the practical one: that by locking out strategic defaulters, that set of prospective future buyers disappears, which could further destabilize the housing market and push prices down further. In addition, without demand, new housing starts will continue to fall as they did in May, pressuring already-struggling Toll Brothers (NYSE: TOL  ) , Lennar (NYSE: LEN  ) , and Pulte Homes (NYSE: PHM  ) . Those homebuilders have seen most of their gains from earlier this year, when the recovery looked more rigorous and promising, disappear. The situation is bad enough that even after a big boost from the homebuyer tax credit, smaller homebuilders are looking for direct government help.

In essence, what that boils down to is that while any one defaulting homeowner may not be significant, when you take them as a group, they're too important not to protect. In other words, they're collectively "too big to fail," and taxpayers should pay whatever price is necessary to protect them.

The real moral hazard
The idea that delinquent borrowers should benefit from their bad judgment runs against good sense. Already, laws in many states protect homeowners from bearing the full consequences of their bad decisions, leaving taxpayers like you and me on the hook. Fannie's proposal doesn't hurt anyone who is truly a victim, but rather focuses directly on those who sought to profit unfairly from the housing bust and are unwilling even to try to act in good faith with lenders.

As I see it, it's about time. Without some sort of consequences for their actions, there's nothing to stop these borrowers from doing exactly the same thing again. And having gotten away with it once, they're not likely to feel any qualms about it the second time around.

With the housing system already in shambles and causing economic chaos across the nation, the last thing it needs is a group of opportunistic borrowers taking advantage of attempts to help those who truly need it. Fannie's move is a small step, but at least it's a step in the right direction.

Think I'm way out of line? Let me have it in the comments below.

How will the housing industry fare in the second half of the year? Rick Munarriz answers that question and much more with his predictions for the rest of 2010.

Fool contributor Dan Caplinger walks the high road with his finances. He doesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy has a price that's right.

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  • Report this Comment On July 02, 2010, at 11:22 AM, kcrich49 wrote:

    It is time to restrict loans to those who can and are willing to pay their bills. Our economy has the problems today due to irresponsible lending and spending. If AMERICANS would learn to live within their means we would all be better in the long term.

    Thank you Fanie May

  • Report this Comment On July 02, 2010, at 11:31 AM, BoAhater wrote:

    Well I have to disagree let's blame now the borrowers that were victims of predatory lending didn't Fannie Mae and And boso Barney Frank created this mess in the first place. And yea banks are there to help you well for starters Bank of America "the goverment favorite whore" is just inflating the numbers on all the modifications that they proudly generate while there are real homeowners in trouble. I know of tons of cases BoA denies mods, short sales and died in lieus on a daily basis since they keep filling the chairs of their offices and call centers with drug addicts and drunks.

  • Report this Comment On July 02, 2010, at 11:39 AM, timmer47 wrote:

    You are right. Responsible homeowners have been punished severely for the actions of those who have bought carelessly, put little to nothing down and now choose to walk in spite of the many incentives to get them to stay. If we are to recover from this housing mess we need to rely on and assist individuals and investors to take over this stock of "unwanted houses" and turn them into rentals until the economy improves enough for homeownership to happen again for the millions who have lost their homes. In short,

    we need to bet on winners not loosers to get us going again. Are you listening banks and government?

  • Report this Comment On July 02, 2010, at 12:27 PM, AnotherNavyFool wrote:

    This is the first good thing I have seen Fannie Mae do in a long time.

    I agree that those who walk away from their responsibilities need to suffer a concequence for their actions. I am tired of seeing the more responsible members of society - us - get stuck holding the bag through lower property values and higher taxes for bailouts. They gave their word in a contract and they need to be held to it, just as they expect the company who issued the loan to do.

    That is not to say there are not those who truly got crushed by life (lost jobs, sinking values in savings and house values), but that would come to light in the process to prove you are not a "strategic defaulter," so I believe those who actually are victims will not be further penalized by this.

    A seven year lockout period sounds more than reasonable (if I were bank management and learned they did this, it would be a lifetime ban for getting loans). It seems right in line with some bankruptcy timelines. I wouldn't expect a bank to be excited about giving loans to a strategic defaulter any more that to someone who declared bankruptcy until they could prove they have improved their ways.

    Americans need to stop thinking homeownership is a "right." It's not. It is something you work toward, saving and renting and responsibly paying your bills until someone thinks you are a good bet to loan six figures worth of money. If you are irresponsible, you shouldn't get a loan.

    Denying people loans who have shown they cannot be trusted is not a crime or immoral - it's common sense. They are not being denied shelter. They can rent or save up enough money on their own, or find a different bank who is dumb enough to take the risk (and they better not be looking for taxpayer bailouts when the loan gets defaulted on!).

    I am not saying that the banks are blameless and that homeownership is always fairly priced, but then again, many Americans seem to believe they all should get the 3,000 sqq. ft. home as their first one and shouldn't have to pay much for it. (When I sold cars for a forgetable portion of my life, I saw the same mentality in most customers. They all wanted $30,000 cars with nothing down and $200 a month payments - and that attitude was usually worse the worse their credit rating was. Then they would get offended when they couldn't get the deal they wanted!)

    I have lived in a couple not-so-great houses in not-so-great neighborhoods. The house I am in now (not my first) is a good house, although the neighborhood has become less than what it was. This is mostly due to people getting houses they really couldn't afford and now have no money (or experience) to properly upkeep a house - or they are just too lazy. The property values drop and then the complaints start about that, yet no connection is made about taking care of what you have so it maintains (and maybe goes up) its value. Not everyone is cut out for home ownership. Like children, it is a long and expensive process that too many people just jump into without thinking. Too bad we don't have mandartory courses on what to expect in both...

    Anyway, good for Fannie Mae. I hope other lending institutions follow suit and get the testicular fortitude to tell people "no" when they ask for a loan if they have proven they cannot be trusted to keep their word.


  • Report this Comment On July 02, 2010, at 12:44 PM, azsince1987 wrote:

    I have recently learned of realtors helping people walk away. They are setting up financing of an 'investment property'.....buyers are putting 20% down out of their already battered lenders are now getting a chunk of 401k cash. The vacated property falls back to Fannie. Responsible, middle class taxpayer will only have their peace of mind to show for their hard work in the end........

  • Report this Comment On July 02, 2010, at 12:52 PM, militauro wrote:

    I think both parties (the irresponsible borrower and the irresponsible lender) deserve to be under scrutiny at this point. If the people want regulations passed against the banks for their irresponsible lending, you can't just sit there and do nothing about the irresponsible borrower.

    Yes banks were lending at 0% down, but borrowers who should know better also came in thinking it was a good idea. In this case, the guy who sold the drugs and the guy who bought the drugs both deserve to get it. Good read.

  • Report this Comment On July 02, 2010, at 1:25 PM, momhere wrote:

    Good people have lost their jobs or taken extreme pay cuts, and need to sell their homes now. Homes where entire life savings were put down. They can't sell due to extreme depreciation. They've already dipped into their saving to pay the mortgage for much longer then most would.

    According to Fannie Mae, these people should now drain all their remaining reserves because they have "the capacity to pay". Many homeowners think of this as emergency money. It was put aside for health insurance premiums, food, shelter and retirement. Fannie Mae won't be happy until these families are standing in soup lines.

    I'm guessing the writer feels that these people are somehow "irresponsible" for not having a crystal ball that would tell them the US would go through a horrible recession AND the housing market would cut the value of homes by 60% - making it impossible to sell.

    Or maybe he feels they should just ask their wealthy parents for the money.

    So Fannie Mae's brilliant idea is to keep these hard working people from being able to buy a homes for at least seven years. YES! So that means the extreme housing inventory excess will be purchased by ONLY people who have avoided buying for the past 15 years. Let's see, that would be young adults who are just entered the market, older investors who want to be landlord in their 60's, and the early no doc deadbeaters who defaulted 4 years ago as soon they couldn't pull out and easy credit equity. Brilliant.

    Mostly, ONLY weel intentioned families are caught up in this now. The no-doc, easy credit set have already been weeded out. Due to extreme depreciating, EVERYONE who has purchased a home in the past 10-15 years is in this now.

    Donald Trump can deadbeat over and over, yet no one asks him to give up his mansions, the banks can go to the government with hat in hand, and their stocks can still maintain a triple A rating, but a sincerely hard working individual is expected to stand in soup lines with his/her children.

    This writer has no grasp of where we are in this meltdown and who's getting screwed. My guess is he's a childless, single guy with a bloated paycheck who was born with a silver spoon in his mouth but likes to tell people he did it all "on his own".

    He is out of touch with the majority of American's and their plight.

  • Report this Comment On July 02, 2010, at 1:37 PM, AZBrewer wrote:

    Dan, I understand what you are saying, I really do. And I felt the same way from 2007 to about mid-2009. However, at that point most of the "strategic defaulters" and subprime borrowers who bought way beyond their means were washed out of the market. The folks defaulting now are your middle-class Americans who have held on to the point where their savings and retirement accounts are drained and there is no other option left but to default, and most likely BK, in order to protect their family. And who is more important to the future of the US economy? The American family that makes up 70% of GDP? Or, Fannie Mae? I think we all know the answer to that question. SO while your sentiment is well placed, it is that approach that should have been utilized at the beginning of this mess back in 2007, not at this late date.

  • Report this Comment On July 02, 2010, at 5:21 PM, DDHv wrote:

    I rented for years. When we bought, it was a fixer upper - basically we were camping inside for months. The current house is also a fixer upper - bought for about one year's gross pay total.

    Support the new market - buy good used! ;-)

  • Report this Comment On July 02, 2010, at 6:03 PM, jkeedy wrote:

    Let's's okay for banks to create a market that essentially was based on bait and switch tactics, then to walk away from their obligations and responsibilities and be bailed out by taxpayers, but home owners whose homes are devalued, whose 401K's have become worthless, and whose jobs (if they still have them) are in jeopardy, need to be taught a lesson. We won't lend to "those" people again! (Banks aren't lending much as it is anyway; but those bonuses are still rolling out the door.)

    Fannie Mae (and Freddie Mac) have NO ROOM to talk, those entities of a bottomless pit of taxpayer monies thanks to Congress. When Congress passes a financial reform bill that doesn't rein in these two quasi-entities, we have a problematic Congress.

    People are naive and they are mostly ignorant when it comes to buying products, from toasters to cars to houses. Anyone who has ever been through a closing knows that even though they are told they can read every document, the atmosphere in a closing induces people to just sign and go. Even those who would stop to read every document have little understanding of what most of them mean. I aggravate everyone because I read every word of every document. Because I did this I discovered a document tucked in that 'allowed' me to release mineral rights "in exchange" for a paltry $10. When told I had to sign it, I refused. Knowing the closing would not occur, those who deigned I must sign changed their minds.

    I sometimes think that those of us who are well-educated and fortunate to have the ability to make what we believe are good decisions are unnecessarily harsh on those who are not as blessed. Whether we want to believe it or not, we make up only about 25% of our population. That leaves a lot of under educated people who can easily get sapped into all kinds of wheeling and dealing. It wasn't a fair playing field and it still isn't.

    Punishing those who would dare to walk away from a losing proposition? Punish Wall Street. They walked away, got taxpayer funding, and continue to do business in the same manner that caused this crisis with the blessings of Congress.

    But all said, I wouldn't worry about punishing these people so much as I would worry about finding jobs for those who continue to become unemployed. Unless, of course, we want to experience what Japan did for the next 10 years.

    Deflation will wipe out the value of homes, retirements, investments. And that's what we are headed for if someone with the tenacity this nation sorely needs doesn't step up and get the job done.

    Pointing fingers and placing blame at this point is nothing more than a distraction from what we really need to do.

  • Report this Comment On July 02, 2010, at 6:16 PM, MKArch wrote:

    Bravo Dan, if I were king anyone who is verified chose to walk would carry a scarlet letter on their credit report for life. I can't believe they aren't already banned from new loans for 7 years. Instead of the government trying to help those who bought a house they could never afford keep it they should be helping those who are in trouble because they lost their jobs but have good credit and would likely make payments when they were employed again.

    My home owner bail out plan would be to work with banks to provide one year total of forbearance for borrowers with good credit histories that can verify they are delinquent due to losing a job. These borrowers could stretch this help out over more than a year by making partial payments if they have the ability with the goal of giving them time to straighten out their employment situation. The current focus on bailing out borrowers who never should have gotten a loan in the first place is bassackwards. Helping those who don't want to lose their house and didn't act irresponsibly would be a win, win, win situation for borrowers lenders and the government.

    I'm not sure why nobody else has thought of this other than maybe these borrowers are not "victim" enough to merit help. Some of the anecdotal evidence about banks trying to keep home owners in their houses sounds like maybe they are doing this on their own. Wouldn't that be a kick in the pants if the great shadow inventory scare turned out to be mostly banks helping deserving borrowers get back on their feet so that they can keep their house and the banks can heal the loan?


    ps: I disagree that losing potential walk away home buyers is bad for the home builders. Keeping their homes out of the ranks of motivated sellers is what the home builders need so that they can get back to competing on an even playing field.

  • Report this Comment On July 02, 2010, at 7:02 PM, badnicolez wrote:

    Most of us who are strategically defaulting have no interest in ever having a mortgage ever again. We'll rent for a fraction of our former payment, or pay cash someday when we have saved enough and the market still hasn't recovered.

    Most of the current defaults are occuring because of job loss, income shrinkage, job instability or some combination thereof. Should we burn through all of our savings and retirement funds paying a mortgage just to lose the house anyway when the economy doesn't recover in time to save our jobs? No thanks.

    A large percentage of current defaults were full-doc, fully conforming loans, not exactly the type preferred by flippers, investors, and people with no money down (the true "irresponsible" ones).

    After losing $150k in cash (our down payment, not including payments over the last three plus years), then being upside down an additional $150k without the ability to refinance into a lower interest rate or even payment (way more than 125% upside down), we're bailing. We "bought" a house, but ended up renting it at more than twice the going rate. There is little to no hope of having any equity in the next 15-20 years, and the market is still falling.

    Blame congress and both administrations for bailing out the banks instead of bailing out homeowners, which would have prevented at least some of the devaluation and many "strategic" defaults, and the banks still would have received the money in the long run.

  • Report this Comment On July 02, 2010, at 7:28 PM, richsue3 wrote:

    Nothing has changed until Freddie and Frannie STOP handing out mortgages with 3% down. This is just another publicity stunt to let you know someone is working -LOL for you. They DO NOT have the personnel or wherewithal to chase down these skofflaws. They both are incompetent agencies that should be disbanded and let the marketplace take over. Mind you I feel for those in need but many are not they just scamming the system.

  • Report this Comment On July 02, 2010, at 8:36 PM, jkeedy wrote:

    Publicity stunt? The recent announcement that homeowners were 'leaving' the home modification program was a stunt. The banks have no interest in doing modifications because they result in less money than the original notes would have garnered. People were getting one run-around after another with banks that were contracted with Fannie and Freddie to perform modifications. Some of those banks whose contracts are posted at Treasury would verbally and in writing deny they were "authorized" to perform these modifications and those banks that were authorized were remiss in handling the modifications in a proper manner.

    Fannie and Freddie don't make it any easier when they pummel banks with constantly changing selling and service policy changes.

    As the president of a market research company, we looked into this matter and were appalled not only by the inefficiencies (seemingly built-in) but the outright manipulation by loan servicers against applicants.

    If I were in badnicolez's situation I would walk away, too. Businesses do it all the time and their customers and employees pay the price. And now taxpayers en masse are paying the price.

    I'm afraid that homeowners do not need to be penalized. If a statute is needed to control the situation, make one that restricts lenders from making usurious loans.

  • Report this Comment On July 02, 2010, at 9:05 PM, maccdw wrote:

    The U.S. is one of very few places where you can simply dump your home. In other countries, yes you can dump it, but the bank then sells it and you are on the hook for the difference between what you borrowed and what the sale yielded. That is how it should be here, too.

  • Report this Comment On July 02, 2010, at 9:37 PM, xetn wrote:

    Loose credit (supplied by Freddie, Fannie, the Fed) created the housing bubble. Allowing people without jobs to purchase houses was utter nonsense. What ensued was rapid price inflation of housing (demand outstripping supply) and was a failed policy. Now the same "lenders" who are now the nation's largest real estate owners are upset that people are walking away from their underwater houses. What is not mentioned, but is very important is that the amount loaned on those houses were predicated on the price. Since the prices have drastically dropped, the lenders are now without sufficient collateral. Collateral being the only thing supporting many of the those loans. Previously, loans were made based on the borrower's credit and ability to pay. That ended with the sub-prime market. I would bet my next month's pay that the banks are way under water themselves and are victims of their own greed. Does anyone think that the banks have revalued their loan portfolios to reflect the reduction of collateral? And if they did, what do you suppose would be the effect on their balance sheets?

  • Report this Comment On July 02, 2010, at 9:52 PM, jkeedy wrote:

    That's the way it used to be and you could negotiate one-on-on with your lender. Once deregulation allowed mortgages to be bundled and sold like a commodity, things began to change. It was in 2007 that the mortgage debt relief act was passed by Congress that allows the difference in what is owed and what a house sells for to not be taxed as income. Otherwise, credit reports are still marred by a foreclosure, which should affect the eligibility of those wishing to purchase another property. So, I have to wonder what the need of "barring" strategic defaulters is for. Fannie and Freddie should be barred from guaranteeing such loans. And other lenders and servicers should be barred from making such loans.

    Glass-Steagall should never have been rescinded/wiped out. But things were changing even long before that happened.

    There used to be laws that prevented usurious interest rates as well, but what was once the mob's domain in charging usurious interest rates is now the domain of your friendly banks.

  • Report this Comment On July 02, 2010, at 11:42 PM, Luis50 wrote:

    If a borrower defaults in his mortgage, his credit score goes down the drain. So, how could he/she get another mortgage anyway for a few years? Banks and even FHA require a good credit score on NEW mortgages.

    Hence, this Fannie May announcement adds no further penalty to defaulters. You agree?

  • Report this Comment On July 03, 2010, at 12:39 AM, MotleyReader wrote:

    This appears to be nothing more than just a publicity stunt. All the people who were gaming and bilking the system in bad faith have already defaulted. All that are left standing (for now) are those honest, hard-working people who have landed into really hard times. I suppose that such an announcement might guilt this demographic into not walking away? Not so sure... If this policy were to have any teeth, it would apply retroactively to strategic defaulters as early as January 1, 2008, then at least the playing field would be more level. Even so, people who strategically default won't care about not being able to get a mortgage for 7 years. They will be happy to rent (or go back to renting as the case may be).

    This nation's housing market will be in shambles for the next 10+ years. The epicenter and source of this whole mess can be traced back to the Frank & Dodd legislation that forced banks (via Fannie & Freddy) to lend to people who were high risk borrowers... and we all know how that turned out. It fueled a greed-driven bubble that has still not finished bursting quite yet. What a spectacular failure the "Frankendodd" social experiment was.

    The only thing that gives me some solace is that the banks are finally getting stuck holding the bag for a change. For centuries, they were the beneficiaries of human suffering when an economy would contract because they would take people's homes and farms. I only wish the government would have let them completely implode this time around and get liquidated themselves. Not every bank would fail and the responsible ones who avoided greed and excess would remain to continue serving us via sound, conservative banking practices.

  • Report this Comment On July 03, 2010, at 4:56 AM, alphaheretic wrote:

    If you can't pay your bills because you lost your job in the recession, that's one thing.

    If you don't want to pay your bills because you over purchased based on your income and are too lazy or too stupid to manage your finances, that's another.

    What happened to responsibility and self sufficiency?

    Americans are too dependent on the Federal Gov't and it's getting worse. Kick these people off the dole and make Americans learn the lessons of their stupidity and irresponsibility.

    Around the world, millions are living in mud huts and caves or worse. America, be thankful for your prosperity instead of thinking that you are owed something by life. You're here. Deal with it. Get off your butts and make your own way.

    I can't stand lazy idiots who think that the gov't or someone else should bail them out of their stupidity.


  • Report this Comment On July 03, 2010, at 10:33 AM, Chunga85 wrote:

    I guess now would be a good time to shoot the greedy homeowners.

    It’s crystal clear. From the very beginning the homeowners have gamed the system. They started by tricking the property appraiser (lender’s agent) into submitting an outcome-based appraisal.

    Then, millions of homeowners shrewdly conned the “lenders” into dismissing all agency and fiduciary responsibility in the underwriting process....going so far as to force the “lenders” into forging


    Then, the greedy homeowners forced the “lenders” to securitize the loan in such a fashion as to bifurcate the mortgage from the note.

    On top of that, the homeowners secretly cooked up the concept of “Credit Default Swaps” and forced the “lenders” to insure the collateral at the full (outcome based) value 30X over.

    Having successfully pulled the wool over everyone’s eyes - these irresponsible homeowners showered themselves with well deserved bonuses.

    Realizing they were too big to fail, these irresponsible, reckless homeowners lined the pockets of legislators and received enormous sums of taxpayer bailouts.

    The result of these cunning maneuvers by the fraudulent homeowner scheme has them sitting fat and happy in the cat birds seat. Yup, that’s how they did it. And they’re getting away with it.

    Savings drained - check, 401ks all gone - check. Kicked out of their homes - check. “Lenders” made whole many times over via Credit Default Swaps - check. Homeowners foreclosed and “lender” buys back property for pennies on the dollar - check.

    Follow the money and you’ll find the culprit. It’s about time we hold these homeowners accountable.

    Good call.

    see - The Foreclosurehamlet

  • Report this Comment On July 03, 2010, at 10:42 AM, Chunga85 wrote:

    WSJ Blogs


    Real estate news and analysis from The Wall Street Journal * December 17, 2009, 6:07 PM ET

    Walk Away News: Morgan Stanley Gives Properties Back to the Lender


    By Emily Peck

    So we’ve discussed the ethics of individual borrowers walking away from their mortgages. (Some say we’ve over-discussed it.) If it’s immoral, as some would say, for a borrower to walk away their mortgage, is it any different for a bank?

    Morgan Stanley is doing just that. News reports on Thursday said the bank plans to give back five San Francisco office buildings to its lender–just two years after buying them at the top of the market.

    “This isn’t a default or foreclosure situation,” spokeswoman Alyson Barnes told Bloomberg News. “We are going to give them the properties to get out of the loan obligation.”

    Sound familiar?


    Mr. Caplinger, please help me out here.

  • Report this Comment On July 03, 2010, at 1:23 PM, PredatoryLoans wrote:

    Educate yourself on so called "strategic defaults"

    Law Professor Brent White, University of AZ &

  • Report this Comment On July 03, 2010, at 1:30 PM, sellsior wrote:

    what is sauce for wall street bankers and investment houses should be sauce for main street home owners. The money lenders and packagers have walked away from many billions of their mistakes. And the Government rushed to help with dollars while chastising with words. Why not the same for taxpayers? Okay, a little greed oils the gears of wall street. But averous has flooded the the works. And the corperate packagers who caused the downfall of the system now want to avoid their responsibility by passing on the blame to the individuals who they knew could not sustain payments on overpriced houses. Maybe the answer is to go back to the Eisenhower days of tougher regulations and taxes.

  • Report this Comment On July 03, 2010, at 2:10 PM, stm wrote:

    Its a contract with the home being collateral. The agreement is simple: The bank says you own the home as long as you make the payment. If you stop, we own the home. Whether the homes value rises or falls, the agreement is the same! Both parties know this when they enter into the contract. The bank would not hesitate to take the home if it had appreciated in value and the homeowner was unable to make their payment. The bank would not give the homeowner the extra money above and beyond the cost of the loan. So it is when the house falls in value. The homeowner has the ability to pay a debt for pennies on the dollar by giving the bank the home. Smart business decision to me.

  • Report this Comment On July 03, 2010, at 7:16 PM, Yotraj22 wrote:

    First off, all those defaulting borrowers had the absolute right to believe the mortgage brokerages were working for "THEIR" best interests, check out the lawsuits against foreclosures (, you'll see lot's of times fraud was used by those brokerages and NOT by the borrowers! 2nd if the Banks hadn't leveraged these same mortgages by a bazillion percent, we wouldn't be having a recession anyway! 3rd, Before I EVER trust the Banks, Wall Street again I for one want mandatory Pee tests for every member of every financial institution & every member of our Congress & Senate!

    In Summary, I've been around a bit and my guess is the crisis we're in looks just like a bunch of Coke heads came up with Great(?) ideas, passed them to the alcoholics to get them OK'd (pretty easy) and then gave it all over to the Meth Heads to run. It's fraud on top of fraud on top of more fraud and if the courts of this Country don't start standing up and do what the LAW says (not what they want it to say) then this Country is doomed and I'll be getting out of here. I suggest to all, you do the same.

  • Report this Comment On July 04, 2010, at 1:29 AM, Dupedbyfandf wrote:

    Fannie Mae needs to follow their own rules and pay up on defrauding thousands of the investing public who bought their "Preferred stock" in May and June of 2008 at $25 per share in a new offering and then two months later they were taken over by the government making that stock next to worthless. The management of Fannie Mae had to know that they were on the brink of insolvency when they were issuing preferred stock to the public.

  • Report this Comment On July 04, 2010, at 1:33 AM, jfrankh57 wrote:

    The comments about folks wanting more house then they can afford is all too true. This country has gone into the toilet because there is a mentality that all things under the sun should be "rights." The average person is no longer allowed to fail. How else can we learn? Failure teaches more lessons than winning, or letting somebody else pay the costs, anyday of the week. Let me reiterate what I have said before...self-responsibility seems to be a lost art any more. I feel for everyone who has lost a job or a livelyhood. I also understand the need for nest eggs and emergency funds. I think that I would love to see folks take responsibility for their actions. I also would love to see Barney Franks and the Federal Entities FNM and FRE go the way of the dinosaurs. I would love to see a Federal Government that would do its job and not try to do everybody else's! One of the primary jobs of government is regulation of commerce. Yes, even to keep the citizenry free from usury, cartels, monopolies, et al. Yes, Unbridled Capitalism is not wrong but is far from being the right thing (except for the person who owns the company), but a lean towards that side of the scale is more desired than the alternative of socialism.

  • Report this Comment On July 04, 2010, at 10:26 AM, Russinator wrote:

    Mr. Caplinger

    In the spirit of professionalism, I will omit the same vitrolic references towards you in which you as an uniformed person on these matters directed toward "borrowers" in general (the same thinking attributed to racism by the way..every borrower is the same according to your view).

    What you (as well as most of America) fails to realize is that the whole MBS / CDO, ets, scenario was a ponzi scheme that make what Madoff udertook look like a theft of a slat shaker from a resaturant..we are talking about hundreds of trillions of dollars here

    Why not start with reading Fannie's servicing guidelines, especially where it acknowledges that it partakes in a shell game in order to create the appearnce that it in fact has colorable title to a property to foreclose...Fannie (theoretically transfers the documents baack to the servicer (who happens to be the originating lending on records at the local registry of deeds) in order to make it look like a complete chain of these transfers to securitized trusts are off record the fraud is allowed to fester

    Yes Trust...not your gamps donative trust, but these things are Massachusetts trusts that are required to follow their own terms...its never fact..most of the foreclosures are icing on the cake for loans that have been paid off by "wrapped CDS" , pool insurance, overcollateralization..and any other "credit enhancement"...

    "Trust" me there is da coming very soon which will make you and your article look very "foolish" in the negative sense..

    Stay tuned my friend..the end of this ponzi scheme is at hane

    Note: I am a foreclosure defense attorney (admitted bias) however everything I have stated is fact..

  • Report this Comment On July 04, 2010, at 3:02 PM, TMFGalagan wrote:

    @Chunga85 - I completely agree that Morgan Stanley shouldn't get any more slack than anyone else who defaults on an obligation. But if future borrowers want to roll the dice that MS won't do it again to them, that's up to them.


    dan (TMF Galagan)

  • Report this Comment On July 04, 2010, at 4:56 PM, Chunga85 wrote:

    Take this House and Shove it:

    The Emotional Drivers of Strategic Default

    Brent T. White

    The University of Arizona

    James E. Rogers College of Law

    May 2010


    An increasingly influential view is that strategic defaulters make a rational choice to default because they have substantial negative equity. This article, which is based upon the personal accounts of over 350 individuals, argues that this depiction of strategic defaulters as rational actors is woefully incomplete. Negative equity alone does not drive many strategic defaulters’ decisions to intentionally stop paying their mortgages. Rather, their decisions to default are driven primarily by emotion – typically anxiety and hopelessness about their financial futures and anger at their lenders’ and the government’s unwillingness to help. If the government and the mortgage industry wish to stem the tide of strategic default, they must address these emotions.

    Fight Back!

  • Report this Comment On July 04, 2010, at 5:23 PM, Chunga85 wrote:

    Letters To The Editor For Tuesday, June 22

    In response to Kimberly Miller's June 13 story discussing debt collection Mafioso buying up post-foreclosure and short-sale deficiency debt and waiting for it to age like a fine wine until the family recovers financially before going in for the kill:

    In the heyday of America's real estate boom, appraisal fraud was the kingpin. Fabricating sales of a few comparable properties was often the routine first step before the grand opening of the sales office of a new condo building or single-family home development.

    Then, all subsequent sales were given a nice, fat bull's-eye for appraisers to put in their sights. News stories abound of honest appraisers who found themselves blackballed out of work as their less-­honorable colleagues hit the right number set by equally suspect builders and mortgage brokers, all of whom were highly incentivized by profit margins that were proportional to the appraised value of each property they touched. And now that the profiteering middlemen got their piece so early in the game, the family that must struggle to regain lost ground will be haunted for up to 20 years post-foreclosure.

    Florida law gives debt collectors five years to file a claim and 20 years to collect, time frames the Florida Bankers Association hopes to lengthen with lobbying efforts. The deficiency often comprises the remainder of the appraisal fraud-based principal balance, then gorged with the jacked-up attorney fees for the foreclosure process, unexplained add-on fees by the mortgage servicer, and no credits applied for any private mortgage insurance payments or payments made during a loan modification that are held in a mysterious "suspense account."


    West Palm Beach

  • Report this Comment On July 04, 2010, at 5:32 PM, Chunga85 wrote:

    Mr Caplinger I hope you are still paying atttention. Between all of your pressing affairs perhaps you can enlighten us with a rebuttal or two....

    Banks Financing Mexico Gangs Admitted in Wells Fargo Deal

    Source: Bloomberg 6/29/2010


    Just before sunset on April 10, 2006, a DC-9 jet landed at the international airport in the port city of Ciudad del Carmen, 500 miles east of Mexico City. As soldiers on the ground approached the plane, the crew tried to shoo them away, saying there was a dangerous oil leak. So the troops grew suspicious and searched the jet.

    They found 128 black suitcases, packed with 5.7 tons of cocaine, valued at $100 million. The stash was supposed to have been delivered from Caracas to drug traffickers in Toluca, near Mexico City, Mexican prosecutors later found. Law enforcement officials also discovered something else.

    The smugglers had bought the DC-9 with laundered funds they transferred through two of the biggest banks in the U.S.: Wachovia Corp. and Bank of America Corp., Bloomberg Markets magazine reports in its August 2010 issue.

    This was no isolated incident. Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers. Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers -- including the cash used to buy four planes that shipped a total of 22 tons of cocaine.


  • Report this Comment On July 04, 2010, at 6:20 PM, Chunga85 wrote:

    "We’re all working for the government now"

    Posted on June 20, 2010 by Neil Garfield

    I've purloined a comment from Neil Garfields very informative site:


    Editor’s Note: The cost of taking over foreclosed homes greatly exceeds the principal reductions that are inevitable anyway. Either way the taxpayer foots the bill. As usual, big business and government have taxpayers paying the higher bill.

    Here is how the narrative ran. The trillion dollar banks and some “smaller” ones used all their influence over the media and lawmakers to get the narrative going in the direction of “why should anyone get a free house?” or “Why should HE get a break on HIS mortgage just because he stopped making payments? I’ve been the good citizen making my payments and I don’t see anyone giving me a break.”

    The answer is as simple as it was when I first voiced it three years ago. This is not a mortgage problem, it is a fraud problem that will bring down the whole economy. And victims of fraud have a right under our existing laws to be made whole, if possible or at least given some relief from the fraud enabled by highly sophisticated financier leveraging off asymmetry of information.

    By getting us fighting amongst each other about a non-issue, the banks, media and lawmakers distracted us from the real issue. The result was a bailout for the fraudsters and a nightmare for the rest of us whether we got hurt directly or not. In fact, we are all hurting from the foreclosure mess either directly or indirectly. Property values are going lower and lower, nice neighborhoods have turned to urban blight, and upscale neighborhoods are seeing ugly signs go up inviting unwanted buyers who either look for the quick buck or who don’t fit with the old context of the neighborhood. Jobs are being lost by everyone, not just people who are losing their houses in foreclosures.

    The plain truth is that both the homes and the securities sold to finance the mortgages were inflated through fraudulent means. The resulting fall-out continues to drag median income down and with it, the price of housing. Everyone knows the securities were overvalued, everyone knows they are worth far less than represented, and that the reason is the appraisals of the homes and viability of the loans were simply a lie. The ONLY possible end to this under any scenario, is that the real value is going to be reflected in the market place whether we like it or not.

    That means in simple language that the securities are going to be marked down to their real value and the home loans, which were also securities in this scheme must meet the same fate. It doesn’t matter what people in or out of power want. The cat is out of the bag and nobody is going to pay the premium that sellers and banks are looking for.


    For those in Rio Linda or prefer to not read is a link to a video that sums things up quite nicely....

  • Report this Comment On July 04, 2010, at 6:40 PM, wolfman225 wrote:

    Sympathy for those having hard financial times aside, why is it that there is much piling on of so-called "misleading lending institutions" and nearly none (outside of the initial article) talking about the misleading borrowers?

    I agree that, according to existing law victims of fraud do have the right to be made whole. However, shouldn't that also apply to banks/lending institutions who provided loans to unqualified borrowers, often based on falsified income docs?

    "Strategic Default" should not be allowed and in fact should be prosecuted with deficiency judgements. Many here are talking about those who can't make payments due to illness, injury, job loss, etc. talking about how unreasonable the lenders are being in cracking down on the practice. If you re-read the article, that is not what is happening. People are being subjected to penalties <i>if they are able to pay and/or have refused to attempt to negotiate a payment agreement/settlement</i>. There is absolutely nothing wrong with this. No one is guaranteed that the house they buy will appreciate (or even hold) it's value, just as no bank or lender is guaranteed that the house will be worth enough to balance out a possible failure on the part of the borrower to repay the loan.

  • Report this Comment On July 04, 2010, at 7:30 PM, BearishKW wrote:

    I'm 27, graduated in 2005, went straight to corporate America and have gone through this big downturn along with everyone else. In 2008, when everyone was jumping on the homeowner bandwagon, I considered it. I could've done it too. 5/1 ARMS, 0% down, refinance in a couple of years on the added equity with increasing home values, etc.

    But when it came down to it all, I considered a doomsday financial scenario, large-scale terrorist attack, or major virus outbreak...I cameto the conclusion that I would be wiped out in a short period of months if prices were to, for whatever reason, fall or stay the same.

    So now, this summer, I was ready. My credit card balance is paid off, I have 1 year worth of mortgage payments saved and tucked away, I have 20% to put down. I must have looked at 50 places, many foreclosures, where people simply left overnight or stopped paying. We would pull into the neighborhoods and they would be the only unkept yards in view. We would walk inside and find holes kicked in the wall, paint and wine dumped on the carpets, cement dropped into the toilet bowls.

    I felt sorry for the responsible neighbors who had decided to stick it out and make their payments through the down market. Even more sorry for those that had the same plan as I, but simply lost their jobs/401ks/investments all at once and were forced to sell for a loss. But these homeowners were on the complete different end of the spectrum from the scumbags who infested their neighborhoods with unwarranted greed, paid 0% down on a 5/1 ARM, then when the market took a downturn, simply walked. Here we are on July 4, independence day, and all have to come to realize that a bunch of children got us into this mess. Me, me, me, I, I, I. I deserve this, I want that, this is rightfully mine, etc. If people simply manned up, rented until becoming financially able to put equity down up front, and worried less about chasing the pipe dream with the rest of the Joneses, we wouldn't be in this mess. People wouldn't be walking away because they had a stake in the investment.

    To "momhere" and all of the others who refuse to accept any blame for what they've done, and look at walking away as "a good business decision". Shame on you, you're just as guilty as anyone. But you're probably not reading this. You're busy finding the next way to game the system to your advantage, but it's just not a system. It's America: our ultimate home and ultimate long term investment.

    As for my home search. I wound up spending the low end of my budget. I don't need a maximum square footage, I don't need to break the bank by making a larger investment than I need to. I just needed a place to live. America walked away from that idea.

  • Report this Comment On July 06, 2010, at 3:40 AM, onowhereman wrote:

    As noted above, there are many home buyers who are not really qualified to evaluate the financial implications of their commitment to buy.

    Whatever happened to the notion of fiduciary responsibility?

    Whose money are the banks lending, anyway?

    "People borrowing irresponsibly" is a pretty shallow excuse for those institutions who had a fiduciary responsibility to their depositors to make loans with manageable risk.

  • Report this Comment On July 06, 2010, at 10:05 AM, mhonarvar wrote:

    more crapping on the little guy..

  • Report this Comment On July 06, 2010, at 10:13 AM, Mouths2Feed wrote:

    This article is spot on. I for one believe each person should be held accountable for his / her own actions. I'm happy to hear that Fannie Mae stood up and put its foot down.

  • Report this Comment On July 06, 2010, at 11:37 AM, brianbeedavis wrote:

    Hi all -- I'm a new fool, picking up the pieces from my strategic default, myself. (No tomatoes, please.) It's troubling to me to see such an impressive group of investors spending any time demonizing the lenders, or the borrowers at this stage in the game. If there is one thing I learned through it all, it's that each transaction was unique in its parameters. Lenders took a gamble, borrowers did as well. Everyone intended to better themselves. I would think from the investment community, there would be an unspoken appreciation of sorts for having a personal threshold as an individual where your losses are significantly beyond the brink of recovery and it makes sense to pull out. The future is yet unwritten. A population that had to / chose to walk away isn't the end of the story...there is opportunity abound! Can't we focus on that? I guess we do on this site, pretty well I might add! Win! =)

    Some emo dump diatribe...

    This is's not entirely about dollars and cents and your bottom line. There are qualitative elements that don't have a line item on the balance sheet. I know, "duh," right? Write this off and put me in the “emotional decision” bucket, if you must. But, when you (whomever) buy a bad investment when you are learning the ropes, there is a threshold of losses when you bail because it is truly hopeless. Why doesn't that apply to homeownership in its previous iteration? I didn't "do" anything to the economy and its participants, no more than any one "did" anything to me personally. It is a tough situation for all parties and we are in it together learning and growing, if we look at the total picture and not just one convenient slice of the pie.

    To be clear, this position (of "we're not all bad") does not mean that I feel that people should get everything they want...I think an attitude of entitlement is incredibly hurtful to our overall well fare...but spare me the undertone of moral judgment for having to make self-interested decisions based on my individual circumstance. "Know what I mean, dude?" =)

    I bought a house at age 21, grossly under-informed and seriously under-qualified. I am not playing the victim, I was just doing "the right thing" like everyone else according to the narrative that was all around me. I bought in a remote place that wasn't super desirable to live (silly me), but demonstrated good returns (silly me), seemed promising and up-and-coming (silly me), and was affordable. Long story short, when you displace your life for an investment that you intend to last only a couple of years, and here you are, 5, 6 years later in a piece of crud styrofoam house that is 75% underwater (yup, I owed 4 times more than it was worth), the priorities just simply change. Surely most people can apprecaite that. You just reach a point where you will never recover your money and the longer you pour money into the pit, the worse off you become. Plus I have to take care of my parents financially, which adds strain to how I spend every dollar. It is the most difficult decision I have ever made, and it about killed me. I wasn’t cavalier or capricious in my decision to walk, as I was in my decision to buy. I know I rambled here, and I apologize...I just detest being lumped into a category of no-good, hapless & greedy. It's so easy to shake the morality stick at anyone who hasn't demonstrated utmost fidelity to their homes. These are people's lives about which we are talking. I am picking up the pieces after learning a lesson that was worth a million bucks, and cost me upwards of 100k (in my early 20’s, no less!). I am deeply sorry that it had to affect other people. But, I am not a dim bulb with my hands up in the air motioning for “more more more help” from the people who are better off than me. If anything I am more motivated to inform myself and make better choices for me and my family. We are all just trying to take care of ourselves.

    Here's my real point:

    People that are clueless and screw things up for other people are just a fact of life. I would think the truly "informed investor" will not allow themselves to be so succeptible to the impacts of this group, but rather learn how to work alongside and sieze the opportunities that this group presents, vs. being impacted by them and detesting them for it. It is just the other side to the victim coin, frankly. Pot/kettle.

    Sorry for clogging the comments to get this off of my chest. Truly. =)

  • Report this Comment On July 06, 2010, at 11:37 AM, CPACAPitalist wrote:

    Finally some responsibility will fall on those that made poor judgements. I don't want to see anyone suffer but if you decided to buy something way beyond your means, enjoy it for a few years and then when things get tough try to walk away and stiff either the bank(and its shareholders) or the government (and its taxpayers) then that just doesn't sit right with me. Hope this makes people think twice about what they are doing. Finally some common sense has found its way into a small portion of this system!

  • Report this Comment On July 06, 2010, at 11:38 AM, brianbeedavis wrote:

    I'm not at all longwinded. =) Sorry again.

  • Report this Comment On July 06, 2010, at 12:00 PM, CPACAPitalist wrote:

    @brianbeedavis: putting the responsibility on the shoulders of "informed investors" to work around people who make uninformed decisions and then decide to dodge the fallout is a bit onerous. How about we recquire people to not be clueless before we give them lots of money?

    "Informed investors" aren't psychologists and socialogists, we look at financial figures to support our decisions the majority of the time.

  • Report this Comment On July 06, 2010, at 12:07 PM, brianbeedavis wrote:


    you took that the wrong way.

    And how do you suppose we require people to not be clueless?

    You point is wonderful in the realm of idealism, but like it or not, they are here, and a fact of life. If you have the ability to make this population do what it should be doing, please do show me how.

    Remember the personal responsibility message? If you can work around this group and leverage to your best ability, why not shoot for that as part of the plan in navigating the market. That's a pretty reasonable assertion. Or, you can simply be the victim of idiots based on principle.

  • Report this Comment On July 06, 2010, at 12:14 PM, D2009 wrote:

    You are way off. And so are most others here.

    Look at it systemically:

    1) People have been asking for loans they couldn't afford for centuries. Only recently did banks decide to stop caring who could realistically pay back what. And that's the borrowers' fault?

    2) What advice do you give to someone thinking of buying a house? You would (and probably have, over the years) recommend they consult a financial adviser...all of whom were telling everyone to buy houses they couldn't afford up until 2007, some even after. And that's the borrower's fault?

    3) You could have easily been a "responsible" borrower, with 20% down and a 30-year fixed, and still be 30% underwater right now, with no prospect of breaking even for the next 15+ years.

    4) Most families can't wait to break even. Whether for work or for life events, people tend to move every 10 years or less. Yet, assuming a 4% growth rate in house prices (which is laughably high, but let's just run with it):

    - 10% underwater = 4 years to break even

    - 20% underwater = 7 years to break even

    - 30% underwater = 11 years to break even

    - 40% underwater = 15 years to break even

    - 50% underwater = 19 years to break even

    5) Where the HELL do you get the idea that borrowers who walk away are "benefitting" from their "bad judgment"? Do you even know what "underwater" means? Strategic defaulters aren't benefiting in the slightest, they're just protecting themselves from eating more losses...losses caused by NON-srategic defaulters who could never pay in the first place...who were OFFERED money by banks that wouldn't know a risk assessment if it kicked them in the face (which it probably should...repeatedly).

    6) The government, Fannie/Freddie, the banks, and any given business has absolutely ZERO moral high ground when it comes to walking away. Christ, the MBA defaulted on their office building! Every business runs the numbers, and if it's more profitable to walk away, they do.

    They can all take their moral hazard and shove it, and so can any of you who think homeowners shouldn't be allowed to run the numbers like every other entity that takes out a loan.

    If a guy loans you $20K to buy a car, and the car loses value, you still pay him back.

    If a guy loans you $20K to buy a car, and then smashes up your car with a baseball bat, do you still pay him back?

    Didn't think so.

    You fools. (note that's not Fools)


  • Report this Comment On July 06, 2010, at 12:19 PM, srmd22 wrote:

    I agree 100% with 100% of this article. We are not talking about victims of aggressive lending practices who lost their job and cannot meet the mortgage payment. We are talking about people who can afford to meet the payments, or who have other options, but who choose to walk away from their COMMITMENT because it is cheaper. It costs those of us who are shouldering the burdens of our payments despite being in an upside down situation.

    Note, also, though that many of the "victims" are not victims at all. They should have known better then to take a 2% interest mortgage that balloons to 7% in two years, with no prospects of their salary doing the same. That is just stupid, and a lot of people did it. I don't care what any lender tells you, it is not a complicated issue. I had lenders try to sell me such a loan, and I laughed at them. I would rather squeeze into a crappy little apartment that I can afford then buy a house I cannot.

    Rant over.

  • Report this Comment On July 06, 2010, at 12:22 PM, CPACAPitalist wrote:

    @brian: I understand that people will make poor decisions, and that there will always be a group of people out there making uninformed decisions, but I just don't see why we need to be complaciant about that fact. I think there should be more responsibility put on the lenders to really determine if a person is bankable or not for a home loan, not every American needs(deserves) to have house, so telling people they don't qualify should just be a fact of life, if they really want to qualify then they can adjust their life.

    Investing ultimately is a personal responsibility, you have to understand the risks and rewards you are chasing, and adjusting for the human factor I suppose should be a part of that system. But that being said the way that some of these investments were packaged, it made it hard to work around that group of people.

    We just do what we can I suppose - not easy being a Fool but someone has to do it. ~{:-)

  • Report this Comment On July 06, 2010, at 12:32 PM, brianbeedavis wrote:

    @CPACAPitalist: I agree, definitely. Good chat. thx =)

  • Report this Comment On July 06, 2010, at 12:52 PM, doremido98 wrote:

    Many hedge funds and business groups default routinely. For them,it is just the bottom line that counts. Just count the hotels and vacation resorts that have defaulted recently. The prominent example of Donald Trump has already been mentioned.

  • Report this Comment On July 06, 2010, at 2:07 PM, ems79 wrote:

    "the lender announced that it would bar defaulting borrowers from getting additional Fannie Mae financing for seven years unless they can prove that they didn't have the capacity to pay, or they attempted to negotiate in good faith for a workout alternative in lieu of foreclosure."

    Doesn't sound like they are hurting the truly downtrodden with this one--if you actually cannot pay your mortgage, you will be able to document that fact and will be excluded from the 7-year ban.

    Otherwise you ARE the definition of a strategic defaulter--when you plunked down X number dollars for that house you decided it was worth that... now that it's worth X minus 20% that is NOT the bank's direct fault, it's just the way a market (as in HOUSING MARKET) works... win some, lose some. You lost, it's a shame, I'd feel like a sucker if it were me too.

    Please don't expect the rest of American to "make it right" for you.

    I didn't buy a home for the past 6 years because of this crisis and I'm currently STILL on the sidelines... just because you decided to pull the trigger doesn't mean I should have to pay for part of your bullet.

  • Report this Comment On July 06, 2010, at 3:28 PM, Chunga85 wrote:

    This simple question needs to be asked - even if it remains unanswered:

    Why would a "lender" prefer the option of spending money to foreclose on a property when the present owner could and would pay more than what would be received via the foreclosure route.

    That is the rule as opposed to the exception.

    Somehow...a non-performing loan is worth more $$$$$ to a "lender" than a performing loan?????

    What happened?

  • Report this Comment On July 06, 2010, at 4:56 PM, wpepoon wrote:

    We bought our house in 2004 when any kid with a pulse and a job could borrow a half a million dollars. Which drove up the price that we paid by tens of thousands of dollars. So I recently told Fannie Mae - our lender - to go to Hell if they don't want to negotiate better terms. My wife didn't sign our mortgage so we can buy another house in her name tomorrow! FM is too stupid to see that we have all the leverage.

  • Report this Comment On July 06, 2010, at 6:13 PM, theHedgehog wrote:

    From the article: "In an attempt to dissuade homeowners from walking away from their delinquent mortgages, the lender announced that it would bar defaulting borrowers from getting additional Fannie Mae financing for seven years unless they can prove that they didn't have the capacity to pay, or they attempted to negotiate in good faith for a workout alternative in lieu of foreclosure."

    This seven year lockout seems a reasonable solution to me. Certainly if you were the victim of predatory lending practices you should have some recourse. But, this recourse should come with the seven year lockout. Call it bankruptcy-lite, if you wish.

  • Report this Comment On July 06, 2010, at 7:05 PM, amayesin wrote:

    I have friends that bought their house in 2000. Every year it went up in value, sometimes 20+ percent a year. In 2003 they started taking equity out of it to buy new cars, boats, vacations, etc. They told me once that they could not lose because real estate never loses money which in they and their parents lifetimes was true. There house would have been valued at almost a hundred percent more than they paid for it. So when everything crashed they should have had a nice cushion. Instead they are now severly underwater. They lived the good life for years off of their house and now they want the tax payers to help? They are my friends but I don't think we owe them anything but an eviction slip if they can't afford their payments.

  • Report this Comment On July 06, 2010, at 7:40 PM, Chunga85 wrote:

    I know a handful of giant faceless banks and insurance companies that pretended to lend out their own capital and colluded with one another to create phony outcome-based appraisals and obtain insurance policies at the full outcome-based values.

    Using financial wizardry, they called it a big loss and also skipped out on paying huge sums of taxes to boot.

    They were never really friends of mine but I don't think we owe them anything just the same.

  • Report this Comment On July 06, 2010, at 8:25 PM, Vineconimcs wrote:

    So here I am the childless, single guy guilty as accused in one of the comments I read. Can’t claim a bloated paycheck though or much of a silver spoon. After owning several of my own homes, I now reside in a “starter home” that has been in the family since 1940. There has never been a mortgage on this property.

    My Grandfather bartered timber for the lot back in 1936. It now needs more remodeling and updating, than the current appraised value, though everything works and the roof don’t leak. I’ll probably never move, any real estate I buy in the future will probably be for “cash.”

    Before checking Neil Garfield’s website, I was already convinced this disaster still unfolding is not the fault of the homeowners who now suffer with their “underwater Mortgages” or after a bout with depression and denial, have walked away from the property, probably knowing they won’t be able to buy for at least 7 years in most states, possibly longer in others.

    The banks, led by Fannie Mae and Freddie Mac are responsible for this entire debacle. They and possibly the Federal Regulators aka the Franken Dodds had the power to change things, so by default they should be the targets of our Ire and distrust. I disagree with Mr. Garfield in one small respect, I don’t think there was criminal intent. Rather, it was a competition that was allowed within the confines of a Monopoly situation. Over the years it turned into a survival situation for the banks.

    Both Robert Shiller and Paul Krugman have written very excellent expose’ books on this subject, which someone sooner or later better read up and take action.

    Shuttle back to 1975 when I purchased my first home, There was no easy method of getting a loan from any out of state source if you wanted to own a home and get a loan, you needed to sign an authorization form for your employer to divulge your pay information. The banks and (back then Savings and Loan Assoc’s) all mentioned to me they would not allow my payment to exceed 30% (one was 28%) of my gross income. I had to have 2 years of employment records and a 20% down payment. The banks bragged about prices in their area being “stable.” The mortgages remained at the bank of origin until it was paid off.

    Move forward to 1999 and CDO’s, now most loans are originated from Big banks via Mortgage brokers. Your loan is sold possibly to a bank in Europe, bundled into some type of “jumbo bond.” The people who service your loan and generated your loan have NO interest in the outcome, they are paid to manage the bloody aftermath and given bonus money to “write more business.” The banks first lowered, then drop all these antique qualifications to write more loans. Until, anyone who wants a house can get one. Everyone is happy when the market is rising, all boats float in a rising market. Even if you can’t make the payments, the short sale, may be leave you no worse financially than you were before the purchase. Builders are in heaven at this point, selling homes to virtually limitless buyers… Dear Fannie, Here is a personal aside question, a young couple purchases their first home, Making a total of $45K per year, can they swing a $345,000 Mortgage, 30 year adjustable rate? Do they need a foyer chandelier that costs $12,500? If they think they can do it, what category of criminal are they in?

    Now the Banks and the legislators have realized the flaw in the operation and have moved forward to the blame stage. As every commenter knows this won’t solve anything.

    America now needs “buyers” to step in and soak up all these foreclosed and unsold homes. Must have both sides to every sale. They won’t take such action until convinced there is minimal downside to house prices.

    Sellers and current distressed Homebuyers need to get out from under their “underwater mortgages”, so they can at least increase their mobility in searching for jobs. They need home prices to rise.

    Mortgage reductions or modifications (whatever that may mean) are a waste of time for a simple reason, they don’t create a sale. Reductions, are considered to be INCOME to the mortgagee. So this sounds like a losing situation all around.

    Ultimately, the banks will need to either voluntarily, court or regulatory pressure return to some reasonable way of qualifying debtors who receive the loans. I have no opinion on where the bar should be set, but it just isn’t fair that I might be held to the limits mentioned above, while another can just walk in flat broke with no job and buy a better home.

    People who are out of work and have troubled mortgages should spell out this information on their RESUME’s. then, broaden your range of applications and make your prospective employer aware of your willingness to relocate. A new employer might be able to write off such a burden. It will also show the prospective employer that you are trying to be a good citizen and financially responsible.

    Banks should be required to respond to “short sales, mortgage adjustments” within a very specified and short period of time, and be penalized if they don’t.

    New loans should all be given a total disclosure statement showing the total amount one would be paying for the loan.. i.e. 360 mos x $715.00 = $257,400.00. $8580.00 per year. New loans should be Fixed rate only, no floating rates. Some down payment should be required.. Buyers should be provided with the “last sold price” of the house they are buying and when that sale was… exempt if previously owned for over 10 years.

    If nothing meaningful is done, by all three participants, the homebuyers, the banks and the regulators this is going to get lots worse before it gets better. These are my ideas, comments and additions are always welcome.

  • Report this Comment On July 06, 2010, at 8:48 PM, Chunga85 wrote:

    I just LOVE this quote from noted foreclosure defense attorney Matt Weidner:


    They seriously think we are that stupid. What are they hiding from us? Maybe that the banks have committed billions upon billions in tax evasion. Follow what is happening in non-judicial states and you will see the arrogance. They actually show us the blank note endorsement from the original lender yet no recording of the interest through the depositor to the trust. Lack of standing?

    Then when they are finished stealing the house they sell the loan from the unlawful foreclosing party(trust) that had no standing to F/C back to the trust through a POA to the servicer and effectively cover their tracks that the loan was never in the trust, they still stole the investors money, and they still claimed the tax exemptions under REMIC.

    All while the Govt and IRS watch.


    Read the whole piece entitled:

    "IRS Form 938- I Have No Idea If This Is Important But It Sure is Curious"

    May 31st, 2010

  • Report this Comment On July 07, 2010, at 12:19 PM, JimNKate wrote:

    I mostly agree... caveat emptor must prevail. Yes, there were unscrupulous lenders working in a wild-west market, but still you would never profit from stupidity, greed, and failure to perform due diligence.

    Nonetheless, this is a declining economy for about 80% of us, but government policy has enabled people with less income to live in ever-more lavish real estate. Sound public policy allows people to enjoy the fruit of their honest labor but not to press people into being homeowners if it is not thier choice or in their best interest. Our real estate market is WAAAAAYYY overvalued in much of the country-- by which I mean, the average income cannot afford the average house.

  • Report this Comment On July 07, 2010, at 3:04 PM, Chunga85 wrote:


    THURSDAY – JULY 8 – SPECIAL “Foreclosed Upon” FEATURE:

    Florida foreclosure activist and former guest on TPH LISA EPSTEIN (Foreclosure Hamlet) provides updates to the major headway, and the difficulties, when fighting back to defend your home. Plus, the latest information as to what the State of Florida intends to do with all the “hidden pre-foreclosures” that banks have been secretly keeping off the official record.

    Joining Lisa will be:

    ANDY from Massachusetts as a person challenging “Denial of the Debt” in it’s validity;

    RANDY from Florida will dispel the notion that homeowners facing foreclosure are predominately folks that “bit off more than they could chew”.

    ALLISON from Texas about The Courts legislating from the bench and how this is severely impairing the homeowner’s consumer protection rights.

    Websites for more information and continual updates: and

    Link to tomorrow's broadcast can be found here:

  • Report this Comment On July 07, 2010, at 3:34 PM, venkyk wrote:

    I somehow do not understand the big deal about underwater homeowners not being able to (or being penalized) for walking away from a bad investment especially in our capitalist system when a company (public or private) that is going bankrupt can easily liquidate. Creditors and shareholders line up in terms of priority and are able to get what they get out of the liquidation process. Those investors and shareholders bear the burden of the business being run properly and also the share in the risk/reward.

    On the personal front, you have the option of exiting any financial position which is negative regardless of where you are in the instrument (real estate, financial instrument). Your creditors you bear the burden along with you who is the investor.

    So I do not know why any person who owns a home and is underwater should not in the most objective and financial analysis simply not exit his/her home position if they so chose to (foreclose/bankruptcy). Why should there be a personal vendatta against them for that?

    What has happened here is that the peopl's elected representaitves (both executive and legislature) over the last 100 years having beenbailing out companies, government institutions and specific groups of individuals, thus creating a double standard of morality where a company like GM gets bailed out when it threatens to "foreclose" because "jobs may be lost", while the individual homeowner "better not foreclose" because if he or she does, then s/he is going to be socially and financially targeted because s/he is now a risk. I would like to know if the CEO, board of directors and every individual employee of a company like GM gets a credit hit (even if they get to keep their jobs because of a bailout) for all the investors that lost a ton of money.

    The entire country becomes complicit in subscribing to a double standard of morality here either through action or by watching from the sidelines.

    Banks see an opportunity either way. I can hardly imagine that everyone in the entire banking sector as well as the political establishment was unaware of the risk of a inflationary real estate market and thought that one of the biggest trillion dollar industry in America was not going to end up this way. For that matter any American that thought this was not a bubble was simply deluding himself/herself. Hence now we all have to pay for our greed. If anything every single American benefitted from the real estate boom directly or indirectly. So now we are all going to have to pay directly or indirectly.

  • Report this Comment On July 07, 2010, at 4:41 PM, Stephreg wrote:

    I am tired if the hypocrisy of those who want to hold homeowners to a different standard than they are willing to hold companies. We do not hear Dan get on his soapbox to declare that management is immoral, or should be banned from running a company for the next seven years when they take a company into bankruptcy (strategic or not). Yet he happily gets on his soapbox to condemn homeowners who essentially do the same.

    The bank signs a contract with an individual when it sets up the loan. That contract contains language about what to do in the event of a default. If the bank does not like the what happens when there is a default, why are they complaining now? Is it because they chose to secure the loan with an asset that is no longer valuable enough to cover the loan? Well, join the club. Nobody likes the fact that property values have declined.

    Read the contract, follow the clauses therein. Get off your moral soap box. The bank has never hesitated to stick it to their customers when the rules favor the bank. (Have you READ your credit card agreement?)

  • Report this Comment On July 07, 2010, at 4:47 PM, OmegaSD wrote:

    I'll start by disclosing that I work in the credit card industry (don't hate, let's leave that for another time), but I'll restrict my comments to the "strategic default" issue mentioned here.

    Isn't Fannie doing what everyone is angrily crying out for, for those previously responsible to correct previous mistakes going forward? I see it this way because Fannie is targetting strategic defaulters, not the person-fallen-on-hard-times, and saying that the previously lax rules that allowed bad mortgages will be corrected, to be tighter going forward. (After reading the comments, I'd personally vote that those like the guy whose mortgage is now 4X the value could maybe get a pass).

    I read Prof. White's article referenced above, and he tries to make a point about a mortgages being contracts like cell phone contracts, with prices built-in to the contract that the lender supposedly agrees on in advance. This doesn't really make sense with mortgages, or any type of credit, though (this is where the credit card expertise does help). The way pricing of a mortgage or credit card works, the price (or interest rate) is agreed upon based on the statistical likelihood of people that look the same, credit-wise, paying back the money, and the interest rate is meant to counteract the percentage of people that WILL default, mainly due to loss of job or disability or death, what-have-you. This does NOT account for people that simply decide they didn't like what they originally signed up for because it didn't pan out the way they wanted. A mortgage is not an I'll-pay-only-as-long-as-my-house-value-goes-up contract. It is a good that's purchased, and the buyer purchases it with financing because he doesn't have enough to buy it outright. Strategic defaulters aren't returning or refusing to pay because a product is defective. The house is fine, and the mortgage is working exactly how it should.

    I'm all for homeownership, but people that want to strategically default because their "investment" didn't work out aren't the typical homeowner. Sure maybe banks made it easier to get these loans, and marketed aggressively. That doesn't force someone to take a mortgage before their ready. Banks don't exactly deposit the money into your account and sign the papers for you, or hold a gun to your head to make you do so. No, what makes one willingly take a mortgage, in this scenario, is when one starts trying to make his dreams come true with a risky bet. In years past, this bet generally paid off; no so much anymore. Homeownership is not a right, it's a possibilty that needs to be worked for and worked up to. The U.S. consitution itself gives us rights to the PURSUIT of life, liberty, and happiness; it doesn't guarantee a positive outcome.

  • Report this Comment On July 07, 2010, at 4:51 PM, OmegaSD wrote:

    And for those who want to compare companies that walk away vs. homeowners that walk away, as even Prof. White admitted, commercial contracts are much more complicated, and I would bet (I admit, this is a guess) there are monetary penalties that would probably need to be paid.

    As far as companies that declare bankruptcy or reneg on debts, well, someone DOES eat that cost, the shareholders.

  • Report this Comment On July 07, 2010, at 6:31 PM, Chunga85 wrote:

    This is an interesting debate and I hope it continues to flourish and further pollinate information on this topic from which I believe, in large part, this country's financial sclerosis stems.

    I agree with a lot of what OmegaSD and others write.

    I put forth the best approach is to apply the law in a court of equity.

    If a borrower is found guilty in the act of borrowing said borrower should be bound to the consequences of the law.

    If a Lender is found guilty in the act of Lending said Lender should be bound to the consequences of the law.

    Unfortunately, capitalism in my opinion has been perverted by the influence of Wall Street money.

    Lock, stock, and barrel.

    The situation has become so (deliberately) complex I must defer to:

    The Role of Derivatives in the Financial Crisis – Credit Default Swaps and the Economic Meltdown

    Testimony of Michael Greenberger

    Law School Professor

    University of Maryland School of Law

    Financial Crisis Inquiry Commission Hearing

    Dirksen Senate Office Building, Room 538

    Washington DC

    Wednesday, June 30, 2010, 9am EDT




    I have been asked by the Commission to address the following four questions in my testimony:

    * The history of derivatives and derivatives market regulation;

    * The structure of the derivatives market at the start of the financial crisis;

    * How derivatives and derivatives markets functioned during the financial crisis;

    * The role of over the counter (“OTC”) derivatives in the financial crisis, distinguishing, if appropriate, between the role of credit derivatives and other OTC derivatives, and the roles they may have played in amplifying and spreading the crises.

    I deal with these questions immediately below.




    By removing the multi-trillion dollar swaps market from the traditional norms of market regulation, a highly speculative derivative bubble was created that was opaque to federal regulators and market observers alike. By removing all forms of ensuring the normal capital adequacy protections of market regulation, the swaps market permitted trillions of dollars of financial commitments to be made with no assurance that those commitments could be fulfilled beyond the highly illusory AAA ratings of the counterparties in question.

    Had the norms of market regulation been applicable, these swaps transactions would have been adequately capitalized by traditional clearing norms; and the dangers building up in these markets would otherwise have been observable by the transparency and price discipline that accompanies exchange trading.

    While the poorly capitalized underwriting of CDS and naked CDS triggered the meltdown, the crisis was further aggravated by the opaque interconnectedness of large financial institutions emanating from interest rate, currency, foreign exchange and energy swaps.

    Because there was no road map outlining interdependency of those financial transactions, the worst was feared in the wake of the Bear Stearns, Lehman, AIG, and Merrill dysfunctions. Institutions became too big to fail because of these uncharted and feared interdependencies; and the fear that unwinding of these institutions (as proven in the Lehman bankruptcy) would be hampered by the lack of reliable pricing of the instruments in question.

    The darkness of this huge multi-trillion dollar unregulated market not only caused, but substantially aggravated, the financial crisis. And, the American taxpayer funded the bailouts and rescued the economy from Depression. The banks are now stronger than ever. The taxpayer, however, is burdened by high unemployment, job insecurity, depleted pensions, and little access to credit. We are depending on this Commission to identify correctly the malpractices to ensure that a fiasco of this nature never happens again.


    Be sure to read the entire testimony below.

  • Report this Comment On July 08, 2010, at 4:33 PM, busterbuddy wrote:

    Gee ain't they tough. Want to really get mad. Pay attention when you try to refinance. They want your DNA and $17 to discover where you are on the flood plain. Never mind you live on top of Mt Everest or bought Flood Insurance think is water ran into your garage you would be covered. Nope got to pay this $17. And if you don't want to pay and say will I'll just take my appraisal that I payed for to another mortgage company. Nope that ain't going to happen either.

  • Report this Comment On July 08, 2010, at 4:36 PM, wasmick wrote:

    "Read the contract, follow the clauses therein. Get off your moral soap box. The bank has never hesitated to stick it to their customers when the rules favor the bank. (Have you READ your credit card agreement?)"

    The irony of this statement is hilarious. Um, read a mortgage contract like uh......ever?

    Except for the few states that are single action or non-deficiency (and even those have limiting conditions), no mortgage contract states that forfeiting the property is an acceptable remedy.

    By stating that walking away is an acceptable option you are saying that bouncing checks and defaulting on credit cards is also OK. If you think they're different, I submit that either you haven't read a mortgage contract or you don't understand what you're reading.

  • Report this Comment On July 08, 2010, at 6:30 PM, wasmick wrote:

    "If a guy loans you $20K to buy a car, and the car loses value, you still pay him back.

    If a guy loans you $20K to buy a car, and then smashes up your car with a baseball bat, do you still pay him back?

    Didn't think so.

    You fools. (note that's not Fools)"

    You don't know what you're talking about.

    Apparently that doesn't stop you from attempting to make up for it with volume.

  • Report this Comment On July 08, 2010, at 7:48 PM, devans10KK wrote:

    A small bank that I used to bank at had a policy of never lending or doing business with a defaulter until they made good on their debt. A local bar would run a tab, but cut you off if you didn't pay. Seems simple enough. Seven years is too short IMO.

  • Report this Comment On July 09, 2010, at 2:19 AM, CMFTomBooker wrote:

    I do wander to editorials other than Housel and Koppenheffer, but this reminds me why I keep it to a minimum.

    This whole financial charade is like going to a play. One where, in Act II, the theatre company burns down the theatre, then blames it on the audience.. because they bought the tickets. "if you hadn't bought the tickets, then we wouldn't have presented the play, and burned down the theatre."

    The theater company created the idea of the tickets, they checked with their legal department, then they printed the tickets which clearly describes responsibilities of both the theater company and the audience, then they sold the tickets in manners they saw fit.

    Let's look at this in a real world, and not even mis-use our time on behalf of the authoritarian and corporate interests, which is apparently a highly contagious meme spin. Let's go Ayn Rand, rational self-interest on this...

    The authority and responsibility for anything belongs to its creator. Without the lender-created mortgage contract, no transaction would have taken place. Without the lender's money, no transaction would have taken place.

    No matter how badly the borrower wanted the house, it was completely impossible for them to buy a house without the consent, terms, and conditions of the lender.

    Now, in some states there is recourse beyond the collateral identified in the mortgage contract for an affronted lender. In more states there is not. This legal disposition is not hidden away from the lawyers who wrote the contract. It was also not hidden from the lenders who decided to do business in the state. Nobody forced them to do business in a state which denied recourse beyond contracted collateral.

    And what was the collateral (in the simple model)?

    The house. The value of which, the lender agreed. Implicit to that agreement go all the risks of any asset.

    There is another part to this which might seem unfair to the lender. Unless the mortgagee misses payments, the lender can't cancel the mortgage on a whim or profit opportunity.

    This is an artifact from the '30s. Until the creation of Fannie (then Freddie) there was no such thing as a 15 or 30 year mortgage. Mortgages were 5 to 10 years. There was virtually no secondary market to which the lender could sell a mortgage or a securitization of it. So after 5 years, the homedweller had to rollover his mortgage.

    This was fine, unless the lender found a materially better residential opportunity or an arbitrage to a commercial buyer. And then acted on it. His obligation to the ex-mortgagee was only the principal paid, with no adjustment for current "value"..

    Of course, this was frowned upon by other people in the town, and they would certainly try to find another place to do business. But as the US Banking system re-collected itself, there were too many incidences of people with some capital opening a bank, collecting deposits, mortgage lending, arbitraging the house out from underneath the hopeful, then closing and moving on after the big score. You didn't have to be clever or have huge foresight. You only needed to see out 5+yrs and (often) a cooperative effort of plans and spreading ambitions of the company, in a company town.

    Add this to the perception of the practice of usury since Biblical times, and the spirit of opportunity inherent to democracy, and it seemed a good idea to make sure the lender's options were clear, yet limited.

    Should a person or group not like that, they could do something else with their capital, rather than go into the mortgage lending business.

    So the banks/lenders/greater-fools are only entitled to the house. It's real unfortunate that they skrewed themselves, by neglecting to think about people walking away, and believing that houses/property could not devalue. Plus they compounded the situation by lending to unworthy prospects.

    In the old days, before the nihilistic 21st Century, people employed by banks and mortgage companies were under continual review of their lending, by both annoying federal agency inspectors and their bosses' internal auditors. Make more than a couple of bad loans, or generally behave in risky lending, and you got fired.

    Anyone is welcome to plead the poor lenders being forced to accept sub-prime vantagescore borrowers. But it's a tough sell when they have represented (an average of a dozen or so sources who have tried to count) $750B of the current mess. That's a 100% non-recovery figure.

    Let's blow it out of proportion so we can end any and all discussion on those who have been sentenced by the authoritarian mob as the worthless, undeserving cause of all that is. $300 billion and game over. Our kids escape indenturement, and it cost another year and a half of IOUs to the Soc Sec Trust.



    "Predictably, opponents of the move focused on the damage the measure would do for troubled homeowners."(snip)

    I'm sorry, from what data was this "predictably" extracted. Is this a correlation or cause and effect? What was the sample in the controlled empirical.

    Or does the author actually believe that all philosophy and behavior has the central locating point of GSE policy?

    So in summary, all opponents to Fannie Mae's policy will behave in a specific manner. Even though there are an infinite number of behavioral responses.

    Name it. Smear. Ad Homenim. Fallacy to critical thinking. Or just angry prejudice, where the prejudiced lumps all in one?

    Forget it, let's move on...


    "Yet is Fannie Mae really asking so much? From the response, you'd think that homeowners somehow have an inalienable right to any and all opportunities to stay in their homes, whether it requires lower monthly payments, interest rate reductions, or even outright writedowns of mortgage principal."

    This so purposefully twists and contorts the issue as to leave it unintelligible. It's attributing to (all homeowners, I assume, there was no qualification) a thought which may or may not exist. Unless you are in command of the epistemologically impossible ability to read other peoples' minds.

    It is demonization in its most vulgar form and disqualifies the author from presenting cogent objective fact, on which to base editorial opinion.

    Let's try to bring this up a notch or two on the evolutionary scale..

    For whatever reason, people who can afford their mortgage, are refusing to pay and walking away. They tender full collateral, as agreed with the lender. And face full legal recourse, should that be available to the lender.

    If there were intermediary solution attempted, it was not acceptable to one or both parties to the mortgage.

    On the table are two assets.. the cash flow, and the house. And they are no longer equivalent over time.

    The market determines the value of the house and land. It is non-negotiable.

    The cash is the only negotiable item. The mortgagee controls the cash flow. They have 2 choices, either pay it or don't pay it.

    There is one other possibility, but it involves the mutual cooperation to reduce the cash flow.

    The banks, lenders, their shareholders, and generally people who make their living off of banks,/lenders and the markets they impact... resent that individuals will negotiate as tough as they would. It is amusing to watch the incredulous indignation of thugs forced onto a level playing field.

    Everybody agreed to the same contract. The lender even wrote it. But sees no advantage in eating a share of the poison.

    I'm assuming the banks worked their numbers. If they chose not to mitigate the cash flow, then they couldn't possibly be stupid enough to believe the mortgagee would keep paying.

    So if people are walking away, it was the bank's decision. They saw it in their better interest to risk the strategic default. If the mortgagee is completely unreasonable and wants the lender to eat it all, then they had best actually evaluate their potential customers. Lenders used to be very, very good at sorting out the problem people.

    The "toughening" of Fannie Mae is sublime. Where could one go to see more unlimited garbage on a balance sheet than with them. "Unlimited" as of Christmas Eve.

    Which leads us to the real poison pill of the situation.

    WE have to pay for ALL of it. IMHO, (notice how to distinguish between opinion and fact) the public is still bailing out the banks, who won't accept some accountability for the bad deal, and take private loss. And instead of the lender taking (say) half of the loss with the mortgagee, it is apparently smarter for them to pass on the full loss to the public.

    Because, we know for sure, they would deal on it, if they were better $1 for it.

    There is a tremendous buyer's regret, because we were stupid enough and morally couchpotatoed enough to think that TARP and guarantees, and nationalizing F&F were somehow going to end our exposure.

    If we didn't actively stop them then, then we have no room to complain, as WE were creating moral hazard. Congress, Hank Paulson and the White House were, and are, just passing through. we're stuck with the bill for their friends' behavior and future behavior.

    The historically hysterically ironic part of this, is that we have been through this all before, and it worked out like a charm. Because of mostly one major difference.

    In the late '70s and early '80s, OPEC and the boys had made a lot of money. Money with nothing to do, except get deposited in American banks.

    Banks did what they used to do, and looked for somewhere to lend it. Latin America looked sweet, and fierce competition threw lending standards in the trashcan.

    By 1982, it was clear Mexico wasn't going to make good on rolling a heck of a lot of short term debt. This set off a chain reaction and Latin America looked like it was going down, fully loaded with debt payable to US Banks.

    The amounts were huge enough that US banking centers were going to go down because they had crap for reserves.

    Does any of this sound familiar?

    In steps Paul Volcker, who has earned zero love south of the border for his moves on inflation.

    He takes the bankers by the throat because he had been warning the banks about short reserves, but the atmosphere and the laws had given the banks too much wiggle room, including rope with which they could hang themselves.

    A little bit longer and a good portion of the US Financial system is going to go down, with easy inclusion of an enmeshed Western Europe.

    What did he do?

    First thing he did was talk to the FDIC, SEC and other agencies with bank auditing powers. Just like Congress made FASB do.. he told everybody to back off close watch on banks' debt assets in terms of valuing them to market. His guarantee was that he would get disaster out of the way as quickly as possible, and then they could smack the banks as much as they saw fit.

    Volcker then went to the banks. He told them he had bought them some time, and he would supply and guarantee moneys for inter-bank business to keep wheels greased. But here was the difference....

    He threatened to destroy (or let be destroyed) any and all of them if they didn't hustle their behinds down to Latin America and restructure every single debt.

    They went down and did them all, reporting loan by loan back to Volcker and eating big writedowns, but spreading them out.over a few years. It still remains one of the largest cannings of bank officers, with the possible exception of the S&L Fiasco. Latin America would faire worse, because it would take Baker and Burns and almost 10 yrs for LA to get debt in tolerable order.

    The point is,... you put it out there, you clean it up. If it takes pain, too bad. Your shareholders take lumps, it was their risk, that's their problem. If they threaten your boards' lives, well then it comes down on you. where it began. Maybe you'll want to think about what you were considering to do after working in the financial industry.

    Not now. People who should have been fired or gone to jail didn't. We live with that everyday, and the fall-out from it.

    And I'll bet they are laughing real hard, when they hear us cursing each other amongst ourselves, rather than them.

    They even have editors claiming some moral high ground on their behalf.

    After they made sure there isn't any left.

  • Report this Comment On July 09, 2010, at 8:10 AM, Chunga85 wrote:

    TomBooker...great narrative!

    Neil Garfield quoted again:

    "The plain truth is that both the homes and the securities sold to finance the mortgages were inflated through fraudulent means. The resulting fall-out continues to drag median income down and with it, the price of housing. Everyone knows the securities were overvalued, everyone knows they are worth far less than represented, and that the reason is the appraisals of the homes and viability of the loans were simply a lie. The ONLY possible end to this under any scenario, is that the real value is going to be reflected in the market place whether we like it or not.

    That means in simple language that the securities are going to be marked down to their real value and the home loans, which were also securities in this scheme must meet the same fate. It doesn’t matter what people in or out of power want. The cat is out of the bag and nobody is going to pay the premium that sellers and banks are looking for."

    A peek into the Barber Shop window reveals only the bottom of the food chain is getting strapped in for a good "haircut".

    That's where the inequity comes into play.

  • Report this Comment On July 09, 2010, at 9:01 AM, marsconi wrote:

    I think people who default on their mortgages are acting immorally. FM did the right thing.

  • Report this Comment On July 09, 2010, at 10:14 AM, vixter50 wrote:

    When I moved in 2003 from Long Island to North Carolina, the house that I built in NC was extremely modest although with a fixed income of $28000 a year in addition to a good job annually of over $75000, I could have purchased a something really indulgent. My theory was that a mortgage of $145000 was more preferable than one over $350000 (even though I could afford the payments). Then 2008 hit. While I still have my job and my fixed income, if I ever lose my job, I can still afford the payments. This strategy was pounded into my head by my parents years ago. The problem we have here is that not everyone was lucky enough to learn that lesson and we are seeing the results of the "not my problem" generation. Your article is the first that I have seen in years that makes sense to me. The question is...Is anyone listening? Because I'm tired of paying for everyone else's indulgence's in higher taxes and higher national debt. "too big to fail" is more self-indulgence on a national level. Bravo for your words...they are music to my ears

  • Report this Comment On July 09, 2010, at 11:39 AM, stokmeister wrote:

    This is all very impressive and there are good arguments around financial responsibility, but here is a real situation for you to ponder.

    Our daughter owns a condo.

    About 18 months ago, her husband was abusive to her and she kicked him out and divorced him. Good for her.

    She got a roomate and charged her half her mortgage amount to keep up her property.

    Her homeowner's association found out about the roomate and fined her and made the roomate move out because CCRs say only owners and approved renters are permitted to live there. She applied w/ HOA to rent, but the list is long and they refused to let her rent. She could not sustain her mortgage so she called her bank and was advised she should sell as they would foreclose.

    She put her condo up for sale and for a time, paid mortgage out of her savings, and shortly after that she lost her job . The market tanked, of course, and no one in their right mind would pay even the amount of the mortgage much less a price equivelant to when she bought it. The realtor began to work on obtaining short sale offers and he received several offers. The bank refused to consider them and instead is planning to wait until foreclosure occurs; because, according to the realtor, under the bank bailout terms, they can get reimbursed by the government for market value, which is even more than the mortgage . The bank wins.

    This is a Bank of America property in Portland, OR, and B of A refused to work with our daughter to do a deed in lieu of foreclosure or any other favorable terms.

    My point is, there is plenty of "bail out" assistance for banks regardless of circumstances and they end up benefitting from the bail out assistance and making sure homeowners go into foreclosure. SOME homeowners should be held accountable if they are ultimately benefiting because they are manipulating. But if you foreclose, the tax laws also work against you because the "forgiven" amount is considered taxable income.

    Banks have responsibility too. They were greedy; they were lending money to people they shouldn't have because they were incented to do so. Banks now have the option to help people stay in their homes by modifying mortgages. Banks have no incentive to do so because banks profit more from the bailout subsidy than from accepting lesser payments or lower interest rates.

    This are difficult times. Foreclosure cases must be evaluated individually and broad statements condemning foreclosing homeowners are not helpful.

  • Report this Comment On July 09, 2010, at 11:40 AM, mikempp wrote:

    what i don't understand, is why if a lender makes a business decision that is best finacially for them, it's a moral issue, but if the CEO sends jobs overseas, heck i could go on, but if the people with big money do what is best for themselves that is called business?

  • Report this Comment On July 09, 2010, at 11:44 AM, mikempp wrote:

    i guess the writers point is lenders should not be greedy, but it's ok for the banks and big business..............

  • Report this Comment On July 09, 2010, at 12:05 PM, par4lou wrote:

    It's about time! Be responsible. There are enough safeguards to protect those that truly deserve.

  • Report this Comment On July 09, 2010, at 12:09 PM, cooperbry wrote:

    I think it's about time for this type of action also. I think all of the banks should pursue this type of action. Restore personal responsibility to those responsible, a novel idea. If only our government would turn their attention to themselves and end "too big to fail" policies!

    Don't pay any attention to Reuters news service, just look who owns it and you'll understand their slant.

  • Report this Comment On July 09, 2010, at 12:42 PM, carolsmithhsa wrote:

    To add a bit of additional and pertinent information to this discussion, in Canada when you default on a loan the bank has recourse on your other assets. So people there do not play loose with the housing market. Canada is not having a housing crisis nor devaluation as we are seeing here in the US. The fact that we have allowed people to put zero down and to default with no recourse has fueled the problem and now hurt everyone including those who actually PUT money down and paid faithfully as long as they could then ran into job trouble etc. I suggest that the 15-20% downpayment of 20 years ago be reinstituted. No exceptions, no arguments. No more good-intentioned-no-money-down-finance-all-closing-costs-too designs. EVERYONE IS NOT ENTITLED TO BE A HOMEOWNER! RENTING IS NOT SHAMEFUL! By allowing such social engineering policies into our housing financing, we have contaminated the marketplace assets of everyone else and are now hurting responsible buyers who have 'skin in the game' in the process. Stop the madness.

  • Report this Comment On July 09, 2010, at 1:03 PM, SoccerDee wrote:

    The housing situation frustrates the heck out of me! In 2005 we bought a 1200 sq. ft. 2br/2ba condo conversion for $352,000 because it was within our means (didn't want to even try for a big house we couldn't afford). Now just shy of 5 years later all but us and 2 other families in our 24-unit complex have walked, leaving the place full of renters (part of the purchase agreement from the developer was that 70% of the units needed to be owner occupied - that has fallen by the wayside). There are currently 4 empty units on the market for $145,000 (being underwater for over $200k also frustrates me to no end). We can and do pay our mortgage - no intention of stopping.

    I would sincerely love to take advantage of the current super-low prices to buy a home with one more bedroom and a yard for our two children and keep this condo as investment property. Currently though we don't have enough 'extra' saved up for a 20% downpayment and 'cushion' for the times when an investment property is empty waiting for renters so we are coming to grips with the fact that this will most likely be our home - even in retirement - which for me is around 2034. Being on these boards - you realize really quickly what a bummer it is to buy when something is at the 'high' end of the scale. When we bought I never thought the market would crash to such an extent - I thought it would go totally flatline but not drop. Now I've learned to run all scenarios in my brain.

  • Report this Comment On July 09, 2010, at 1:39 PM, jmw631 wrote:

    Common sense, I thought that was a long forgotten commodity. It is about time someone takes the bull by the horns and subdues it.

  • Report this Comment On July 09, 2010, at 1:39 PM, holly66 wrote:

    I agree Dan. All the people who bought houses they KNEW they could not afford should share some of the blame. I don't care how uneducated you are, buying a home based solely on what your real estate agent and mortgage broker tells you is just stupid. There are so many resources out there to help people figure out how much home they can afford. And did they really expect housing prices to go up forever when every expert on TV was talking about a bubble? It's difficult to have sympathy for people who obviously did ZERO research before making the biggest investment of their lives.

  • Report this Comment On July 09, 2010, at 1:58 PM, jtedsmith wrote:

    I realize that from an outsider's view there are only two sides to this. The borrowers that are trying to profit off of this situation and those that are truly in dire straights and can not recover enough to pay their monthly mortgage payment. Although, to those of us that live in the markets that are seeing the biggest down fall, there is a third party. The people that responsibly purchased their home and now live in a situation that their house is half of what they bought it for and have become restricted to either paying down tens or hundreds of thousands of dollars to get out, or living in the home (like it or not) for the next 20 years while they attempt to pay it down month by month. I don't think the outsiders pay any attention to this demographic. I am positive that the government nor the banks are looking out for these people.

  • Report this Comment On July 09, 2010, at 2:17 PM, Kassandrasduplex wrote:

    Let's make life harder and harder for common poor and working class Americans especially those who are "irresponsible" because they defaulted.

    Let's bring back debtor's prisons and let's move into the Third World and Old World realm of GENERATIONAL DEBT!! Yeah!!

    But god forbid we should levy a tax on the bankers who robbed the country blind...and let's make sure hedge fund managers who steal billions pay onyl 16% while cops and firemen pay 25 to 35!

    America, land of the Third World mentality and First World superpower bombs.

  • Report this Comment On July 09, 2010, at 2:20 PM, Kassandrasduplex wrote:

    We are seeing what the gross disparity of wealth in America looks like in real time. Life will get harder for those at the bottom while the scum floating at the top will suck more from them.

  • Report this Comment On July 09, 2010, at 4:00 PM, shbeavers wrote:

    Seems like these arguments for punishing strategic defaulters could easily be applied to corporate defaulters as well. By what code of justice should honor, integrity, and accountability be enforced only on individuals?

  • Report this Comment On July 09, 2010, at 4:30 PM, wnm60 wrote:

    Silly me. I had thought that a mortgage was a secured loan and that the lender had a due dilligence process whereby they determined that the property and the mortgagee were deemed to be of sufficient merit so as to warrant the risk of the loan at some interest rate.

    Isn't that the mortgage lending business?

    The housing bubble burst and caught most banks by surprise - aren't they a lot more sophisticated than most borrowers?

    The homeowners who are walking are leaving their down payments and any repaid loan balance behind. The mortgage company gets the property that was the collateral for the loan.

    I really fail to understand why the borrower should ever be on the hook for any balance when defaulting on a secured loan when the lender has 100% title to the asset until the loan is 100% repaid.

    Home owners are losing their down payments and their homes. That was their part of the shared risk that was the transaction.

    Banks are getting interest and principal payments and the properties. That seems to be more than adequate compensation for the lender's failure to correctly assess the value of the property and the ability of the mortgagee to repay the mortgage.

    Summary judgements are a complete farce. They're a tool, available only to lenders, which enable them to completely absolve themselves of any obligation to perform due dilligence when making loans!

    What on earth are points, fees and hefty markups on interest rates all about if, in the end, the lender has no responsibility whatsoever for assessing their part of the risk in making the loan?

    Why do we have county assessors and professional appraisors involved in the process of qualify home buyers when these people have no liability whatsoever when their assessments prove to be absurd?

    Why does the buck always stop with the consumer and never with the big business that was oh-so-happy to rake in piles of money when times were good but has no reserves in sight when the bubble they created bursts?

    Good grief - you've completely lost the plot on this one.

  • Report this Comment On July 09, 2010, at 4:50 PM, Chunga85 wrote:


    The judicial system is like a battleship.They turn very slowly. As more and more successful legal battles against predatory "lenders" are won in sets legal precedent.

    The guns of justice will eventually take aim at these institutions that are "Too Big to Jail".

  • Report this Comment On July 09, 2010, at 5:06 PM, kedo76 wrote:

    I just read about Bank of America defaulting on a big building in Mesa, AZ. I am sure this doesn't apply to them. They are doing the smart, financially sound thing. Homeowners, though, the evil homeowners, lock them out!! That's a great plan, since they are all rich. This is why Fannie Mae is government owned. Run by morons, and supported by morons (like the author of this article).

  • Report this Comment On July 09, 2010, at 5:10 PM, IIcx wrote:

    As usual the solution to the problem is fairly easy if our government agencies actually work together.

    US Department of Housing and Urban Development (HUD) has offices in each county and or major city in every state. Each of these offices is staffed to offer services like assistance with buying a home, avoiding foreclosure, rental assistance, and, as a Federal Agency, has the same the power as local governments.

    Most of the offices have programs for tenants who are also out of work to help them get on their feet again.

    The primary problem with owners who are allowed to walk away is the additional costs associated with oversight and upkeep of vacant property and the legal costs until the home is resold.

    Fannie and Freddie should coordinate with HUD.

    Home owners who are in default should be required to meet with a local HUD agent and determine the best course of action. HUD can also oversight vacant property and assist with the resale in return for either fees. The properties as owned by Fannie and Freddie can also be licensed to HUD for scattered site housing.

    Fannie and Freddie then can collect the rent from HUD until the property is sold.

    Bottomline, HUD is then doing Fannie and Freddie a favor in return for cost reduced licenses and Fannie and Freddie are able to reduce the oversight of vacant property.

    Since the owner is in default, HUD can also assist with relocation and determination of financial status.

  • Report this Comment On July 09, 2010, at 5:37 PM, IIcx wrote:


    I should have also said you're not out-of-line but didn't take it far enough.

    What I just proposed is a win win for taxpayers and defaulting homeowners and would potentially employ a lot of people for property maintenance etc.

  • Report this Comment On July 09, 2010, at 5:55 PM, desertjedi wrote:

    Some good comments here about the hypocrisy of this article as well as the hypocrisy of blaming homeowners instead of banks and Wall Street. One thing to keep in mind, the vast majority of people who are defaulting are doing so because they can't pay their mortgage - not because of a strategic decision. Of course, all this wouldn't be nearly such a huge problem if mortgage contracts were set up so that the homeowner could not be evicted...coupled with a caveat that one could not simply walk away from a mortgage...coupled with only granting mortgages to people who TRULY qualify. This is how its done in "sane" countries like Canada and Australia...but not in places like the US where greed is the lifeblood and soul of the country. Even with those changes, it would put banks in a world of hurt considering the number of people who currently can't pay their bills in this decimated economy. But, as a country, we would be in a far better situation.

  • Report this Comment On July 09, 2010, at 8:41 PM, homelawyer wrote:

    It will be interesting to see if the banks are really bold enough to spend the time, money, and bad publicity on judicial foreclosures so they can get deficiency judgments. In CA, most homes are under deeds of trusts, not mortgages, so they can't go after people's assests. And the wait to get a fannie loan after foreclosure was already long. Once again, fannie's done too little too late. The banks are profit motivated; humans are guilt motivated...people don't stand a chance in the battle between wall st. & main st.

  • Report this Comment On July 09, 2010, at 11:19 PM, philkek wrote:

    United we stand. Divided we fall. Lots of good writing here by MF and many fools alike. May God and fools have mercy on America before it is too late. Fool on for profits.

  • Report this Comment On July 09, 2010, at 11:45 PM, bucks00 wrote:

    Wow ---lots of good dialog here!

    Until the big money banks clean up their lending practices, this problem won't end. Don't get me worng, I'm not looking for more government. Butr how else do we get these clowns to pay attention?

  • Report this Comment On July 11, 2010, at 4:55 PM, zxdfmlp wrote:

    I'm a victim. Help. They made me borrow money from them. Help. I'm a victim.

  • Report this Comment On July 11, 2010, at 5:00 PM, zxdfmlp wrote:

    Overpriced homes? Buyers and sellers set the price of homes, not the lenders?

  • Report this Comment On July 12, 2010, at 10:38 PM, ObscuredVision wrote:

    Well we have to draw the line somewhere don't we? How convenient that we waited until after the big boys got their bailouts and bonus money. Congress just got a nice raise for encouraging irresponsible borrowing while Fannie and the bankers got to keep their bonuses for doing what Uncle Sam said - So now it's time to draw the line. Justice is not blind. Nobody deserves a break on this but somehow the big boys who don't need it get a break and the little guy who does doesn't.

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