Today I have a guest author who came to share his insights into what happens after mortgage delinqency.
Irvine Home Address … 3 East ALBA Irvine, CA 92620
Resale Home Price …… $610,000
I've never been so poor.
I bought something I can't afford
Most people can relate with a new car
but this is more value by far
Bankruptcy — Antifreeze
Joe Weber is a local bankruptcy attorney, a daily reader of the IHB, and a frequent astute observer. (I won't tell you who he is.) I have gotten to know Joe over the last year, and I asked him to share his perspective with the broader IHB readership.
From Joe's website, www.bkrights.com, “Attorney Joseph A. Weber has represented thousands of people and businesses in bankruptcy. He is a graduate of St. Leo University, the American College of Law, and has been a member of the Orange County Bar Association, The National Association of Chapter 13 Trustees, The National Association of Consumer Bankruptcy Attorneys, and the Orange County Bankruptcy Forum. He is the author of Credit Limits, a book about the proliferation of bankcards.”
Joe sees what happens at the end of the line. When Ponzis implode, most of them end up in Joe's office. He is privy to the gory details of Ponzi debt as he sees it every day in his practice. He has seen the credit bubble inflating and taking over consumers lives for decades now.
Joe Weber's observations on debt, foreclosure, and bankruptcy
When I first saw a person with six figure credit card debt I was shocked. That was in the middle 80s. Now I see it every day. Since the 1960s, non-rich people having large lines of unsecured credit became commonplace. Since the 80s, my law partner and I have filed thousands of Bankruptcy cases. Almost all of them have significant credit card debt, in addition to the traditional medical and store debt. I wrote the book “Credit Limits” in the early 90s about this phenomenon. In the nearly 20 years since then, more people have universal (e.g. Visa, Master Card, Discover) cards than ever before. Kids still in or just out of high school have them, many with credit lines of 5K or more.
After the housing bubble burst and many banks failed, credit tightened up. Of the folks we saw coming in for Bankruptcy consults, many had had their credit limits cut, and the interest rates on their cards sharply raised. Like the housing bubble, this created a “musical-chair” effect: monthly payments increased, but those who regularly took advances to meet installment payments on other accounts couldn’t do that anymore. And those who regularly took 30-40K out of their home “equity” to pay down the credit cards, couldn’t do that anymore as this particular ATM was shut down too. Then, many of those who would work longer hours or take a second job to service their debt found it impossible, as overtime and employment opportunities also dried up.
As 2011 starts I’m seeing more people in debt who are unemployed or grossly underemployed than any time in my career, even compared with the early 90s. I just don’t believe that government statistics accurately give the true picture- almost every day I talk with someone who is not only unemployed or underemployed, but who has just given up looking for work altogether, living back with parents or crashing on a friend’s couch.
As IHB has clearly laid out, people with low income can’t qualify for large mortgages when liar loans and other “alternative financing” aren’t available. I believe that many more people have to become employed or better employed before things go back to normal.
All Bankruptcies concern debt and assets and how they are treated. Natural persons (unlike “paper” entities like corporations and LLCs) get their debts discharged or wiped out in Chapter 7. Natural persons get their debts reorganized in Chapter 13. The two big housing-related issues I’m seeing now are: 1) Junior lien deficiencies during or after foreclosure; and 2) Homeowners behind on their mortgage payments reorganizing mortgage back payments in Chapter 13.
During the Great Housing Bubble, many people bought houses with 80/20 loans. In California, if the house later goes down in foreclosure and the junior lien (2nd mortgage) was never refinanced, then the lender cannot collect money from the former homeowner. If that loan was acquired AFTER the original purchase, (non-purchase money), then whoever signed the note could be liable for any money not realized from the foreclosure sale. These days, what usually happens is the holder of the 1st Deed of Trust forecloses and becomes the owner of the property, the lien of the 2nd TD is extinguished; the holder of the 2nd never gets a dime, then they look to the former homeowner for whatever the balance was. This can be devastating, as the balance could easily be in six figures and most people can’t just write a check for it.
If the person files a Chapter 7 Bankruptcy and receives a Discharge, this obligation is then wiped out. Another strategy Bankruptcy clients employ is to file a case under Chapter 7 and delay foreclosure- once a case is filed a “stay” goes into effect, preventing collection actions including foreclosure. If back mortgage payments aren’t brought up to date and the bank wants to continue with the foreclosure, they have to apply to the Bankruptcy judge for permission to continue, or what is called “Relief from the Automatic Stay.” If the creditor moves at top speed they can get relief in as little as 5-6 weeks. Some mortgage holders/servicers elect to do nothing, and wait for the Chapter 7 case to end, typically 4-5 months after it was first filed. This affords the debtor/homeowner even more time to stay in the property without making payments.
In Chapter 13 Bankruptcy a person can propose a Plan to the court to make up back mortgage payments over time, usually 60 months. And in Chapter 13, junior liens (2nds, 3rds, etc.), if there is no value to secure them, can be stripped off the house, leaving only the 1st mortgage.
(Joe Weber is a Bankruptcy attorney in Costa Mesa. His site is www.bkrights.com)
[end of commentary]
As a follow up question, I asked Joe:
I have believed from the start that foreclosure followed by bankruptcy was going to be the ultimate resolution for those who succumb to mortgage distress. Right now that is shaping up to be millions and millions of bankruptcies. What do you see as the ultimate resolution for those who stop paying their mortgages?
His response was:
Foreclosure. I've seen too many people pay too much for a house they never could afford in the first place. And many of them STILL can't afford that house, even after saving it through Chapter 13 restructuring or non-Bankruptcy loan modification. A large percentage of homes nationwide have negative equity. We've yet to understand, then see the long-range effect of this.
Unfortunately, I see more foreclosures “cleansing” the market and bringing prices back in line to true value.
Thank you, Joe.
The impact we don't see
Many flamboyant spenders during the bubble are quietly contemplating their options. Joe only sees borrowers who have decided to do something about their problem. But many more are in denial, ignoring creditor queries, and hoping the problem will simply go away. Perhaps the lender will forget they were owed money, right?
Usually it isn't until the collection calls get overwhelming that people realize they have to act. With so many bad loans and bigger issues to deal with, following up with collections on old bad debts has not gotten the attention it will over the next several years. Also, since lenders are pretending many non-performing loans will still be paid, they are ignoring the problem too, probably hoping for another government bailout.
In the end, these debtors will be coaxed out of hiding, and they will be forced to work out something with their creditors. For an increasingly large number, the only workout is a bankruptcy.
The trend of increasing bankruptcies will likely continue. Bankruptcy reform in 2005 was supposed to reduce the number of bankruptcies permantenly. As the number of bankruptcies continues to rise, the failure of this legisltation will be apparent.
Gold in shadow inventory
There is a group of delinquent borrowers in shadow inventory that don't concern the bank: squatters with equity. The owner of today's featured property hasn't made a payment in a couple of years.
Recording Date: 10/30/2009
Document Type: Notice of Sale
Recording Date: 07/21/2009
Document Type: Notice of Default
However, the bank is in no hurry to foreclose? Why is that? Well, as long as they property has equity, the bank is merely adding to the principal balance the lost interest, penalties, and every fee they can dream up.
From a banks perspective, shadow inventory can be divided up into two broad categories: 1. those delinquent borrowers with equity where they can recover their capital in foreclosure, and 2. those delinquent borrowers with no equity that will cause a huge loss. The bank has no urgency to foreclose on the first group, the ones with equity, because its actually better than if the loan were performing. Not just are they booking the interest as income, they are also getting fees and penalties.
Banks will not move aggressively to foreclose on squatters with equity because they are a hidden cash cow. The probably watch reports to see if the remaining equity is getting low enough that they may not recover their capital in a foreclosure. When a borrower's equity runs dry is when their foreclosure will be bumped to the front of the queue.
Banks are in no hurry to foreclose on the group with no equity because of the losses it will cause. Basically, the only people the bank feels any urgency to act on are those with marginal equity. These are the delinquent borrowers who consumed their equity with non-payment. As soon as equity is gone, they are a prime target because the bank has extracted all they can, and any further delay costs them money.
Today's featured owners were minor Ponzis. They did consistently add to their mortgage, but it was very small amounts that shouldn't have been a source of financial distress. Unemployment is a likely culprit here.
Irvine Home Address … 3 East ALBA Irvine, CA 92620
Resale Home Price … $610,000
Home Purchase Price … $236,000
Home Purchase Date …. 7/21/97
Net Gain (Loss) ………. $337,400
Percent Change ………. 143.0%
Annual Appreciation … 7.0%
Cost of Ownership
$610,000 ………. Asking Price
$122,000 ………. 20% Down Conventional
4.82% …………… Mortgage Interest Rate
$488,000 ………. 30-Year Mortgage
$123,731 ………. Income Requirement
$2,566 ………. Monthly Mortgage Payment
$529 ………. Property Tax
$150 ………. Special Taxes and Levies (Mello Roos)
$102 ………. Homeowners Insurance
$139 ………. Homeowners Association Fees
$3,486 ………. Monthly Cash Outlays
-$436 ………. Tax Savings (% of Interest and Property Tax)
-$606 ………. Equity Hidden in Payment
$225 ………. Lost Income to Down Payment (net of taxes)
$102 ………. Maintenance and Replacement Reserves
$2,771 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$6,100 ………. Furnishing and Move In @1%
$6,100 ………. Closing Costs @1%
$4,880 ………… Interest Points @1% of Loan
$122,000 ………. Down Payment
$139,080 ………. Total Cash Costs
$42,400 ………… Emergency Cash Reserves
$181,480 ………. Total Savings Needed
Property Details for 3 East ALBA Irvine, CA 92620
Sq. Ft.: 1915
Lot Size: 3,825 Sq. Ft.
Property Type: Residential, Single Family
Style: Two Level, Contemporary
View: Park/Green Belt
Year Built: 1980
Premiere Location on Cul de Sac Street-3 Bedrooms, 2.5 Baths w/ Approx. 1915 S. F. , Wood Floors, Vaulted Ceilings, Sunny Kitchen w/ Newer Appliances, Tile Counters, Wood Floor, Garden Window, Breakfast Nook w/ Pantry, Spacious Family Room w/ Double French Doors & Sidelights Opens to Private Backyard, Built-In Entertainment Unit, Brick Fireplace & Recessed Lights, Formal Living Room & Dining Room, Master w/ Walk-In Closet & Window Shutters, Master Bath w/ Dual Vanity, Tile Floor & Tiled Shower, Private Backyard has Hardscape w/ Brick Accents & Grassy Area, Walk to Tot Lot & Large Grassy Area Behind Home, Walk to Award Winning Schools including Prestigious Northwood High, Enjoy Resort-like Association Amenities w/ Pools, Huge Spa, Tennis Courts, Volleyball Courts, BBQ's & Remodeled Clubhouse, No Mello Roos, Low Tax Rate, Assoc. Dues $83/Month
Thank you for reading the Irvine Housing Blog.
Astutely observing the housing market and combating California Kool-Aid since 2006.
Have a great weekend,