Strategic Foreclosure

[DRIVEWAY]

Strategic Foreclosure is a new twist in the arena of underwater home values.

Let's say you brought your home 5 years ago. You have a 30 year mortgage of $145,000. You paid $180,000 for the house and are current on all mortgage payments, have a stable income source, credit is good and the same house as yours across the street just sold in foreclosure for $75,000. There are several houses in the area under foreclosure.

The strategic foreclosure goes something like this. Utilizing your good credit and worthy income you purchase a house, just like yours, across the street for $75,000. You move into the new house. You rent your first home. You apply all of the rent to your new house's mortgage. You do not pay the mortgage on the first house and wait for then bank to foreclose.

The result is that you have a similar house in the same neighborhood with a smaller mortgage and equity in the property.

This strategy could create chaos.

[delayjf]

Could not the banks come after you and lien your other property?

[Relwob Owner]

People started doing this a few years ago and banks caught onto it, calling it "buying and bailing"......now, in order to buy a second home while keeping your first one, most banks make you have 30 percent equity of the current value in your initial home in order to get a loan on the second one.....thus, if you wait for the bank to foreclose, you then lose that 30 percent equity.

Now, if you had the cash, you could do it but as the previous poster stated, depending on the deficiency laws in the state, they could come after your second home purchase after foreclosing on your first.

[Saratoga_Mike]

Upper-income households much more likely to default in this manner...

http://www.nytimes.com/imagepages/2010/07/09/business/09rich_graphic.html?ref=economy

[DRIVEWAY]

People started doing this a few years ago and banks caught onto it, calling it "buying and bailing"......now, in order to buy a second home while keeping your first one, most banks make you have 30 percent equity of the current value in your initial home in order to get a loan on the second one.....thus, if you wait for the bank to foreclose, you then lose that 30 percent equity.

Now, if you had the cash, you could do it but as the previous poster stated, depending on the deficiency laws in the state, they could come after your second home purchase after foreclosing on your first.

The second home becomes your primary residence. The state laws are all over the map concerning this. Many banks have sold the initial loans and they are now equities. Some mortgage companies are still active in these areas.

The state, I've heard this manuever happening in, is Florida.

It sounds like fraud to me but others are touting it's benefits.

[Relwob Owner]

The second home becomes your primary residence. The state laws are all over the map concerning this. Many banks have sold the initial loans and they are now equities. Some mortgage companies are still active in these areas.

The state, I've heard this manuever happening in, is Florida.

It sounds like fraud to me but others are touting it's benefits.


What has happened to the initial loan and whether they have been sold is of little consequence in your example.......every bank that I know of now helping people buy homes make them have 30 percent equity in the initial home, making what you are talking about impossible.....maybe some banks are still not requiring it but most have caught on.....


The move now among underwater homeowners is to use a Short Sale even when there isn't a hardship.....it essentially starts a game of chicken with the banks, who have to make a decision on whether to let the owners short sell or incur the expense of foreclosing.

Many refer to it as a "business decision"....what is debatable is whether this business decision to walk away screws the neighbors and hurts the economy as a whole.

[Saratoga_Mike]

.

Many refer to it as a "business decision"....what is debatable is whether this business decision to walk away screws the neighbors and hurts the economy as a whole.

So if the homeowners had done really well, I wonder if they would have shared the upside appreciation with the lender? It seems like strategic defaulters thought buying a home was a sure thing.

If people did as much research on buying a home as they did buying a new flat-screen TV, we wouldn't be in this mess. Of course lenders are just as guilty with their lax lending standards pre-2007.

[Relwob Owner]

So if the homeowners had done really well, I wonder if they would have shared the upside appreciation with the lender? It seems like strategic defaulters thought buying a home was a sure thing.

If people did as much research on buying a home as they did buying a new flat-screen TV, we wouldn't be in this mess. Of course lenders are just as guilty with their lax lending standards pre-2007.

Spot on......you didn't see people who bought in 2002 and sold in 2005 giving back their huge earnings or having any grievances with the banks......

I think the next 3 to 5 years will see a huge amount of
short sales, as well as foreclosures and until these get flushed out, I don't see much improving with the overall housing market.

[chickenhead]

read an interesting book regarding mortage underwriting during this phase, called Chain of Blame.

The Investment banks were far more involved in the entire process than I assumed, they essentially owned the entire channel from soup to nuts. Several of them (Bear Stearns etc) actually owned their own subprime originators, others just provided the credit for 3rd party originators to make the loans.

Credit is provided, Mortgage is made:

Investment Bank >>warehouse loan to non-bank lender >> broker >> consumer

no one involved will hold the loan, brokers paid very high fees, volume is primary metric. Loan quality simply does not matter.

and then mortage is sold back up the exact same chain:

broker >> non-bank lender >> I.B. that provided warehouse loan >> Institutional Investor

Essentially the investment banks created a new strategy that allowed them to take over 20% of the mortgage market in just a few years, taking a cut out of every step in the transaction. A completely new phenomenon.

As long as Institutional Investors are buying, the music keeps playing, bubble keeps inflating, Investment banks making huge profits. Institutional Investors eventually get their fill of these higher yielding bonds, crappy mortgages pile up on investment bank books, credit gets cut, prices begin to decline, investment banks quickly go insolvent, institutional investor lose their ass, housing undergoes massive declines bankrupting everyone involved in any kind of mortgage origination during the period.

[delayjf]

no one involved will hold the loan, brokers paid very high fees, volume is primary metric. Loan quality simply does not matter.

Not sure I understand, going back up the chain after the loan - the investment bank knows they are getting bad loans that they initiated. Are they only concerned with their commissions to the tune of they don't care what happens to the investment bank?

[Saratoga_Mike]

Not sure I understand, going back up the chain after the loan - the investment bank knows they are getting bad loans that they initiated. Are they only concerned with their commissions to the tune of they don't care what happens to the investment bank?

The loans were typically securitized*, so they had no, or little, vested interest in what happened to the loans once they were packaged up and sold off.

*Simplistically, take 20 loans from each state in the country with FICO scores between 650 and 700, bundled them up (they're securitized) and sell them off. It's much more complex than this, but that's basically how it works.

[chickenhead]

yeah, basically since they were selling them all off, it didn't matter. They just got caught out as the bubble burst with the remainder of this crap stuck on their books.

But then the question is, why did institutional investors buy these crap mortgages?

A.) Ratings Agencies: Gave these bonds ratings higher than they should have had, they basically performed very scant due diligence using bad models. The investors, who should have been savvier, put way too much trust in the ratings agencies doing their jobs.

B.) Insurance: The investor buying the bond could buy insurance against it defaulting. Which would have been ok, except the companies selling the insurance on these bonds didn't have nearly enough capital to cover what they should have paid out when the bonds all declined much further than they expected. Again poor due diligence, short term payoff, bad models.

C.) Low Interest Rates: After 9-11 when rates were to cut to extremely low levels, that not only causes consumers to borrow more, it means capital looks for something other than treasuries to invest in, they need to get more return. So this created a huge pool of money looking for something riskier to invest in.

[Relwob Owner]

read an interesting book regarding mortage underwriting during this phase, called Chain of Blame.

The Investment banks were far more involved in the entire process than I assumed, they essentially owned the entire channel from soup to nuts. Several of them (Bear Stearns etc) actually owned their own subprime originators, others just provided the credit for 3rd party originators to make the loans.

Credit is provided, Mortgage is made:

Investment Bank >>warehouse loan to non-bank lender >> broker >> consumer

no one involved will hold the loan, brokers paid very high fees, volume is primary metric. Loan quality simply does not matter.

and then mortage is sold back up the exact same chain:

broker >> non-bank lender >> I.B. that provided warehouse loan >> Institutional Investor

Essentially the investment banks created a new strategy that allowed them to take over 20% of the mortgage market in just a few years, taking a cut out of every step in the transaction. A completely new phenomenon.

As long as Institutional Investors are buying, the music keeps playing, bubble keeps inflating, Investment banks making huge profits. Institutional Investors eventually get their fill of these higher yielding bonds, crappy mortgages pile up on investment bank books, credit gets cut, prices begin to decline, investment banks quickly go insolvent, institutional investor lose their ass, housing undergoes massive declines bankrupting everyone involved in any kind of mortgage origination during the period.



CH,


Thanks for the book reco....I am going to check it out.

[teddy]

I owned some mortgage brokerages during the good times..hand full of checks and you get a mortgage... or just tell us your income! Its fine..... no money down needed...

Sales people left the closing with 20k all the time on 150k houses.

[Saratoga_Mike]

I should have mentioned Financial Regulatory Reform (Dodd-Frank) attempts to address the securitization issue by requiring the entity securitizing the paper to retain a small piece in the future.