Monday, May 31, 2010

The Foreclosure Freeroll

For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of. 

Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.
“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.” 

Freeroll!  "It's really been a BLESSING!"  Of course, the blessing is that the banks have so many houses to foreclose on, that it takes them even longer than usual to evict delinquent mortgage holders, as we find out later in the article: 

"The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics."

I wonder what happens to this "blessing" when the banks finally get around to these folks... I'm guessing it won't be such a blessing then.

"A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by."

Ok - but again, like most of our other "solutions," this is no solution!

"The couple owe $280,000 on the house, where they live with Ms. Reboyras’s two daughters, their two dogs and a very round pet raccoon named Roxanne. The house is worth less than half that amount — which they say would be their starting point in future negotiations with their lender. 

“If they took the house from us, that’s all they would end up getting for it anyway,” said Ms. Reboyras, 46. 

One reason the house is worth so much less than the debt is because of the real estate crash. But the couple also refinanced at the height of the market, taking out cash to buy a truck they used as a contest prize for their hired animal trappers. 

It was a stupid move by their lender, according to Mr. Pemberton. “They went outside their own guidelines on debt to income,” he said. “And when they did, they put themselves in jeopardy.”"

Now, ignoring the bizarre sentence about taking equity out of their home to buy a truck for a prize for hired animal trappers, this situation reminds me of the old adage:

If you owe the bank $10,000, you have a problem.  If you owe the banks $100,000, the bank has a problem.  

Mr. Pemberton has turned this right back on the banks, and, quite frankly, seems to have them by the balls.  The logic of "Eff you, we're not paying the $280k because, basically, the lender no longer has collateral for a loan of that amount - the house is only worth half of that," puts the banks in a brutal spot to negotiate from.  Obviously, his situation is not unique, and the bigger problem for the banks is that once more people realize this, the effect will multiply and expand.

It's the ultimate financial game of chicken, and the delinquent borrowers may be starting to gain the upper hand.



Anonymous said...

Having been to foreclosure auctions before, I'll simply say: The value of a house, in which the current occupant is keeping a raccoon as a pet, is significantly lower then face value. I wonder how much chicken-wire is being used _inside_ the house.

The worst one I can remember was in N. Conway, NH., back in about 2002, right at the foot of Cathedral Ledge. The town had it valued at about $150k (IIRC), and the house had at least 2 rooms that were once human bed rooms that had since been converted to chicken coops. IIRC, the foreclosure auction that day settled at $35k (about 75% what the vacant lot would have been worth). I did not bid that day, but stayed to watch the $h#% show. Good Times!


Transor Z said...

QE was a mindless - as apposed to mindful - way of addressing a problem anyone could understand. Asset bubble bursts, paper wealth vaporizes. The heart of resolving the crisis should have been simple double-entry bookkeeping: matching assets and liabilities.

But now it occurs to me that the policy choice alternatives presented between QE/mark-to-myth and unwinding into certain global depression was a fallacy of false alternatives. Instead of a thoughtful/planful hybrid QE/unwind for a "soft landing" and "orderly markets" -- but with pain -- we got kick the can QE with conclusory white papers written by the Fed that "prove" that mortgage renegotiations don't work.

Of course, you have to read the fine print in those white papers to understand that "renegotiation" absolutely DOES NOT include principal write-downs.

For example, you can imagine a federal opt-in mortgage bailout program in which Fannie/Freddie bought up loans at a discount in exchange for a federally guaranteed revenue stream to serve as proxy for surrendered loans. Banks take a haircut, the taxpayers are on the hook -- but not to the tune of 100 cents on the dollar.

These kinds of ideas were rejected as too cumbersome or an invitation to more incompetent "Big Government" that would only screw it up. But my point is not to say I've got the ironclad better alternative, but to say look at where we are and where we're going. How can it possibly make sense for banks to not be forced to realize some losses? We all know that is THE major reason for delays in foreclosures -- not "when the banks get around to it." They don't want to, can't, because doing so means realizing a loss and flooding the market with firesale inventory.

So where we are is completely absurd and makes me sick.

Easycure said...

Owe $320K, house is worth $200K, got laid off on Aug. 3, 2009. It was an easy decision to stop making house payments first. Being a vet, I have no money in this house. VA loans are financed 100%. Never be able to get one of those again, though. It's a one time deal. No rent since then, I've saved up enough cash to get to Texas - at least there are jobs down there. How did I get in this position though? Dodd, Frank, Greenspan, Obama...they all can suck mine.

Kid Dynamite said...

transor: "We all know that is THE major reason for delays in foreclosures -- not "when the banks get around to it." They don't want to, can't, because doing so means realizing a loss and flooding the market with firesale inventory."

yes. exactly. it's all a shell game designed to hide the health of the banks.

scharfy said...

Aggressive policy idea:

Offer amnesty and citizenship to any illegal alien or other immigrant/tax evader/ anyone on the planet who buys a house in the united states in the next 12 months.

Owe 50k in back taxes? no problem buy a house.

Want citizenship? no problem buy a house.

Been hiding out in bermuda? no problem buy a house.

Been convicted of war crimes? ok you gotta buy 3 houses.

Doctor from India wanna come to the US? No problem buy a house.

We need to incentivise 5 million immigrants with money to buy houses.

Daniel said...

Hey easycure; can bush, cheny et al suck yours too or is it just Democrats that are responsible for your plight? Oh and I get why you have no pride or reputation to consider given the 100 % financing. Why should you care with zero of your own money involved? Vwry well played sir. Be proud. Nothing in what you described is your fault. It's all someone else's fault.

Anonymous said...

What people don't realize is that it's not really a game of chicken - at some point, all of the banks in recourse states are going to book the loss and sell the claim against the former owner to sweat-shop collection agencies/law firms, who will be more than happy to make people's lives miserable for as long as they can get away with it.

People who do this are banking that the banks won't have the resources to go after the people who walked away from their mortgages. They forget that there is a whole industry (which is growing rapidly) devoted to this very purpose.

Kid Dynamite said...

good point anon - but those loans go for fractions of face value... so if you default, foreclose, and owe the banks $100k, some collection firm probably pays $10k for that loan - or less! (i'd guess - what would you guess?)...

Mark said...

If you borrowed the money, unless a fraud was perpetrated on you, you have a moral obligation to pay it back.

Does anyone know why bankruptcy protection does not cover home loans? What politician got that law passed?

Transor Z said...

Bankruptcy protection is limited around mortgages on a primary residence. The stay still applies during the bankruptcy but after 1993 you can't bifurcate the secured (i.e., collateralized) portion of a mortgage from the "unsecured" portion (i.e., underwater portion) in Chapter 13.

Between 1978 and 1993 you could bifurcate in quite a few jurisdictions, but SCOTUS ended that practice in the Nobelman case. The legislative history doesn't say much on this point but the Supreme Court took the position that Congress drafted section 1322 this way to preserve the flow of capital into the mortgage business.

Anonymous said...

<good point anon - but those loans go for fractions of face value... so if you default, foreclose, and owe the banks $100k, some collection firm probably pays $10k for that loan - or less! (i'd guess - what would you guess?)...?
yeah, that's about right (maybe 20 cents on the dollar if the case looks better) - but the issue for the person walking away is that credit agencies are going to go for the whole enchilada - that's how they make their money.

My prediction is that in 3-5 years, you're going to read a lot of stories about the hardships of these people who are being sued for the full amount of the claim and their wages are being garnished (etc.).

Anonymous said...

Daniel and Mark,

What's with the personal attack on Easycure?

Easycure is doing *exactly* what Corporate America already does. Some deals go bad, and when they do, they break the deal in the least costly manner.

Do you have the same righteous indignation for the individuals in Corporate America doing the same thing? What about the Corporations they represent? How many 'moral obligations' have Real Estate developers walked away from? How many 'moral obligations' have Finance and Banking corporations walked away from?

Easycure's actions are the personification of the Free Market ideology, and yet both of you condemn him. Why do you hate Freedom so much?

Kid Dynamite said...

anon - the problem I have with Easycure's comment is his last sentence. is he blaming others for his problems? because that is unacceptable.

Mark said...


Who is bashing Easycure? I never mentioned his name. I merely said that if you go into the deal with your eyes open, you borrow the money, there is no fraud involved, then you have a moral obligation to pay it back. If we could all void deals when the market turns against us how can business continue?

By the way, as far as corporations go, they should not be able to skip their debts either. I think chapter 11 bankruptcy is a giant fraud. Corporations that reach that point should be dissolved and their assets divided up and given to their creditors.

Anonymous said...


I never mentioned his name.
So, your comment is a non-specific condemnation of all failed borrowers? My criticism still applies. Individuals are doing what businesses have done for at least a generation. Why do you hate Free Market ideology so much?

I merely said that if you go into the deal with your eyes open,

That's an "if" the size of the Big Dig. The vast majority of borrowers do it on faith with only a very rudimentary understanding of their obligations.

If we could all void deals when the market turns against us how can business continue?

And yet it is endemic. Business-to-business monetary obligations (not just debt) evaporate every day. Now that individuals are switching into 'capital conservation mode', it's somehow wrong?

Pontificating from your N.H. homestead about the failures of others makes you look really bad. You exploit easycure's closer when in fact the critical line is "how did I get here?"

Over time, one would hope that easycure learns from an expensive mistake. That last sentence is an example of empathy. Get some.

Kid Dynamite said...

anon - you are way off base. anyone who blames the administration ("Dodd, frank, greenspan") for giving them free money needs to take a deep look inside themselves. NO ONE who received free money was a victim. NO ONE. let's get that straight.

and i believe what Mark was trying to say was this: one may or may not think that we should give 0% down loans to anyone... let's say that because I value the service Veterans give to our country, that I think it makes a lot of sense to try to give something back with 0% down loans. Mark's point, i believe, is that if everyone treats that like a business venture, and walks away with impunity, the 0% loan program that could be so beneficial will die a very quick death.

if mark wasn't trying to say that, well, I still am. If everyone abuses the system, the system doesn't work. so sure - Easycure can walk away - i don't fault him for that - but he can't blame anyone else, and by walking away he's hurting the 0% down loan program for Veterans.

Mark said...


You hit the nail right on the head - they went into the deal with only a rudimentary grasp of their obligations. Now tell me, whose fault is that? The borrower is blameless? No, I do not accept that.

Today EVERYONE is repudiating their debts, from the largest corporation down to my bet welshing bar friends. Epidemic is not a strong enough word. And yes, eventually it will destroy the system.

Anonymous said...

. If everyone abuses the system, the system doesn't work.

My point is economic Systems (business-to-business and governments pretending to regulate businesses) have been worse than abused, they've been sodomized by the most powerful interests in the U.S.

10 years ago, it wasn't sodomy, it was described as the essence of capitalism.

Now that individuals do it (no hiding behind a corporation) it's wrong. NOW it's wrong? Now it's broken? It wasn't 10 years ago? I think not. The time for pontificating and righteous indignation has long since passed.

I agree that blaming political celebrities is wrong. Right now easycure is plenty angry. My hope is it's just one phase of a process where easycure hopefully reflects/learns something.

But Kid, your absolutes "no one" in your reply hangs plenty of blame on an individual, when the reality is there's plenty of blame to go around. Again, it's called empathy. Get some.

Kid Dynamite said...

anon - you can continue with the Victimization of Everyone, and that ensures that nothing ever changes. yes - there is plenty of blame to go around - but lets not kid ourselves that the buck stops with the borrower.

people can walk away from their mortgages and deal with the consequences - but they should own up to their own failures, greed and ignorance instead of continually trying to push the blame onto other parties - as you CONTINUE to do.

were mortgage originators who practiced the loan-to-sell model of reckless lending a massive part of the problem? of course they were. and the ratings agencies totally fucked up, leading to the end buyers of the paper ignorantly buying more paper and prolonging the bubble.

In the end, however, it always comes back to the poor old borrower, who didn't read his loan document, counted on future price appreciation, got greedy, took out equity to buy other stuff, etc etc etc.

go ahead - walk away - but don't blame everyone/anyone else.

We need to return to the Age of Personal Responsibility.

Kid Dynamite said...

further, Anon - in case it's not clear, i don't think you'll ever convince me that anyone who "bought" a house with 0% down is a victim. and i don't think that's because i'm a cold hearted non-empathetic asshole. I think it's because I'm rational and reasonable, and because I believe in taking responsibility for your decisions and actions.