Owners Stop Paying Mortgages and Stop Fretting About It Because Banks Ignore Delinquent Borrowers
New York Times - 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.”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.
This type of modification does not beg for a lender’s permission but is delivered as an ultimatum: Force me out if you can. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads.
“I tried to explain my situation to the lender, but they wouldn’t help,” said Mr. Pemberton’s mother, Wendy Pemberton, herself in foreclosure on a small house a few blocks away from her son’s. She stopped paying her mortgage two years ago after a bout with lung cancer. “They’re all crooks.”Foreclosure procedures have been initiated against 1.7 million of the nation’s households. The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages.
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.
While there are no firm figures on how many households are following the Pemberton-Reboyras path of passive resistance, real estate agents and other experts say the number of overextended borrowers taking the “free rent” approach is on the rise.
There is no question, though, that for some borrowers in default, foreclosure is only a theoretical threat for a long time.
More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier.
In some states, including California and Texas, lenders can pursue foreclosures outside of the courts. With the lender in control, the pace can be brisk. But in Florida, New York and 19 other states, judicial foreclosure is the rule, which slows the process substantially.
In Pinellas and Pasco counties, which include St. Petersburg and the suburbs to the north, there are 34,000 open foreclosure cases, said J. Thomas McGrady, chief judge of the Pinellas-Pasco Circuit. Ten years ago, the average was about 4,000.
“The volume is killing us,” Judge McGrady said.Mr. Pemberton and Ms. Reboyras decided to stop paying because their business, which restores attics that have been invaded by pests, was on the verge of failing. Scrambling to get by, their credit already shot, they had little to lose.
“We could pay the mortgage company way more than the house is worth and starve to death,” said Mr. Pemberton, 43. “Or we could pay ourselves so our business could sustain us and people who work for us over a long period of time. It may sound very horrible, but it comes down to a self-preservation thing.”They used the $1,837 a month that they were not paying their lender to publicize A Plus Restorations, first with print ads, then local television. Word apparently got around, because the business is recovering.
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.”His mother, Wendy Pemberton, who has been cutting hair at the same barber shop for 30 years, has been in default since spring 2008. Mrs. Pemberton, 68, refinanced several times during the boom but says she benefited only once, when she got enough money for a new roof. The other times, she said, unscrupulous salesmen promised her lower rates but simply charged her high fees.
Even without the burden of paying $938 a month for her decaying house, Mrs. Pemberton is having a tough time. Most of her customers are senior citizens who pay only $8 for a cut, and they are spacing out their visits.
“The longer I’m in foreclosure, the better,” she said.In Florida, the average property spends 518 days in foreclosure, second only to New York’s 561 days. Defense attorneys stress they can keep this number high.
Both generations of Pembertons have hired a local lawyer, Mark P. Stopa. He sends out letters — 1,700 in a recent week — to Floridians who have had a foreclosure suit filed against them by a lender.
Even if you have “no defenses,” the form letter says, “you may be able to keep living in your home for weeks, months or even years without paying your mortgage.”About 10 new clients a week sign up, according to Mr. Stopa, who says he now has 350 clients in foreclosure, each of whom pays $1,500 a year for a maximum of six hours of attorney time.
“I just do as much as needs to be done to force the bank to prove its case,” Mr. Stopa said.Many mortgages were sold by the original lender, a circumstance that homeowners’ lawyers try to exploit by asking them to prove they own the loan. In Mrs. Pemberton’s case, Mr. Stopa filed a motion to dismiss on March 17, 2009, and the case has not moved since then. He filed a similar motion in her son’s case last December.
From the lenders’ standpoint, people who stay in their homes without paying the mortgage or actively trying to work out some other solution, like selling it, are “milking the process,” said Kyle Lundstedt, managing director of Lender Processing Service’s analytics group. LPS provides technology, services and data to the mortgage industry.
These “free riders” are “the unintended and unfortunate consequence” of lenders struggling to work out a solution, Mr. Lundstedt said.
“These people are playing a dangerous game. There are processes in many states to go after folks who have substantial assets postforeclosure.”But for borrowers like Jim Tsiogas, the benefits of not paying now outweigh any worries about the future.
“I stopped paying in August 2008,” said Mr. Tsiogas, who is in foreclosure on his house and two rental properties. “I told the lady at the bank, ‘I can’t afford $2,500. I can only afford $1,300.’ ”Mr. Tsiogas, who lives on the coast south of St. Petersburg, blames his lenders for being unwilling to help when the crash began and his properties needed shoring up.
Their attitude seems to have changed since he went into foreclosure. Now their letters say things like “we’re willing to work with you.” But Mr. Tsiogas feels little urge to respond.
“I need another year,” he said, “and I’m going to be pretty comfortable.”
CNBC - Some encouraging signs on the foreclosure front may not be as rosy as some are reporting.
RealtyTrac, the online foreclosure sale site, shows a 9 percent dip in the number of properties with foreclosure filings in April, month-to-month.
The driver of that dip is a big drop in new notices of default.
The final stage of foreclosure, that is bank repossessions (REO) shot up to a new record high, up 45 percent from a year ago.
When I first read the report I thought, okay, we knew there was a big pipeline of loans that would not get modified and would have to come out the end at some point; now is that point. The fact that fewer loans are going into the pipeline should be our focus, and that's a positive. That's what I thought until I interviewed RealtyTrac's Rick Sharga.
"People are sitting in their houses not paying their mortgages, and the banks are letting those delinquencies extend longer and longer periods of time before they put them in foreclosure," Sharga told me.That, he adds, is the main reason we're seeing lower numbers of new defaults.
The borrowers are in default, but the banks aren't paying attention, so they don't show up in the numbers.
He goes on:
"The fact that we have six to six and a half million loans that are either seriously delinquent or in foreclosure also suggests we are not nearly out of the woods. If we just started to absorb that inventory at the pace we're currently seeing new foreclosure proceedings we have about a 50 to 55 month supply of loans that yet have yet to be processed, so we have a way to go before we are out of the mess."I know you're all going to tell me that Sharga works for a company that makes its money selling foreclosures, so he's going to play the bear side.
Take it for what it's worth.
But Sharga makes a compelling point when it comes to redefaults on loan modifications.
A lot of folks are either falling out of the trial modification period or not qualifying in the first place, and those loans are moving quickly to bank repossession.
California-based mortgage analyst Mark Hanson adds perspective with a look at "cancelled foreclosures."
These are not tracked by RealtyTrac, but they "bite right out of Notices of Default and foreclosures, so to get a real idea of how 'credit' is doing, you have to add a certain percentage back."
That's because Hanson believes the redefault rate on these modifications will be at the very least 50 percent 6-19 months out.
Herald Tribune - ... No one can fully explain why it remains such a difficult task to complete one short sale -- the process by which a lender agrees to accept less than is owed on a home -- while another sails through. The only certainty as to why lenders do what they do: their bottom line.
Sometimes short sales bring more cash than foreclosures, and vice-versa. Which one it is depends on a host of factors, not the least of which is whether a lender has an agreement with the Federal Deposit Insurance Corp. for reimbursement of most losses on a bad loan like those sold short.
Multiple liens on a house and fat home-equity lines of credit that must be dealt with first are easy explanations for why a short sale languishes. Another is that lenders -- historically only handling a few cases each year -- are now overwhelmed with hundreds or more in a month, a logjam that builds upon itself.
Then there are the complexities of the post-boom world: loans that have been bundled with hundreds of others, then securitized and sold to an investor, and scores of Florida banks on the verge of insolvency that do not want to account for losses on a short sale.
Even with those hurdles, there are short sales that can take 90 days or less from offer to consummation.
Simply put, the decision an individual lender or investor group makes -- even if that is not to make a decision -- is laden with a convoluted mix of what-ifs, if-thens, no-ways and sure things ...
In the worst straits are those borrowers, usually through sub-prime loans, who have had their mortgage wrapped into an investment pool like those held by Citigroup and Bank of America, Ross said.
About 25 percent of boom-time mortgages are contained in such securities. Few of those securities have even basic guidelines for short sales, he said.
"They got into some pretty crazy financial gymnastics," Ross said. "If your loan is in one of those groups it could be very challenging to get a short sale approved."The process of bundling notes and selling them to investors as a security was a boom-time staple, said Irv DeGraw, a banking professor at St. Petersburg College. AIG, Citigroup, Lehman Bros. and others backed, or insured, these so-called "credit-default swaps." When the housing market began tanking in 2006 and foreclosures began piling up, pay-outs to the investors skyrocketed.
Eventually the federal government stepped in with the multibillion-dollar bailout that shook America's consciousness.
"It was an absolutely maniacal problem," DeGraw said. "Nobody understood exactly what we were dealing with and then it exploded. Those taking the risk did not understand the amount of risk they were exposed to."In a counter-intuitive move, many investment groups preferred a complete collapse of the security rather than agreeing to short sales.
"When the mortgages start to get into trouble an insurance policy kicks in and they are made whole," DeGraw said. "If they grant a short sale they are not made whole. It's one of these bizarre nightmare scenarios where people got too sophisticated."Thomas Budzyn, past president of the Mortgage Bankers Association of Southwest Florida, acknowledged the nightmare scenario that banks are facing with these bad loans.
"You are going to see more banks go out of business this year than in the last ten years combined," Budzyn said, noting that dozens of banks nationwide have failed so far this year.In the midst of that crisis, it is somewhat understandable that getting a short sale done is often difficult.
"Some of the short sale offers I have seen, for example, are on a loan of $400,000, and the offer comes in at $125,000," Budzyn said. "Some of the banks would rather wait until a more reasonable offer comes in rather than take that much of a hit upfront."Many are loath to approve a short sale because they stand on perilous footing -- one in four by the count of Ken Thomas, a Miami-based expert on Florida banking with a doctorate in economics.
"The banks in Florida are having a very difficult time because they make loans on real estate and we are ground zero for the collapse," Thomas said. "Instead of being hit by a Category 5 hurricane we've been hit with a Category 5 mortgage crisis."Some banks are urging federal regulators not to come in and force them to admit all of their problem loans, he said.
"Most banks are trying to buy time. It is called the 'delay and pray strategy,'" Thomas said. "You delay valuating the house at market and pray the value will come back. If you mark it down for short sale and do that deal you have to take a hit to your capital."Others employ what Thomas calls the "extend and pretend" strategy to keep regulators from noticing a delinquent mortgage, whether that be lengthening the term, lowering the interest rate or allowing a distressed homeowner to skip a few payments.
"Banks will say there is nothing wrong with that because we have one on the books for a million dollars and the market will come back in a year, so why we should we hurt our shareholders," Thomas said.Banks are hoarding assets to avoid the fate that Thomas described, said Matt Augustyniak of Bradenton's Horizon Realty, Horizon Title and Horizon Financial.
"They have to show as much assets as possible to balance the books," Augustyniak said. "That is why these banks are dragging their feet on short sales."When Bank A takes over failed Banks B's assets, usually laden with risky mortgages, the FDIC often agrees to a "loss-share" agreement to minimize the acquiring bank's risk. The agreements cover anywhere from 80 percent to 95 percent of any losses on the bad loan portfolio.
In some cases, that prods lenders to agree to a short sale, especially if they can make more with the FDIC cash than the banks would if the house fell into foreclosure.
But the opposite can be true as well, with the lender actually making more from a foreclosure if the loan has a private mortgage insurance payout and can be resold at a good price.
The Committee for a Responsible Federal Budget, a Washington, D.C.-based think-tank, reports that the FDIC has taken over 203 failed banks since 2008, many with a loss-share agreement. Total deposits so far this year equaled $18 billion. In 2008, it was $389 billion, and at an estimated cost to the FDIC of $64.4 billion.
Seventy-eight percent of the existing loss-share agreements have no deductible, so the FDIC starts paying banks for their losses immediately.
For single-family mortgages, the loss-share agreement stays in effect for 10 years and covers losses when the loan is modified, foreclosed upon, when a second mortgage is charged off, or when the property is sold short.
"It has helped us sell a considerable amount of assets that we normally would have had to keep," said FDIC spokesman David Barr. "We audit the loss-share agreements to look that they are modifying the loans in a timely manner and not just opting for foreclosure or short sale. They have to choose the option that makes the most economic sense to the FDIC."Despite the efforts of the Obama administration to speed and streamline the short-sale process, experts say banks do whatever will provide the best outcome for their bottom lines.
Charryl Youman, a sales agents with Prudential Florida Realty in Venice, has seen that firsthand.
What the banks are often doing by scuttling a short sale seems -- at first -- to make no sense, Youman said.
She had a buyer put in three offers over the course of 240 days on a two-bedroom, two-bath home selling short for $82,000. The buyer gave up.
"I never did hear from the bank," Youman said. "I did, however, hear from the foreclosure listing agent to take off my lockbox because the bank now owned the property. They sold it for $48,000."But it turns out the lender may have played the game very well, she said.
The bank received mostly interest payments for three years before the buyer defaulted. It also received the payout from the private mortgage insurer, which was about $50,000, and then the proceeds of the foreclosure sale.
"The bank walked away with $98,000 -- and the three years of mortgage payments," Youman said. "The bank is not really losing much and sometimes can actually make money on these deals -- and so they can have little incentive to take a short sale offer."