Facing Foreclosure? Buy A Second Home! Wait, What?

ABCNews says that more and more people who are facing foreclosure are just buying cheaper homes and then just walking away from their original mortgage. It only works for people who can afford the down payment on a new home and carry both mortgages until they’re in the new home, but for some people whose payments are about to balloon, it’s the most attractive option out there right now.

From ABCNews:

Eble owes $334,000 on his first house, which is now worth only $219,000 and is still dropping in value. He has an adjustable rate mortgage that has doubled to more than $4,000 a month, more than Eble can afford to pay.

So before the bank forecloses on his first house he is taking advantage of falling real estate prices to buy a new home for $285,000, with a fixed rate mortgage he can afford. Once inside the new home, he can either sell the first property for a huge loss to the bank or walk away completely and let it slip into foreclosure.

This exit strategy only helps homeowners who can afford the down payment on the second home as well as carry both mortgages until they are in their new home.

Like Jim Eble, homeowner Kim Hinske just bought a new home — for $280,000 — as a way to get out of an expensive mortgage.

“Yes, it’s a scary thing, but I know that my family’s taken care of ’cause we have another house, a bigger house and a mortgage that’s less,” Hinske said.

ABCNews says that the practice is prompting lenders to improse more strict guidelines for approving a second mortgage. A spokesperson from RealtyTrac, the firm that compiles foreclosure statistics, says that the trend is caused by desperation on the part of both borrowers and lenders.

“Desperate people do desperate things and again, we’re at a point now where the relationships between the borrowers and lenders really seem to have devolved into a survival of the fittest mode,” said Rich Sharga, a spokesman for RealtyTrac, an online marketplace for homes in foreclosure.

In Foreclosure? Buy a Second Home [ABCNews]
(Photo: stirwise )

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  1. stavs says:

    Great. Now it will be just be harder for normal hard working people to move into another house.

    • Crymson_77 says:

      @stavs: Hit it on the head in one. I feel VERY lucky to have been smart enough to use an FHA loan through Wells Fargo when we bought our home. Now we are just trying to ride it out so that we can eventually buy a better home without taking a huge loss on this one.

    • Well-Dressed Geek says:

      @stavs: Hopefully not. Fortunately this phenomenon requires the prospective borrower to have an existing mortgage and tell lenders that they are obtaining a second residence/mortgage. I should think it would be a different matter entirely if you were to obtain a loan for your next primary residence. I see banks clamping down on second-home loans as A Good Thing(tm).

  2. kittenfoo says:

    I’m speechless. Makes me feel like a sucker for scaling back my lifestyle to cope with the economic downturn.

  3. SkokieGuy says:

    I call shenanigans. This cannot be a widespread practice.

    First, when you buy a home, you have to indicate if it will be your primary residence. You can’t have two mortgages on two separate primary residences.

    Second, the non-primary residence is considered and income property and is normally a higher interest rate, reducing affordability.

    Third, banks look at total debt to income ratios. If the borrower’s income is high enough to justify payments on both homes, then there are more than financially sound enough to pay the first mortgage.

    Fourth, if their credit and debt load is good enough, why don’t they simply convert the mortgage to a fixed and honor their commitment.

    Frankly, anyone who tries to do this should be tried with fraud. This isn’t poor desperate homeowner facing being homeless.

    • HIV 2 Elway says:

      @SkokieGuy: I agree with most of your points except #3.
      It pay be less that they can’t afford their first mortgage and more they don’t want to make payments on a $334k loan when the property is only valued at $219k.
      Still, I have a hard time believing this is common.

    • Brontide says:

      @SkokieGuy: How is this fraud, it’s good business sense. Buy a new, reduced price, home and sell your old one. Unfortunately the bank is on the hook when the secured asset doesn’t cover the remaining principal.

      Kinda sounds like what F&F, can’t deal with paying your debt, don’t worry, the govt will pick up the tab.

    • balthisar says:

      @SkokieGuy: Sure you can have multiple primary residences for mortgage purposes. The only thing that matters is the purpose of the loan at inception. How the heck do you think people move from house to house on non-contigent bases? When I bought my current house (no contigencies to sweeten the offer), of *course* the new mortgage was for a primary residence. The old mortgage was already 6 years old, and had dutily served its purpose.

      I have adequate credit and was approved for carrying both mortages, and it made buying a second house incredibly easy. If I had to do it again today, I’d hate to think that all of these irresponsible creeps are making banks change their consideration policies, which affects *me* personally. I see all the heartache that’s a result of offers with these types of contingencies, and I feel sorry for the people that are forced to accept them, and creeps like this are just making it harder for us.

    • @SkokieGuy: “First, when you buy a home, you have to indicate if it will be your primary residence. You can’t have two mortgages on two separate primary residences.”

      Sure you can — you go home shopping with your home on the market, buy a new house and get a mortgage on the new one, move, and end up stuck with your old mortgage for months and months while your original house lingers on the market.

    • Fuzz says:

      @SkokieGuy:

      First: The banks clearly haven’t been doing there jobs, which is why this whole mess got started in the first place. Therefore, your sound logic does not apply.

      That is all.

    • lightaugust says:

      @SkokieGuy: Fair enough, but also on #4, if the house is upside down, no way to convert to a fixed rate.

  4. coan_net says:

    At least he is smart enough to get a fixed rate this time.

    I know for myself the house I purchased about 2 years ago, I could afford my payment at that time.

    And guess what – I got a fixed rate and I can still afford the payment.

    I’m just wondering if all these people who got an adjustable rate just thought their payments would never go up or something.

  5. mugsywwiii says:

    [i]Desperate people do desperate things[/i]

    I wouldn’t call them desperate, I would call them opportunistic and willing to game the system in a way that screws the rest of us.

  6. winstonthorne says:

    So wait, he has enough money to pay for closing costs and a new down payment, but not his monthly mortgage bill? I concur with the earlier proclamation of shenanigans.

    • narf says:

      @winstonthorne: No, they can afford the current mortgage, but choose not to.

      Having this done with one individual isn’t always so easy, mainly because of the DTI ratio, but if the current property is only in one person’s name, the spouse could readily be the primary on the new property + a co-borrower to qualify.

      One guy at my dad’s work is doing just that … he’s figured 6 months of not paying the current mortgage + savings = down payment for a new house down the street that’s priced 40% lower than what he owes on the current one.

      Really screws it up for everyone else, of course.

    • JohnDeere says:

      @winstonthorne: its not that he cant pay it. its just that he doesnt want to be $100k upside down.

  7. ideagirl says:

    This is what killed the real estate market in Phoenix in the 80s during the S&L melt down. People could buy a near identical house next door to theirs for half of what they were paying on the existing home, so they would buy home #2, then walk away from home #1. It drove housing prices into the ground.

  8. billbillbillbill says:

    Wait, doesn’t the bank come after you for the difference! It is just delaying the hurt (not to mention the crappy credit that will come with it)

    • laserjobs says:

      @billbillbillbill: Most first money mortages are non-recourse. People who re-fied or have HELOCs will no have the same opportunity.

      • cf27 says:

        @laserjobs: California is one of a small number of states where an original first mortgage is non-recourse. In most states, mortgages are generally full-recourse.

        Even in those other states, though, it may make sense, since the borrower now does not have the risk of losing his home. The debt secured by his primary residence now just turns into unsecured debt. As long as the borrower doesn’t have a bunch of “consumer” debt, he’s going to end up in pretty good shape in bankruptcy.

    • mugsywwiii says:

      @billbillbillbill:
      If the mortgage on the first house is non-recourse, the only thing the bank can take is the house that secures the loan.

  9. sir_eccles says:

    Why doesn’t he just buy his own house from himself? Then he would only have the one mortgage to pay plus he would get the proceeds from the sale!

    Yeah, logic like that cannot fail!

  10. timmus says:

    What? How in the hell is someone going to get a mortgage on a second property when the bank can easily find out that you’re in financial trouble (the reason you’d be doing this to begin with?) I don’t think it’s 2002 anymore where the bank will just look at collateral and rubber stamp the loan.

    • laserjobs says:

      @timmus: This is pre-meditated, no financial trouble would be reported as yet. See this is mostly with adjutable rate mortgages where the payment is going to adjust in a few months time. The homeowner buys an affordable second home with their good credit and then stops mortgage payments on the first home that is worth less than the morgage. Not many will be able to qualify to do this and it really has to be pre-planned before any issed payments on the first house. Financially it could be a very good financial decision.

      • timmus says:

        @laserjobs: This is pre-meditated, no financial trouble would be reported as yet.

        Ah, ok, gotcha. Yeah, I can see how that would work… though I don’t think anyone realistically “plans” for financial trouble. Usually it just happens.

    • castlecraver says:

      @timmus: Bingo. If the lenders are stupid enough to still give someone a loan considering they already have a mortgage and clearly can’t afford both, they deserve to get screwed. This is just further evidence that the ridiculously low lending standards precipitated this whole mess.

  11. muckpond says:

    sorry. i disagree with the bulk of the sentiment here. i know “we” are the ones getting screwed in the end, but the more i hear about how we got into this mess in the first place, and the more golden parachutes i see jumping from banks, the less pity i feel.

    banks and mortgage lenders were playing the system WAY before people like this guy. what’s good for the goose is good for the gander.

  12. That-Dude says:

    Remember, its a business decision. There is nothing personal about it, and its not a moral failure.

    This practice may make perfect business sense. If you can get an identical home for half the cost, and plan to hold onto said house for an extended period of time, its a rational decision.

    – Business Never Personal

  13. Brontide says:

    Remember that the new mortgage lender doesn’t care about the old mortgage lender… it’s all business.

  14. rpm773 says:

    I read about this somewhere a few months ago. It was fascinating. From a business standpoint it makes great sense if one can pull it off.

    However, I think we’re all learning that we’re all on the hook for the mortgage crisis, whether it was our fault or not. And I think anything that causes the problem to spin uncontrollably in a new direction should be curtailed somehow. It’s irresponsible actions that got us here in the first place.

  15. SoCalGNX says:

    this is getting more common place. case in point – someone i know bought a house for $650k a couple of years ago. they supposedly tried to sell it and couldn’t. it never showed for sale in the local multiple listings, realtor.com, trulia, zillow or redfin. they bought another house nearby (a foreclosure itself) and a very expensive vehicle. they have dumped the first house. the reason they state is that the husband “wants to retire” in a few years. nice!!!

  16. crabbyman6 says:

    To all those that have already and those that will say “its a business decision, there’s no morality involved”, I hope you remember this quote from a Citibank executive: “Stealing from our customers is a business decision, not a legal decision.” and are also OK with that.

    [consumerist.com]

    • JohnDeere says:

      @crabbyman6: stealing is different. the bank agreed to take my house if i default. i didnt agree that they could steal to me.

    • Orv says:

      @crabbyman6: To all those that have already and those that will say “its a business decision, there’s no morality involved”, I hope you remember this quote from a Citibank executive: “Stealing from our customers is a business decision, not a legal decision.” and are also OK with that.

      You’ve hit upon the real issue here, which is that the social contract between borrowers and lenders has broken down. Banks long ago stopped feeling they had any duty to give homeowners a fair shake and now just see them as cash cows ripe for the slaughter. Is it any surprise that homeowners are now reacting the same way towards the banks?

      It’s a bit like the situation in the employment market. It used to be you cared about the company you worked for, because you knew as long as you pulled your weight you’d always have a job there. You took care of them and they took care of you. Then came the ’80s and slews of layoffs and benefit cuts. People realized their employer would cut them loose without a second thought, so they ceased to care about what happened to the company.

      @cozynite: I’m sorry but it’s because of people like these that will prohibit me from ever being able to afford to buy a house.

      Actually, I doubt it. These kinds of maneuvers will only drive prices down because of the foreclosures that result. You should be more worried about the government’s attempts to prop up prices at an artificial level through bailouts. If you’re waiting to buy a house right now, you want the market to fall far and fast in the next couple of years so that housing prices come back in line with wages.

      • Erwos says:

        @Orv: You’re forgetting that more foreclosures will result in higher interest rates and tighter lending standards. If they get too tight, they’re going to start hitting folks they shouldn’t – an over-correction to the lending standards problems.

      • Tiber says:

        I personally find the practice a bit immoral. I mean, sure, the decision makes fiscal sense for the person doing it, but isn’t thinking only of your immediate financial benefit what lead the industry to blow up the housing bubble until it burst? The person doing it may benefit, but they’re also dragging the housing market down further, and further depreciating assets that honest people have been working hard to get.

        That said, the banks, for their part, are far from innocent. Businesses have always had the upper hand in contracts, and have used and/or abused that privilege extensively. Orv had a great point about how businesses have sacrificed their relationship with customers/employees in the name of profits. These companies could have asked for higher collateral for instance.

        The banks could also take a more proactive approach, rather than sitting back and watching it happen. For instance, a banker may not be happy with lowering the loan amount on the homeowner’s current house, but when the alternative is repossessing the house, and paying taxes on it until it finally sells at a possibly lower value, the option looks a lot more attractive in comparison. That, or they could compromise with the homeowner, and offer them an attractive loan (with stipulations) on the new house, in exchange for paying the property taxes (not the mortgage) until the house can be sold.

  17. johnnya2 says:

    Why shouldn’t the be able to take the write down for the value of their property in much the same way companies that go bankrupt do.The asset isn’t worth as much anymore, so move on from it. They “reorganize” and still make boatloads of money. The bank that decided to lend them the first mortgage took a risk and it backfired, the second company is taking a risk as well. The house you are living in will get paid first. There is such a small part of the population that this will apply to that its hardly newsworthy. If you want to look at fraud look at the original appraisal that said the house was worth an exagerated amount so the mortgage company could have huge fees and commissions.

    • mugsywwiii says:

      @johnnya2: If the person can’t afford to pay, fine. That does not seem to be the case with someone who is able to get approved for a loan on a second house at a time when lenders are being more strict. You wouldn’t be able to get approved for the second loan if you’re unable to pay for both houses at the same time, so it stands to reason that the first house is affordable.

      I’m shocked at the number of people who call this a “business decision” with no moral implications on a website that holds businesses to such high standards. It’s interesting how the story changes when the shoe is on the other foot. It’s a business decision when a customer screws a bank, but it’s pure, unadulterated evil when a bank screws their customer.

  18. snoop-blog says:

    From what I just learned today in business class, there is no right or wrong answer to this, but two clearly divided sides that are both justified in their reasoning. It just depends on what you feel is more important to you.

    • Erwos says:

      @snoop-blog: Really? My business class covered basic ethics last semester. Maybe you’ve got to get to graduate school for that.

      • snoop-blog says:

        @Erwos: Yup, weez jus cuntree bumpkin redneks round heer. Maybe one day I can go to fancy shmancy grad skoo and be just as smug as you! but till den, we jis gonna have a hoot-n-nannie of a good o’ time!

        Really though, I don’t care what you learned, apparently they need to teach you some mannors, cause we see how well of a job you parents did.

  19. Darkkeyboard says:

    Just found out about this site a couple of months ago, and LOVE IT.

    It seems to me, that it would be more work trying to secure a second mortgage in this day and age, than it would be to negotiate payments with the bank on the first one. Now, I don’t have a house, or a mortgage, but in terms of good business sense, the bank wants to make some money back. And if you let it be known that you can’t pay it, really, they might be more pliable about renegotiating.

  20. cozynite says:

    I’m sorry but it’s because of people like these that will prohibit me from ever being able to afford to buy a house. I’m sure that the majority of those people are also waiting for the gov to help them, because they didn’t do the research on buying a house themselves.

    Sorry for the rant.

    • KyleOrton says:

      @cozynite: Take heart, friend. This actually helps you. This drops housing prices as the old property goes through foreclosure and provides current comps in areas with little sales activity.

      Also, hopefully this will result in real lending standards so you don’t have to compete in the market against droves of people making less but willing to spend more than they can afford.

  21. chuckv says:

    Isn’t buying something with someone else’s money and then not paying them back “theft?”

    • EdnaLegume says:

      @chuckv: No because the house is the collateral. The bank lends you the money, and if you don’t pay, the house is theirs. Too bad for the bank when the value of the house is less than the balance due. That’s when you call them up and say “nah nah boo boo, you should have negotiated the loan for me”.

      The only reason I’d be wary of this is the whack on the credit report. I see this scenario: you fart out of your original mortgage, Bank Of America sees this and jacks your credit card rate up to like %400.

      Oh yeah, you better believe any knuckle head that signed up for an ARM loan and didn’t plan ahead is carrying a balance with BOA. And for now, BOA can jack your rate for any reason they want.

      on t’other hand… you’ve already got your new house, with a nice shiny lower and fixed rate. If you already have a decent car, you may not have need of good credit.. except for maybe getting a job, buying an iPhone… getting auto insurance…. etc.

  22. allstarecho says:

    I will say it’s been nice for home buyers right now, what with all the cheaply priced homes on the market now. I just bought a 3 bedroom, 2 full bath 1100 square feet fannie mae foreclosure home for $55,000 cash. No, 1100 sq. ft. isn’t huge but when it’s just me and the hubby, it’s plenty. Knocked the kitchen wall into a half wall with a bar, painted, new flooring and I’m in it for a total of $65,000 cash. A home, paid for.

  23. lightaugust says:

    Wait a second… the foreclosures are going to happen regardless of whether or not they get a second house, since it’s happening in the storm of their mortgages readjusting and property values dropping like a rock. The second house here is irrelevant to the moral/ social contract aspect, unless you just think that they should never get a house as some sort of punishment. Why is it so damn bad for the unstable buyers to get some stability, if, like this article claims, these buyers are buying houses (something we desperately need people to be doing) and doing it on sensible fixed rates that they can afford?

    Point being, the damage is done. Doing this, actual real life families and people end up with a home and the market moves a tiny bit, and in the process, stabilizes, so…

    • mugsywwiii says:

      @lightaugust: These are walk-away foreclosures, where the borrower is able to make the monthly payment but decides that it is more advantageous for them to stop paying and let the bank take the house back. I don’t think they should be punished by never being able to buy another house, I think they should pay for the one they already bought.

  24. LatherRinseRepeat says:

    Ha! I guess “exit strategy” is a nicer way to say “scam the system”. Here’s an LA Times article that’s a little more blatant..

    [latimesblogs.latimes.com]

    “They pulled about $300k in equity (based on inflated appraisals) out of their California home. They spent the proceeds on vacations and new cars and a new house in Texas. They then walked away from the California home. … They basically got a free house and a couple nice cars in exchange for a bad credit score for a while.”

    • cf27 says:

      @LatherRinseRepeat: Aahh… But, they didn’t. In California, a mortgage used to buy a house is “non-recourse” — the bank can’t go after you for anything other than the house. BUT, if you take out a HELOC or refinance your mortgage, the HELOC and replacement mortgage are both full-recourse. If they pulled out $300K in equity, the bank that lent them that money is going to go after them.

      If the California banks choose not to go after them, that’s their business. Heck, it may be that they agreed with the lender that the new loan would be non-recourse. If so, the lender got what it deserved — the loan documents described EXACTLY what everybody’s rights and responsibilities were. It’s just plain silly for the lender to complain, after the fact, about a situation they could have easily protected themselves against, ESPECIALLY when the loan documents were written by the lender.

  25. msbask says:

    I know someone who took out a car loan, then defaulted on the loan with about $15k left to pay. The bank repossessed the car, sold it for $12k, then send him a bill for the difference, which he was legaly obligated to pay.

    Does it not work the same way with mortgages?

    • Orv says:

      @msbask: It varies from state to state. Some states have “no recourse” mortgages where the bank can’t go after you for the difference. Most, however, are “full recourse” where they can.

      Note that if the bank does forgive part of your mortgage the IRS considers that income and will expect you to pay taxes on it.

  26. grapedog says:

    sorry, houses and land are severely over-priced right now, by ridiculous amounts….I’m glad things like this are happening. The banks got greedy, and now they are paying the price…to a very limited and not harsh enough degree.

  27. latemodel says:

    Doesnt PMI cover the banks on all these foreclosures?

  28. u1itn0w2day says:

    The ‘bailer’ admits that loosing/restoring his credit will be the toughest thing.

    Now when he goes before a bankruptcy judge/court he will honest enough to say I bought the 2nd home cause I knew I wouldn’t be able to afford the first one???
    What will this guy actually say when the authorities ask WHAT THE HECK were you thinking?

    And I’m still confused,why the heck did he buy a home in a still DECLINING market for more than his old house is currently worth?-Can’t afford a 334K mortgage,your current true ‘bailout value’ is only 219K and you buy a 285k house?

    I don’t think the bankruptcy court might be as understanding or lenient as he thinks.They might even consider him a flipper wanna be.

    I believe the story or scnerio but the planned outcome or consequences I’m still questioning.

    • mac-phisto says:

      @u1itn0w2day: having been to bankruptcy court (to represent a lender’s stake in a claim) – they really don’t care what your story is. they plug all you income into the left side of the ledger, all the money you owe into the right side, map an ascii likeness of william rehnquist on a ti-81 graphing calculator, wave their magic wand & POOF! either you’re footloose & fancy free or you just flushed $3000 down the toilet on a crappy attorney.
      =========
      @Orv: excellent comparison. a wise man once said, “you reap what you sow.”

      • u1itn0w2day says:

        @mac-phisto:didn’t realize it was that cut and dry.

        In some respects that’s good:I guess bankrupt is bankrupt.On the other the hand the poor slop who is desperately trying to pay their bills and not just ‘desperate’ gets screwed.

        I know people who got lectured by a judge and were told under no circumstances was he ever to apply for or use a credit card again for basically over extending their credit-no forclosures or reposseded cars.

  29. Doesn’t a move like this totally torpedo your FICO score?

    I would think it would.

  30. snoop-blog says:

    This is nothing new to the car industry. I sell cars to people everyday who have a nicer car that they pulled up in getting ready to go back to the bank. They want to make sure they get a replacement car before the get a charge off reported on their bureau.

  31. ordendelfai says:

    The industry and deregulating government created this mess by allowing anyone to get a loan. This outcome was inevitable and the people responsible new it way in advance. I’m not going to personally suffer for a decade or more for their greedy screwups. And no, I do not hold the mass public even a little responsible. Buying a home is the american dream for almost everyone; if you give people an unrealistic means to do so and bombard them with advertisements and “must by now” talk people will do it. No it’s not smart of the people to listen blindly either, but thats how the general public works and organizations know how to take advantage of it.

    My property lost about $210k (from an original 640k loan) since Sept 06. Riding out a loss like that would take 10-15 years just to get back to original *value*. When I bought I was promised by everyone involved I could refi from an interest only loan after only a year to a lower rate and do int+Princ. When I tried, every lender turned down a refi because the loan was upside down. After six months of trying, I had NO qualms of leaving the house. The banks have no problem screwing all of us so I shed no tears for their plight. Given it’s a secured non-recourse loan, why wouldn’t I walk? I bought a cheaper place that was bigger and nicer and short-saled my original house at $430k (which was smarter than a foreclosure for my credit rebuild). The lending rules made it hard to buy that 2nd house but it was doable in the end. I know two other people doing the same thing.

    All moralistic and ethical debates aside, it makes financial sense to do it – period. The market is correcting itself to actual wages and almost everyone who bought in late 2005 to early 2007 is in the same situation. Bailing is the only logical thing to do for them.

    Now people who pulled out their phantom equity they perceived they had in those same years and spent it on beemers, benzes, and plasmas, well, for them, they are screwed and rightfully so.

    • mugsywwiii says:

      @ordendelfai: I don’t absolve the banks for their screw-up, but your lack of personal responsibility disgusts me. People like you are only making the problem worse.

      • ordendelfai says:

        @mugsywwiii: I take my responsibility very seriously.

        Seriously though, trying to pay $4200 a month in interest only for years to come and not being able to do anything about it because my lender is not willing to negotiate a loan mod or refinance to a lower rate with int+princ is the losing proposition. I never missed a payment and had good credit yet the lender did not care to work with me unless I moved out and shorted – which I did.

        For my family and future, this was the responsible thing to do. My wife even insisted when I brought up the moral issues of reneging on the loan. We are both very educated and after looking at the pros and cons knew this was the right course of action for us as it will be for many other people in the years I specified.

        My recommendation to everyone wanting to do this is to always try a short sale first as you have nothing to lose and it doesn’t cost you a dime nor does it affect your credit as a foreclosure does if your successful. It’s also better for your community since you will maintain the house to sell and it’s better for the bank because it will be off their books faster in most cases.

        • sketchy says:

          @ordendelfai: Your mistakes were:

          Buying in a grossly inflated market.
          Counting on a refi to afford a home you can’t.

          No amount of fuzzy ethics will undo the fact that you (and the OP, and all the other priavteers) made miserable business decisions which you are now trying to justify to everyone, including yourselves.

  32. TMurphy says:

    While this isn’t an honest practice, I think in the wake of the mortgage industry’s horrible practices, he kinda deserves this to get back at them. Heck, if his options are foreclose and no longer be qualified for a mortgage, or this, I think his decision is less of a burden on the economy.

  33. queenofdenial says:

    My cousin did something similar. He and his wife bought a row house in a twin cities suburb, identical to everyone else in the subdivision. She decided to have kids and stay home so they could not afford the ARM. No one wanted to buy, so my aunt and uncle purchased a home for them and they walked away from the old house. I don’t think it was right but I have a hard time feeling bad for the bank.

  34. XTC46 says:

    If the person can be eligible for a second loan for an entire house, why couldn’t they just refinance their first? Or take the second, use it to make a balloon on their first, and then carry both while it is paid off.

    I have a hard time this is as wide spread as they make it sound.

    • ordendelfai says:

      @xtc46: Because how can you refi when your upside down on the loan? I tried, 3 lenders, no dice. It’s probably not very common, but my close friend and a work acquintence are doing the same thing so it’s not that uncommon.

      @sketchy: Mistakes…hmm. Well true on number one, but I was a first time home buyer and was told by numerous experts that the market wasn’t grossly inflated and I had to buy now. I had to get a bigger place than I was renting due to an addition to the family. We make good money and wanted to own a home we could make our own – unfortunately all this happened at the wrong time. My story is similar/same to many many others who bought 2006.

      For the people who bought more then they could handle, I feel for their situations equally. They were convinced into believing that arms are great because they can afford something now and refi it later when they make more money (since everyones wages increase right??) When people are offered the ability to own a home on a silver platter, people will (as millions did) take the risk. It was the so called industry and govt experts who are supposed to prevent this situation from happening by controlling risky lending – which they didn’t. Want a shocker? I was approved at age 27 for a 640k loan, 1st time buyer, stated income, by myself. That shouldn’t ever of happened.

      Number 2 isn’t true, I could afford it – and still could (thats the point of this article right?). I was advised interest only for now was the way to go since payment would be lower and values were just going up, might as well save the money cause I would have equity later as I was told over and over. I was naive and know better now, but at the time, I didn’t know better. Sure, I feel misled now, but every source I read and talked to agreed the purchase was solid. I finally refuse dto throw money down the toilet for years to come and not bring my principle down on a loan 200k upside down.

      I have no need to justify anything to myself, it has worked out just fine. The bank didn’t have to foreclose, the old property was well maintained. We have a nice home at a true fair market value, a regular mortgage with a reasonable rate, and a much brighter future. My credit will be fine in 2 or so years.

      I recommend the same solution to anyone else who was screwed by all this.

  35. LassLisa says:

    It’s not just the homeowner who made a ‘bad business decision’ by buying in an overinflated market. It was the bank that did the same: they gave out a loan for vastly more than the value of the collateral. At the time, the market seemed to indicate that the house was worth X, and the bank took a certain gamble.

  36. Powerlurker says:

    I for one find it amusing that after years of exhorting homeowner to view their homes and an investment that they are now getting surprised when that’s exactly what people start doing. When you give non-recourse loans to people who have little to no down payment, and thus no “skin in the game” why would you be surprised when they find themselves upside-down and willingly default on a declining asset. Count me in with the crowd that sees no moral or ethical issues regarding this. The mortgage contract is fulfilled under one of two conditions: Option A where you make your payments and keep your house or Option B where you don’t make your payments and the bank gets the house back. Unfortunately for the banks, they didn’t structure their mortgages appropriately and thus increasing numbers of people started choosing Option B, sucks to be them.

  37. econobiker says:

    A spokesperson from RealtyTrac, the firm that compiles foreclosure statistics, says that the trend is caused by desperation on the part of both borrowers and lenders. “Desperate people do desperate things and again, we’re at a point now where the relationships between the borrowers and lenders really seem to have devolved into a survival of the fittest mode,” said Rich Sharga, a spokesman for RealtyTrac, an online marketplace for homes in foreclosure.

    If more lenders were actually desperate you would think they would let people work out the loans versus making it so hard to even contact someone… These banks et al need to pay the piper now for the loose lending they did…

  38. u1itn0w2day says:

    The more I think about this guy and article the more this burns me up.This guy is talking about “his new” home like it’s an entitlement.Since when are we entitled to OWN a house.They call it the American DREAM for a reason.

    And the guy talks about how his family will be taken care of in “his” new house.If you were that worried about taking care of your family what the heck were you doing using an exotic mortgage for YOUR family when you could have rented.

    He exploited the rules of ‘the game’ just as the banks exploited the rules.What’s the difference here?

  39. Danimal08 says:

    Not only is this highly immoral but i’m certain it has very intense legal rammifications as well. Firstly, if the borrower misrepresents what they are doing with their current property (i.e. rent it out, 2nd home, etc) and they they turn around and short sale it or let it go into foreclosure, they can be held accountable for the balance to that mortgage. In other words if the borrower is telling the new lender they are making their current home a rental/2nd home and then the do a shortsale or foreclosure they are deemed to be fraudulent per the terms and conditions of their new contract.

    Secondly, if realtors are soliciting this type of business they can also be held accountable for their actions. I have heared realtors say that what the borrower does with their current home is none of their business, but their due diligence agreement with the borrower/homeowner says otherwise. The bottom line here is that the realtor and borrower/homeowner can then be held accountable. This is fradulent, no matter what why you look at it.

    How do I know? I am in Loss Mitigation and have taken both realtors and borrowers/homeowners to court over this issue and have won on all accounts. On top of this, I ensure that the realtor is reported to the Dept of Realtors, for their actions, per their state/states they cover.

    • ordendelfai says:

      @Danimal08:

      Sorry, I’m a little skeptical with what you are saying. Loss Mitigation for what lender? The original home or the new home?

      I’m assuming the lender for the original home. So lets say the owner defaults on the original home and you as the lender find they bought another home. So what – the contract for the original home has explicit default terms. You can foreclose the property, and if a non-recourse you can’t go after the owner. There is no fraud, unless the borrower misrepresents to the new lender for the new house.

      I’m curious how you could ever prove what the borrowers intention really was to the new lender though. If they said they were going to rent or use the original house as a 2nd, and then changed their mind later (or just couldn’t rent it), you can’t prove they were lying at the time they represented their intentions when buying the new house.

  40. u1itn0w2day says:

    Great,now everyone’s ‘intent’ will be questioned on a normal transaction.I hate to say it but even I’m against having your intentions question or revealed.

    This guy irks me but I guess bankruptcy should be more cut n dry unless you want to make it something else.

  41. Danimal08 says:

    ordendelfai

    I hear and understand your skepticism. However, you have not taken into account many things that I have had upheld in a court of law.

    First, it’s quite easy to see the intent on a borrower who is doing this type of transaction. They are “buying down” for one. In other words they are buying a property for less than their primary residence which is very odd. People don’t usually have a “rental or second home” that is more expensive than their primary home. Also, in this type of transaction they usually buy quite close to the home they are going to be foreclosed upon or completing a short sale on. On top of that it is up to the loan professional to complete their due diligence to ensure the borrower is acting in good faith. The easy question is “What are you doing with your current residence”. This often ends the deal right there because the borrower has to concocked a lie on the spot. The realtor is also bound by their contract and license to disclose all that is going on with the real property within the transaction which includes what is happening with the current residence the borrower owns. Are they going to be party to a fraudulent rental agreement? If they they’re smart they won’t and they will walk away from such transaction.

    Second, when foreclosing on a home, a lender has every right to go after the “deficiency” balance left over. In other words they have every right and all lending notes are written with recourse in mortgage transactions. When you leave the lender high and dry they will come after you, today, tomorrow, or in the future. There are many lenders “waiting in the weeds” and will strike when the time is right. Nothing is truely free, and lenders are beginning to act on behalf of their investors.

    And for the lender I’m associated with, let’s just say it’s one of the top 2 lenders and services in the US. I have done this type of job for more than 18 years and you might want to read up on the laws in the arena before you act in this manner, or better better yet , don’t get involved in it at all in deceptive lending/borrowing.

  42. ordendelfai says:

    Ok, I supposed if the borrower made some stupid obvious mistakes something could be implied. But if done correctly, I can’t see anything being proven.

    As to going after the borrower, I have a non-recourse loan.

  43. Danimal08 says:

    ordenfai,

    It can can be easily proven and if you want to lie in a court of law and then we wait until your transaction is complete and then we show what you did to the courts (priving you lied). That’s called perjury and you can be prosecuted in a criminal court for that. I bet you told your lender you are going to rent out your current home when you have no intention to do so. You are the problem and you are fradulent, and I hope you get caught.

    As to your non-recourse loan. You may want to read a little deeper as the Deed and Note stand by themselves and if the note doesn’t have recourse, the deed certainly does.

    Either way you look at it, you are defrauding the system and should be taken to task for it. What you are proposing is immoral. Just because you bought a home at a stupid time, the lender should not have to pay for your mistake, and they likely won’t. It’s just business, nothing personal, like you eluded to in your earlier comments. You know who you should be going after are the people who told you to buy at a stupid time. Oh, on second thought, you know it all so you are making the decision and going to drag your current realtor with you.

    By the way, if your lender does take a loss of any kind, do you realize who pays for it? The people who are honest and paying their bills without question to the value of their home. You are a crook and I wish you the best in your scheme.

  44. ordendelfai says:

    No renting story. I did a Short Sale, which had to get approved by the lender. Oh, and I was smart enough to only buy the house in my name, as everyone should if two borrowers are not needed. So my spouse was clear to buy her own. Though for arguments sake, if someone(s) did say renting and later foreclosed, that doesn’t prove fraud or perjury, it proves the borrower didn’t rent it after all. You make it seem that all is black and white with the point of this article, but it’s anything but.

    I had my lawyer review my contract before I took the loan and again during the short sale, the lender has no recourse.

    As to crooks, I would say that is the lenders – sorry. I work in underwriting for another industry and know that we live and breathe based on the risk we take on, and we absolutely know when we take on too much risk (seldom) and so did you guys. The mortgage industry is getting bailed out by us taxpayers for their greed and risky business mistakes. How’s that for fair and honest?

    People trying to get out of the situation caused by the lenders by buying a new home is hardly fraudulent or wrong in my opinion. Your opinion obviously represents the career and industry you are in. I’m speaking from the other side as an individual caught in the fallout of this whole mess. To each his own eh?

  45. Danimal08 says:

    Ahh, I see, you made a poor decision about buying and the lender is the crook for helping you to buy. I hear ya. I hope you get found out and that you are taken to court. See the “smart enough” thing that you speak of is the real problem here. You are unethical and immoral in your choices. Yep, you just let the American people pay for your mistake with the charge off. The lender was not the crook, they just helped you finance you dream, and now you’re screwing them and the American for your crooked scheme. I wish you were in my portfolio so I could get involved. Like they say, “What comes around goes around” or in another quip “loose lips sink ships”. By the way you resemble both of the above remarks.

  46. Danimal08 says:

    ordendelai:

    Nobody hurt me physically or in a business way directly, however, by your decision to defraud the lender and the American people is immorral, unjustified (i.e. YOU made a poor decision, not the lender), and it’s a potentially criminal practice you are partaking in. Do yourself a favor, stop being part of the problem and be part of the solution for a change. It’s people like you that have caused the credit crunch, and it will effect the rest of us as banks fail and credit become more and more unattainable. You have no RIGHT to own a home, it’s a priviledge. You come to a blog like this brag about your decision, seemly looking for comfort and back up, and now that you receive little you play the holier than thou hand? I hope you, and your realtor are taken to task by the former lender and you are able to lie in a court of law for all to hear. You will have your day in court and playing this type of immorral game will eventually catch up to you. “What comes around, goes around.” You are a weak man, and your previous statements only back up that sentiment. You have no sense of right and wrong.

    Did lenders get overly zealous with lending to people they shouldn’t have? Yes they did! However, if they didn’t you would have had to put down at least 20% of your purchase price on your last home, and I have an idea that wouldn’t have been possible. Your family is taking advantage of the system and you are expecting the rest of us to pick up the slack? You need counseling and a adjustment of your attitude. People like you hurt us all! And, the scary thing is you came here to brag about it!

  47. Danimal08 says:

    Nope, sorry I get it…you are a small small person and we The American people are sad that you are amonst us. I got a place that will tolerate your type, prison! I hope you and your realtor get busted and that you are happy that you have defrauded the American people. Maybe I should use the technology available to me to find you and have your name and scam exposed…Heh, now I got your attention.

  48. jackiejr says:

    Here is a rant for you. Some Background – last year I earned 150k, I have no equity in my home even though I put down 56k in cash, my credit score is poor due to errors I can’t fix, my credit cards have interest rates that went from 7% to 27% even though I always paid. Last year I paid AMT – the alternative minimum tax. I don’t get the child tax credit either. I paid 600 dollars last year in bank fees when my bank decided to group transactions in such a way as to clear the largest items first, so if you move money to a different account yet have a 2 dollar coffee paid last, they get a 35 dollar fee. The bank I use does not link my savings to overdraft anymore, rather, they now provide a revolving credit overdraft protection which I didn’t want because it is just another credit card. Besides, I have a savings account with them!
    We can speak of moral obligations all we wish, but if I have learned one thing it is that you need to take care of yourself first. If you are underwater on a home that has lost 30-40% of its value, and can get a new home that is comparable and priced right – why wouldn’t you? You would be saving your family hundreds of thousands of dollars. It is a smart business decision. All of the large corporations have made record profits for the last 8 years, while the individual has been blatantly abused. Whether it is gas prices, ridiculous salaries for executives, banks and credit card companies charging excessive fees and lastly, a bankruptcy law that made it harder for people to file, make no mistake that corporations deserve to be screwed back. Think about the fact that a corporation can do whatever they want and if they slip up, they can file bankruptcy easily, get billions of dollars in bailout money, give out 4billion in bonuses like Merrill did, but the individual has no recourse. The reiliance on the FICO system is another example of this. Why should this number carry so much weight in our society? They did not rely on a computer score in the 50’s, or other decades. Has anyone ever tried to change their FICO score if something was amiss? Good luck to you. Once again, the creditors can report whatever they want, but the consumer must fight to correct even the simplest items. Employers, cell phone companies, CAR INSURANCE???? carriers and any company with 75 bucks can buy my credit report, and make a judgement on me regarding it. Have wages increased at all for most people? No. Should Exxon mobil make 60 Billion dollars in one quarter while most people can’t find affordable day care, or get braces for their kids? I hope every major bank continues to take losses. The sad thing is, they will just get a bailout and overpay the wrong people anyway. This is exactly what 8 years of policies favoring businesses has done. Walk away from that bad mortgage – They are so swamped they will never come after you.