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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Comments:
@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.
I'm speechless. Makes me feel like a sucker for scaling back my lifestyle to cope with the economic downturn.
@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).
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.
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.
[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.
@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.
@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.
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.
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.
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)
@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.
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!
@billbillbillbill: Most first money mortages are non-recourse. People who re-fied or have HELOCs will no have the same opportunity.
@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.
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.
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.
@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.
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.
@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: 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.
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
Remember that the new mortgage lender doesn't care about the old mortgage lender... it's all business.
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.
@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.
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!!!
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.
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.
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.
@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.
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.
@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.
@crabbyman6: stealing is different. the bank agreed to take my house if i default. i didnt agree that they could steal to me.
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.
@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.
@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.
Isn't buying something with someone else's money and then not paying them back "theft?"
@snoop-blog: Really? My business class covered basic ethics last semester. Maybe you've got to get to graduate school for that.
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.
@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.
@SkokieGuy: Fair enough, but also on #4, if the house is upside down, no way to convert to a fixed rate.
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...
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..
"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."
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?
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.
Great. Now it will be just be harder for normal hard working people to move into another house.