But There's a Catch

Two Local Couples Have Figured Out How to Default on Their Mortgages and Buy Bigger Houses

Comments

1
Well if you don't mind looking like a piece of shit who breaks promises, this operation works just fine.
2
@1 - that's the thing. strategic default is something that businesses do all the time. we ought to get over the idea that there's a moral obligation to keep a promise that puts the stability of your family in jeopardy while making big bucks for the banks. yes, people should be honest and trustworthy. but i don't think that translates into sticking with a mortgage that is so completely without benefit for the family that's stuck with it. given the alternative between financial ruin and the notion that it's important to keep your word to the bank that you'd pay the mortgage back, i think it's a pretty easy choice.
3
I agree with AmyC, why should we struggle to keep a promise to a bank that feels no obligation to us. She is correct that strategic default is very common in the business environment. However, I'm torn on the issue. Walking away seems to perpetuate the problem, and harms neighbors trying to 'keep their promise' and potentially the neighborhoods, and the city, and it's citizens (renters and homeowners) -- as home values decrease, so does the city's tax base/revenue.
4
@1 - Funny, do we consider the former owners of the Smith Tower - (Walton Street who defaulted on the Smith Tower loan) - to be "looking like a piece of shit who breaks promises"? Even as Walton Street is in a position to potentially acquire 11 other office properties in the Seattle Metro area? No? Funny how a moral double standard exists when a "business" defaults on a contract ... it is considered "just business" and "financial prudence". But when a individual or family decides to make the exact same financial decision the slings and arrows of moral superiority are quick to be launched.

Lann
5
Odd, I don't remember any of my peers or parents buying a house to live in as some sort of investment. But people who bought in the fall/winter of 2006/2007 were drinking the "Buy Now or Be Priced Out Forever!" Kool-Aid(TM).
6
Nice move. 1, you're a dick.
7
@1 - So, Wells Fargo funded a home they KNEW wasn't worth the asking price, did so in order to gouge the couple thousands of dollars in interest, and you're saying the couple were the bad guys? Not only that but Wells Fargo HIRED assessors to overvalue the home and didn't even question them. And Ill bet you those same assessors STILL work for Wells Fargo.

You are, of course, wrong. The bank was in cahoots with the assessors and fucked over the couple and that's why they had a home that was "upon reexamination by the bank" worth $100K LESS then they got billed for the place.

Every fucking one of those 11 million people who lost their homes had the same SHITTY deal done to them. Have you noticed the absence of a company called Lehman Brothers and Countrywide Home Loans? They were the MAIN criminals perpetrating this FRAUD against consumers and in the next year or so, you'll be reading about their executives going to the fucking slammer.
9
Well done !

The entire crisis was created by Wallstreet and the banks. Well done my friends.

Piggybankblog.com

Read all about the way it is and how it was created, that is the entire housing crisis.

Gregory Dean Lemke
10
@4 Well you may not consider those people POS, but I do. I think it's complete bullshit when businesses do this is as well, because that type of practice hurts the general public as well. For example, it gives individuals the ability to say "well if a business can do it, why shouldn't I?"

@6 Your words. They sting. Badly.

@7 I wasn't trying to single the owners who just decided to whatever the fuck they please. The banks are just as culpable for, (I'd argue far more) creating this situation.
11
I personally think that individuals have a responsibility to their neighbors and the community NOT to act like this couple did.

People are not businesses! A business's decision to not honor a contract in similar circumstances would not necessarily have an impact upon another business's assets. However, homeowners who do "strategic defaults" have an definite impact upon their neighbors' property values in the same manner that a poorly maintained property has an impact upon their neighbors home values.

I guess it depends on whether a person thinks "we are all in this together" or whether they think it's each man/woman for themselves.

I wonder if these people even knew their neighbors on Beacon Hill...
12
#7 wrote:

"The bank was in cahoots with the assessors and fucked over the couple and that's why they had a home that was "upon reexamination by the bank" worth $100K LESS then they got billed for the place."

Nobody forced any homeowner to buy an overpriced house. Many other people recognized the bubble - knowing that realistically, home prices could not and would not rise in the future as they were for those few years in the mid 2000s. If you weren't ruled by greed, it was easy to see that what was fueling the astronomical gains was the crazy mortgages people were signing.

If you bought into that "get it now" mindset, you bought a house at an unsustainable price that is now underwater. If you didn't, you either kept your current house or continued renting.
13
They were willing to play hardball, the bank should have renogotiated the loan if they didn't want to get hurt. Business is business, as republicans and, um businesses have drilled into us.
14
@13 It's the ol' "we don't negotiate with terrorists" technique. Lenders would much rather take the financial hit, ruin the borrowers credit and make them look like assholes, than bend to their threats. The unfortunate side of that is lenders apply that to every situation so when someone gets sick and can't pay their mortgage, they get the same treatment.
15
Well if you don't mind looking like a piece of shit who breaks promises, this operation works just fine.

Holy shit, I wish we could find a way to bronze a comment!
16
perfectly rational conduct. it's not breaking a promise. read the contract: read the law: the promise is this:

if I make payment I keep my house, if I don't, you get to take my house, but if you take my house you can't come after me personally.

this is the law because the real estate lending community wanted this law. they wrote the law. they supported the law. they got the deed of trust device, and they paid the price for it that if the borrower walks they can't come after the borrower personally, they only take the house itself and they get to do so without a court action or a judge ruling or the ever feared one year redemption period that would come if it were a true mortgage foreclosed via judicial action. almost no one knows about THAT do you. the lenders got a way around that one year redemption period in the law with the deed of trust device, and in return, we borrowers got the right to walk with no debt consequences no liability on this loan, the lender just gets the house and sure, your credit takes a hit, but guess what?

it's smarter not to use credit for credit card shit.

it's sometimes smarter to rent than buy, or have your spouse buy, so you don't need a good credit score.

the moralistic view of you're a piece of shit if you break promises is silly. that's not the law. the laws says if I contract my wheat to you for $100 then the market rises I AM FREE TO BREAK THE CONTRACT and cash in on the higher price then you sue me and you get the reemedy the law gives you which is the diff between market price and contract price -- the law does not say I am a piece of shit, it encourages me to break contracts when this makes sense eocnomically so why wouldn't borrowers do exactly the same thing businesses do? businesses fucking break contracts all the time no one says they are a piece of shit, the only thing is, they have to face the legal remedies the affected party has. same thing with borrowers and lenders. but good news folks! the law does NOT say you are a piece of shit it says you MAY WALK AWAY and if the lender takes your house via the deed of trust "foreclosure" then they can't even sue you for the unpaid part of the debt. The law gives you this. This was part of your bargain. Go forth and enjoy it and don't listen to the idiots imposing moral overlays on a business deal that allocated the risk you'd walk away in the first place and that the banks adjusted their interest rate to account for anyway.
17
There are even more possibilities to underwater borrowers that are also legit: Get your house foreclosed, hire a company to buy it at auction in a relatives name and you GET YOUR HOUSE BACK at a 50-70% discount. It's for real!
18
"Well if you don't mind looking like a piece of shit who breaks promises, this operation works just fine."

In fact I DON'T mind, if it saves me from losing $75,000 or $100,000. Like the posters above said, businesses do it all the time. And "jvic", the Supreme Court has ruled that CORPORATIONS ARE PEOPLE, so why can't people be businesses?

@16, you did a great job summing up why just walking away is perfectly rational and not "immoral". The LAW in this case simply spells out the rights and responsibilities of the borrower and lender. There's no "morality" involved. Since people often skip over unregistered comments, let me repost, edited for clarity:

"Perfectly rational conduct. it's not breaking a promise. read the contract: read the law: the promise is this:

"If I make payment I keep my house, if I don't, you get to take my house, but if you take my house you can't come after me personally.

"This is the law because the real estate lending community wanted this law. They wrote the law. They supported the law.

"They got the DEED OF TRUST DEVICE; that if the borrower walks they can't come after the borrower personally, they only take the house itself and they get to do so without a court action or a judge ruling or the ever feared one year redemption period that would come if it were a true mortgage foreclosed via judicial action.

"The lenders got a way around that one year redemption period in the law with the deed of trust device, and in return, we borrowers got the right to walk with no debt consequences and no liability on this loan; the lender just gets the house and sure, your credit takes a hit, but guess what?

it's smarter not to use credit for credit card shit.

it's sometimes smarter to rent than buy, or have your spouse buy, so you don't need a good credit score.

the moralistic view of you're a piece of shit if you break promises is silly. That's not the law.

The law says if I contract my wheat to you for $100 then the market rises I AM FREE TO BREAK THE CONTRACT and cash in on the higher price, then you sue me and you get the remedy the law gives you which is the difference between market price and contract price.

The law does not say I am a piece of shit, it encourages me to break contracts when this makes sense economically. So why wouldn't borrowers do exactly the same thing businesses do? Businesses fucking break contracts all the time. No one says they are a piece of shit, the only thing is, they have to face the legal remedies the affected party has.

Same thing with borrowers and lenders. But good news folks! The law does NOT say you are a piece of shit, it says you MAY WALK AWAY and if the lender takes your house via the deed of trust "foreclosure" then they can't even sue you for the unpaid part of the debt. The law gives you this. This was part of your bargain. Go forth and enjoy it and don't listen to the idiots imposing moral overlays on a business deal that allocated the risk you'd walk away in the first place and that the banks adjusted their interest rate to account for anyway.

19
Working in the industry I see this a lot. Individual circumstances determine the best coarse of action for any of you. Most people want to work hard and make good money and pay for the things they want. Things happen, sometimes out of your control. Sometimes you have to make some tough decisions. It is always easy to say what the other guy ought to do.
20
I hope Jas and Bri are renting out the old place while it awaits foreclosure.
21
@ 7 the house was worth that amount when they purchased it. The bank wasn't trying to screw them by financing a loan. The bank doesn't decide which house you buy. You do. That being said, yeah go ahead and default. The banks got bailouts, and that as close as were gonna get.
22
I'm not getting the outrage. The thing about a contract is that both sides agree that if you don't do x, y will happen. This couple decided that y was preferable to x and now both sides are living with the ramifications of that. Not so different than walking away from a cellphone contract and having to pay the disconnect fee.

Does the bank end up with the short end of the stick on this one? Yep, but it's their contract .They knew the risk of ending up with a foreclosed property on their hands and decided that the possibility of raking in something near the purchase price of the home in interest payments over the life of the mortgage was worth it. Not to mention the bank wouldn't flinch when making a decision that gave their customer the short end of the stick.
23
Let me get this right. Neither couple in each case here had apparent difficulty making their payments on the first loan. They just didn't like the size of their payments relative to the value of their houses after they went down in value.

So would these folks have walked away from the homes if they had gone up in value as much as they went down?
24
Contracts in America are literally made to be broken. That's why contract law is completely separate from criminal law and one of the reasons that American commerce is so much more efficient than other countries.

When the contract no longer makes sense for one party to adhere to, then that party is able to walk away according to the terms of the contract. In this case, the contract states that ownership of the house returns to the lender. Both parties are getting exactly what they agreed to at the outset.

Case closed.
25
So would these folks have walked away from the homes if they had gone up in value as much as they went down?

Of course not. They'd only walk away if they are underwater. Yes, they are terrible. Just terrible. Isn't it just terrible how badly they treated the holders of mortgage-backed bonds, the poor things?
26
Does the bank end up with the short end of the stick on this one? Yep, but it's their contract.

What's really funny here is that, this late in the game, the allegedly smart Seattle readers of the Stranger actually think that banks hold mortgage loans. How quaint.
27
@12:

"Nobody forced any homeowner to buy an overpriced house. Many other people recognized the bubble "

True, many other people recognized the bubble, HOWEVER not one of these people with underwater mortgages actually bought a house. They were ALLOWED to get a mortgage. That's it. They don't own those homes, the banks do. People have proven time and time again to not make wise financial decisions. That has always been true. The banks, however, are the ones who allowed these people, who they knew damned well couldn't afford these crazy overpriced mortgages, to sign on the dotted line. The BANKS bought these homes. The people paid the payments with interest to get them from the banks at some point 15-30 years in the future. If the people were going to try and flip the home, that's totally fucking irrelevant! They should have never qualified for the loan in the first place.

If someone, who you know doesn't have the money to pay you back, asks for a loan from you, and you give it to them, it's your own stupid fucking fault for granting them the loan. The same is true for the banks, except worse, because the banks approved the loans for something they know wasn't even worth what the asking price was to begin with.
28
I went to the restaurant the other day and ordered a meal. By the time I was finished, the food that was inside me was no longer worth what I originally agreed to pay for it so I walked out the door.
29
This article kind of implies that it's all good to walk away from a mortgage. There can be more consequences for borrowers who walk away, more than just bad credit. If the numbers are favorable for it, a lender can get a judgment against a borrower who walks away. That judgment is the difference between the auction price and the principal balance. Lenders aren't doing that very much but they generally have six years to decide whether to pursue a judgment against the borrower. If you have a judgment out against you it's not good, will leave it at that. One more thing to consider. But hey, it's the Stranger: have a beer and a taco at the Cha and let the banks bugger off.
30
The wicked borrow and never repay.