Four posts back was the article about principal reductions – below is the response from Irvine Renter, or click here to his blog:
To give the hopeless a reason not to strategically default, several banks have singled out a few deeply underwater loan owners for principal forgiveness. By spreading news of their magnanimous deeds, they hope the remainder will keep paying.
Banks have a problem, a riddle they must solve. Twenty-five percent of their borrowers are underwater, and when you factor in second mortgages and sales commissions, more than half can’t sell their homes without writing a check for the shortfall. And house prices are still going down. When homeowners have no equity, they are no longer homeowners, they are loan owners. If a loan owner’s payments are less than the cost of a comparable rental, they have an incentive to stay and pay, but when the payment exceeds a comparable rental — and the huge mortgage balances of the bubble make this common — loan owners have an incentive to keep their money and strategically default on their mortgage.
Underwater loan owners have their names on title, and if they keep making payments long enough, amortization may catch them up, and prices may come back, so they may have equity again someday. The more their payments exceed the cost of rental, the further a loan owner is underwater, and the longer they perceive they will have to wait to have equity again, the more likely they are to give up and strategically default. If a loan owner strategically defaults, the lender is forced to make a choice; foreclose on the property when the resale value is worth less than the loan, or allow the loan owner to squat in the property.
Neither choice is palatable to the lender.
Lenders have responded to these circumstances — conditions the lenders created through irresponsible lending which inflated the housing bubble — by using both a carrot and a stick to keep borrowers paying when it is in the best interest of the borrower to strategically default. The stick is the threat of foreclosure, debt collection, reduced access to credit in the future, and an appeal to morality. The specter of consequences to borrowers has been wildly exaggerated, and these circumstances are lessening by the day.
The appeal to morality has been steadily eroding, as borrowers are coming to realize they have a greater moral responsibility to their families, than they have to their lenders.
Lenders’ threats of foreclosure have been neutralized by reports of delinquent mortgage squatters obtaining years of free rent. In fact, instead of being a deterrent to strategic default, the long foreclosure timelines have actually become an inducement. Lenders combat this perception with the use of terrorist tactics. Each month, lenders will randomly select a small number of fresh delinquencies to push through the system as quickly as possible. If some of the herd are executed quickly while others are allowed to squat indefinitely, it creates uncertainty. This uncertainty keeps some paying rather than play Russian roulette.
The carrot lenders dangle in front of loan owners comes through rumors of principal reduction windfalls. Like the random executions of freshly delinquent borrowers, a very small number of principal reductions given to loan owners who are doing what lenders want — making all payments — provides the lottery-style false hope to motivate the masses. Today’s featured article is part of the public relations campaign lenders use to get the word out concerning the principal reduction lottery windfall ostensibly available to loan owners who dutifully make their payments.
If someone somewhere got a principal reduction, it could happen to anyone. I hope nobody is holding their breath.
This could really hurt the banks and lenders.
http://www.scribd.com/fullscreen/57764888
This is the summary paragraph:
In sum, because MERS was never the lawful holder or assignee of the notes described and identified in the consolidation agreement, the corrected assignment of mortgage is a nullity, and MERS was without authority to assign the power to foreclose to the plaintiff. Consequently, the plaintiff failed to show that it had standing to foreclose.
The consolidation agreement was the deal-killer, and I don’t think they did many of those around here. They make sense; Countrywide funded a second mortgage about seven months after the purchase, and lierally attached the two loans together in the first position as part of the arrangement.
“June 30, 2011, 6:39 a.m. PDT
The Oregonian
“ST. HELENS, Ore. (AP) — A Columbia County judge has blocked U.S. Bank from evicting a Vernonia woman whose home was sold in foreclosure.
“Martha Flynn says it’s a victory for a lot of people, although her ability to stay in her home remains in doubt.
“The Oregonian reports the action last week raises questions about other foreclosures and could create legal problems for lenders and title companies.
“The bank tried to evict Flynn during a May 24 court hearing. But on June 23 Circuit Judge Jenefer Grant found that the original lender had sold the mortgage to other parties, and the exchanges were never assigned in the county’s recorder office.
“U.S. Bank spokeswoman Teri Charest says it will cease eviction action while it assesses its next step.”
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Information from: The Oregonian, http://www.oregonlive.com
Not recording an assignment of deed of trust: penny-wise, pound-foolish.
Yes, and the next settlement will be where MERS coughs up the back fees owed and county recorders hit the jackpot.
Could one of these be the landmark case where everyone gets a free house?
Doubtful, but, if so, the hysteria would be entertaining!
There are two additional factors in the equation you must add and subtract: 1) The money you’d earn by strategically defaulting (i.e. going into your bank account instead of disappearing into your underwater mortgage), 2) The cost of having this delinquency on your record for 7 years.
1) Is a ton of free money.
2) Varies wildly from person to person, as some simply aren’t willing to default if given a choice.
In summary you must add and subtract those two factors to determine the true value of strategic default.