Monthly Archives: October 2010

Strategic default in the news

Strategic default is not funny.

But the video below from “The Daily Show” talks about how the Mortgage Bankers Association strategically defaulted on its own building, yet instructs everyone else to stay put.

Also interesting in today’s Wall Street Journal is “The Great Mortgage Mystery” that starts with this rather eye-opening lead:

The big question from the mortgage meltdown isn’t why so many distressed homeowners are defaulting on their loans. It’s why any of them are still making payments.”

The story also uses the term “zombie homeowners,” that is  borrowed from the Japanese “zombie banks,” to define underwater homeowners.

Read or browse the 150 plus comments to the WSJ story.  Because strategic default is such a volatile topic, the comments are as good, if not better than than story.

The Daily Show With Jon Stewart Mon – Thurs 11p / 10c
Mortgage Bankers Association Strategic Default
Daily Show Full Episodes Political Humor Rally to Restore Sanity

Monster in the closet: Collection agency or deficiency judgment?

When it comes to foreclosures and strategic default,  clients are very afraid of deficiency judgments. Deficiency judgments are like the monster in the closet — unseen, but scary as hell. Homeowners in or near foreclosure are terrified of these things, but there is no reason to be afraid because in the cold light of day deficiency judgments shouldn’t be feared  since they are so rare. I have yet to talk with a client against whom a deficiency judgment was entered in Illinois.

In reality, it may be that collection agencies are a much bigger threat to those thinking about strategic default or in foreclosure now. Channel  5 reported on this last summer, but it seems to be increasing since then.

I have had two cases recently in which lenders assigned their foreclosed mortgages to collection agencies. The collection agency starts calling and sending letters and finally files a lawsuit for “Breach of Contract” against the owner. A breach of contract case can be filed because the owner signed a promissory note at closing. The liability on the note survives the foreclosure. The statute of limitations on cases like these is a hefty 10 years.

Mostly this is happening on second mortgages, not first mortgages, but it is still possible on a first mortgage. Citibank seems to be very active in sending its delinquent second mortgages to collection.

Case 1: In the first case, the client had been foreclosed 5 years ago.  Then, suddenly the client started getting letters and calls from a collection agency. This agency specializes in “seriously delinquent and defaulted loan portfolios.”  I don’t know for sure, but most likely they agree to a contingent fee based on whatever they can collect from the foreclosed loans a lender assigns to them.  Most likely the client will have to put up with a series of calls and letters and then a lawsuit will be filed. When a judgment is entered the client will have to file bankruptcy to get rid of the judgment.

Case 2: The client owns a Chicago condo that is currently in foreclosure and, before the foreclosure was even completed, Citibank filed a breach of contract case against the owner based on the client signing the note for a second mortgage.  When this happens a whole separate lawsuit is filed. This is not part of the foreclosure case and it is not a deficiency judgment. A local law firm that is a well-known debt collector filed the case. The client will have no alternative except to file bankruptcy after the judgment is entered.

(Update 10/20/10: Wells Fargo is also filing collection actions on second mortgages. A McHenry County client was served with a $40,000.00 breach of contract case.)

I think that it’s very likely that lenders will continue to hand over their foreclosed loans to collection agencies in the hope of at least getting something back on delinquent loans. This is another reason to carefully weigh whether a strategic default is worth the cost, since you will have to look over your shoulder for 10 years until the statute of limitations expires. Ultimately, a chapter 7 bankruptcy will be the only way to eliminate the collection agency from the picture.

FHA mortgages get more expensive

On October 4, FHA mortgages get a little less expensive upfront, but a lot more expensive in the long-run.

FHA mortgages are the only game in town for first-time buyers. Most first-time buyers obtain FHA mortgages.

Until now the FHA premium (called MIP) paid by the buyer at closing was 2.25% of the loan amount. From here forward, it will be reduced to 1%. That’s good and will reduce initial closing costs.

With an FHA mortgage, in addition to the upfront MIP payment, the buyer also pays a monthly MIP premium that’s included in the monthly payment. This payment will increase.

It used to be .55% of the loan amount (this is the yearly amount, divide by 12 for the monthly payment).  Now it will be .9%, almost twice as much.

Buyers should not automatically assume an FHA is best. This increased FHA expense means that buyers should carefully examine FHA vs. conventional mortgages because a 5% down conventional mortgage will be much cheaper than an FHA.