From the W-S-J:
After losing her condo in San Diego to foreclosure last year, Charissa Kolich thought that at least she was free of mortgage bills.
But Wells Fargo & Co., which holds a home-equity loan made five years ago to Ms. Kolich, last month filed a lawsuit against her in the Superior Court of California, San Diego County, seeking to collect the nearly $72,000 it said she still owed on that second mortgage. “This was all kind of a shock,” says Ms. Kolich, a food-service administrator recently diagnosed with inoperable brain cancer.
Banks are coming under increasing political pressure to write off or at least write down second-lien and other junior mortgages as a way to help borrowers keep their homes or extract themselves from heavy debt. As the Wells Fargo suit shows, however, banks often are reluctant to give up on loans when they see a chance of recovering all or part of their money.
This issue will be the focus of a hearing Tuesday by the House Financial Services Committee in Washington. Panel members are due to quiz executives from Wells Fargo, Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co. about their junior-lien mortgage policies.
Why do junior-lien mortgages matter? The $1 trillion of junior-lien mortgages outstanding in the U.S. at the end of 2009 added up to only about 10% of total home-mortgage debt, according to Federal Reserve data. But many banks have large holdings of these junior liens. Among borrowers whose first mortgages were packaged into so-called private-label securities (those not backed by any government entity), about half also have junior-lien loans, according to mortgage-bond trader Amherst Securities.
Those junior liens now represent one of the trickiest obstacles to efforts to get distressed borrowers back on their feet. Borrowers who negotiated lower payments on their first mortgages often find they are overwhelmed by payments on second mortgages and other debts.
The owners of first-lien mortgages (mostly investors in mortgage securities) are reluctant to reduce payments or cut principal for troubled borrowers unless holders of the junior liens (mostly banks) also take a hit. But banks, struggling to rebuild their capital, don’t want to write off any more junior liens than they must.
Many junior liens lack collateral backing because home values have fallen below the amount owed on just the first mortgage. “Large numbers of these second liens have no real economic value,” Barney Frank, a Massachusetts Democrat who is chairman of the House Financial Services Committee, said in a recent letter to the big banks. He added: “I urge you in the strongest possible terms to take immediate steps to write down these second mortgages.”
But many people who have fallen behind on their first mortgages are still making payments on their junior liens, and banks say they shouldn’t have to write down loans that are performing.
Even in cases where a foreclosure or related action has turned a junior-lien mortgage into an unsecured loan, lenders may still be able to collect, though state laws vary on this point. Leo Stawiarski Jr., a lawyer in Englewood, Colo., who advises banks, says they should assess each borrower’s ability to repay any second mortgage after a foreclosure. For borrowers who have sufficient income or other assets, or are likely to have the means in the future, banks should try to negotiate a settlement involving at least partial repayment, he says. If borrowers refuse to cooperate, lenders in some cases can garnish their wages or other assets.
Mr. Stawiarski believes banks should, and eventually will, become more aggressive in pursuing these claims. “I think lenders are really leaving a lot of money on the table,” he says. One option for banks is to sell junior-lien loans to collections firms, which can then pursue borrowers.
Representatives of J.P. Morgan Chase and Citigroup declined to comment on their junior-lien collection policies. A spokeswoman for Bank of America said that if efforts to avoid a foreclosure failed, “then we do reserve the right to recover the unpaid balance on the second lien if permissible by state law. However, our practice has been to only to pursue recovery in situations where we believe the customer has sufficient nonretirement assets to satisfy their debt obligation.”
If you have the money, it shouldn’t come as a shock that the people who loaned you money want it back. It’s the same as someone failing to pay child support because they have no money, then being surprised years later when they’re sued for money now that they do have money. While I feel sorry that you’re in a tough situation, the fact of the matter is you’ve already screwed someone out of money once and this is just the second time around. Your only defense is that you couldn’t help it.
Psst. If they sue you, it’s because they think you can pay. There’s a simple explanation for that.
When are we going to re-institute debtors’ prisons? Dickens had the right idea!
I was going to reply a few minutes ago and noticed that the first 2-3 posts were deleted.?! Oh well. How does one go about getting an FHA loan and minimizing their initial upfront costs? Please provide specifics!!! If you can’t beat em, join em I say.
#3, Try inoperable brain cancer like the example. That might do it, unless the New Obama Health Plan come to the rescue in time…
The banks will probably come to the funeral and ask for donations. . .
The situation cited is what bankruptcy is for, to clear up a debt mess. Clearly what one should legally do, is to max out retirement savings, since they are protected and then when the come after you, file bk. I think that those in the multiple lien case should file bk to clear up the mess. Yes you will loose stuff, but …
Does anyone else notice a contradiction here? Strange to claim that individuals should file bankruptcy, when the banks involved chose instead to run to Washington for a bailout. What is good for the goose is becoming good for the gander.
SaltOdaEarth at #3,
I’m the only one with a delete button, and I’m glad to report that I was sleeping at 11:46pm Sunday night, so no posts were deleted.
You may have been looking for the guys two posts back, at ‘Who Gives a HAFA?’. They were discussing the use of FHA to minimize risk.
FHA is still requiring only a 3.5% down payment, and the seller can pay your closing costs. But the prime properties are being contested, so you may have to settle for a house/price that doesn’t generate a bidding war.
A hooded armed robber bursts into the Bank and forces the tellers to load a sack full of cash.
On his way out the door with the loot, one brave customer grabs the hood and pulls it off revealing the robber’s face.
The robber shoots the guy dead without hesitation!
He then looks around the bank to see if anyone else has seen him.
One of the tellers is looking straight at him. The robber walks over and calmly shoots him dead.
Everyone by now is very scared and looking down at the floor.
“Did anyone else see a my face?” demands the robber.
There follows a tense silence. Then an elderly gent, looking down, tentatively raises his hand and says:
“I think my wife over here may have caught glimpse”
There is little to no defense for the behavior of today’s banks. I tend to go with the “no” defense.
They are a bunch of gangsters. Period! Here in Georgia, we’ve got the big gangsters (BOA, Chase, etc.) and the little gangster banks, as chronicled in today’s New York Times:
http://www.nytimes.com/2010/04/12/opinion/12krugman.html?th&emc=th
Enjoy the sun in San Diego. Housing is screwed in Atlanta for a long time.
As a bank teller in a previous life, I experienced a “take down” style robbery many moons ago. Having a sawed off shot gun stuck in your face, by a hooded ski masked chicken s*&t robber is no joke.
Unfortunately for the robbers they left with less money than they could have gotten away with. Not only did I observe them entering backwards, in long raincoats to conceal their weapons, my finger was on the silent alarm trigger before they even opened their pathetic mouths.
This is one teller who didn’t hand over a single copper cent. I was too busy laying on the floor taking detailed notes for the FBI. Not a single shot was fired.
Did I receive a “bankster” size bonus (or any bonus) for my efforts? Not a chance.
A few months later our branch office was selected for the very first ATM trials. The handwriting was on the wall. I quietly started efforts to retrain myself and seek other opportunities in a variety of other directions.
LOL… What about the gardener who had no chance in hell of making his mortgage payment, but went ahead and borrowed way too much money for a house he couldn’t afford. Is that really just the banks fault for trusting him? Is it the drug dealers fault for selling crack to a crackhead?
I blame everyone who can’t do simple arithmetic, and can’t read a contract. 74.346% of the blame goes to consumers. If you can’t appraise a house that you will be paying a mortgage on for the next 3 decades then you shouldn’t buy it. If you are not strong enough mathematically to figure out how much money you can afford to pay for the next 3 decades, then you shouldn’t buy a house (take a math class instead).
Salt, no posts were deleted as I was the first and mine is still there. Jim is pretty gracious on this site with letting people speak their honest opinions.
Sol, when you work for someone else the bigger they are the less likely you’ll get real recognition. It’s the same as living in a big city, you help someone else but you’ll never see them again. At the end of it, you have to accept that a good deed is its own reward – i.e. an inner scorecard. It’s no coincidence that people who keep an inner scorecard ironically do better in the long run, as they tend to live among like minded people in time.
Dualing scammers…
Banks backed up by tax dollars vs. Deadbeats with the ability to declare bankrupsy in massive numbers.
My money is on the deadbeats as they get tax forgiveness, loan forgiveness, free housing, and can keep the Hummer. Its a quadruple deadbeat cheeseburger.
Rational Expectations-Honestly, I think it was the government who rank to the banks to give them the bail out, not the other way around. And, as much as people don’t like it, it was needed. If BoA and Wells Fargo and every other major bank went bankrupt at the same time (a fairly likely proposition), tens of thousands of small, medium, and large businesses would have immediately followed, as many businesses require revolving credit lines and the like just to keep the doors open. Unemployment would have been 30, 40, 50% instantly.
Geotpf, the banks decimated revolving credit lines anyway. One of my clients had to put their PERSONAL residences up for collateral to guarantee their line of credit earlier this year. They need that line of credit to pay their staff while they wait for their big corporate clients to pay their bills.
Filing suit against a borrower with “inoperable brain cancer” seems inconsistent with a policy of only pursuing borrowers with the assets to pay. The chances are that by the time the suit makes it to court there will no longer be a borrower. It also seems guaranteed to wind up as a bad PR move when the evening news interviews the woman from her hospital bed. Unless the bank doesn’t believe her story or thinks she has other assets that will survive her even after she exhausts whatever cash she has in the last days of her life.
I’m all for suing the deadbeats instead of writing off their defaulted loans. OTOH, if I discovered I was dying from brain cancer, making my mortgage payments would probably not be at the top of my bucket list.
Art, your client is a poor student of history. Banks have no obligation to lend to even the most qualified borrowers.
I recently sold some real estate. The bank showed up late to the closing. The buyers were whining about the bank, customer service, crazy paperwork, etc. I was giggling quietly for when I purchased that crappy little piece of real estate there were no banks that would even contemplate loaning on it (even at 1/10th the price I sold it for).
History isn’t just a decade old… Go back and look at how bad things got in the 70’s, even how bad they were in the 90’s. No money. Maybe it’s tighter now than 3-5 years ago but it’s still loose as a goose across the board!
“Sol, when you work for someone else the bigger they are the less likely you’ll get real recognition.”
Couldn’t agree more. The last full-time position I held was for a small business owner (as in – he & I). He had a heart attack (which he survived). I carried on with daily operations (as if nothing had ever happened, and no one ever knew), and I was well compensated for my efforts & discrection. I’ve worked in the background supporting our small business for the past 25 years, most rewarded efforts of our lives.
“It’s the same as living in a big city, you help someone else but you’ll never see them again. At the end of it, you have to accept that a good deed is its own reward – i.e. an inner scorecard. It’s no coincidence that people who keep an inner scorecard ironically do better in the long run, as they tend to live among like minded people in time.”
I’ve lived in big cities and small towns. They both have advantages and disadvantages. It’s all about keeping it in perspective.
Oh, and, the “creepy old guy” (the one in JTR’s story, looking for a way out of his relationship), he’s really the one in the teller line clutching a hand wrapped bottle of inexpensive “Charlie” perfume, in an unvarnished attempt to flirt with the lady, and say a personal thank you during the holiday season. Which was/is better than any free lunch in the private dining at headquarters with the ultra-creepy golf playing/ womanizing branch manager, in recognition of “perfect balance” for a whole year… Woo Hoo!
Jim,
I thought FHA down payment requirement was going up to 5%?
The 5% got shot down by NAR and the Mortgage Bankers Association, and they were quite proud.
Art Eclectic-Exactly my point. Had the bank bailout not happened, he would have had to sell his house or close down the business, not just put it up for collateral.
Bailing out rich bankers was never going to be popular. But Congress, Bush, and later Obama actually saved the country, IMHO, by doing the unpopular thing for once.
I don’t disagree that the bailout helped good people. Throwing money out of a helicopter at poor neighborhoods would achieve the same result. The problem is a lot of the money disappears in a hole or into the pockets of crooks. If that’s just fine and dandy, I vote for money out of a helicopter. At least it’ll get distributed more randomly.
Oh, and a pony for every girl while we’re at it. Who’s against that idea?
Geotpf,
Why couldn’t they just nationalize the banks instead? Seems we could have had the same (or better!!!) outcome, but with much less moral hazard.
IMHO, the bank bailouts were NOT needed (as they were done). They needed to backstop insured deposits (and nationalize banks, and start work programs, etc.), and let everything else fall. With the way they did everything, we will be paying for it for generations to come. It was a very, very bad decision on their part.