From the What-did-you-expect? Department comes this story of people who, deserving no sympathy, are astonished, mortified, flabbergasted to discover that they get none – as reported in Market Watch (October 18, 2013):
Foreclosures dog even wealthiest home buyers
As I’ve posted before, for some reason unfathomable to me, journalists love to depict borrowers who’ve run away from their obligations because their home is financially underwater as innocent victims being pursued by hysterical furies – you know, people who thought that if they lent you money, you’d honor the obligation to pay it back.
Why banks deny mortgages to some high-earning Americans
Because … the last time we lent them money, they refused to pay it back even though they could?
A witch! Burn her! Burn her!
Crowd: A witch! A witch! A witch! A witch! We’ve found a witch! A witch! A witch! A witch! A witch! We’ve got a witch! A witch! A witch! Burn her! Burn her! Burn her! We’ve found a witch! We’ve found a witch! A witch! A witch! A witch!
Villager 1: We have found a witch. May we burn her?
Crowd: Burn her! Burn! Burn her! Burn her!
Bedevere: How do you know she is a witch?
Villager 2: She looks like one.
She looks like one!
Jumbo borrowers who went into foreclosure a few years ago are learning the hard way: You can’t go home again.
You could go home … if you paid back what you owed on the last one – oh, but you were smarter than that, weren’t you?
Affluent home buyers attempting to get back into real estate after defaulting on their home loan are finding that few lenders are willing to work with them.
They dressed me up like this.
Witch: I’m not a witch. I’m not a witch.
Bedevere: Uh, but you are dressed as one.
Witch: They dressed me up like this.
Crowd: Augh, we didn’t! We didn’t…
Yeah, we did that
Witch: And this isn’t my nose. It’s a false one.
Those that do often impose long waiting periods, higher down payments and higher interest rates.
Since spring, lenders say they have increasingly been hearing from would-be buyers who went through foreclosure. “We get the calls routinely,” says Al Engel, executive vice president at Valley National Bank, based in Wayne, N.J.
Al’s gotten used to people engling for his money
Callers include self-employed borrowers whose income dropped during the recession, causing them to fall behind on their mortgages, but who have since financially recovered.
As we’ll see, this hypothetical case is the most sympathetic we’ll encounter, because the default was genuine, not volitional, and the borrower suffered a significant loss of income. Of course, the lender should never have made the loan, as the borrower’s income was volatile and that’s one of the five legitimate credit-denying pips; and if a self-employed borrower’s income fell once, it could fall again. So maybe the caller shouldn’t be a homeowner, but a renter instead.
Bedevere: Quiet! Quiet! Quiet! Quiet! There are ways of telling whether she is a witch.
Villager 1: Are there?
Villager 2: Do they hurt?
Bedevere: What do you do with witches?
Villager 2: Burn!
Villager 1: Burn!
Crowd: Burn! Burn them up! Burn!
Then there are people like this, who deserve the negative of sympathy:
Also affected are borrowers who walked away from their homes after their values plummeted and owed more on their mortgage than the house was worth.
Burn her!
Bedevere: And what do you burn apart from witches?
Villager 1: More witches!
Villager 3: Shh!
Villager 2: Wood!
Bedevere: So, why do witches burn?
[pause]
Villager 3: B–… ’cause they’re made of… wood?
‘Cause they’re made of … wood?
Credit denial is too good for people who are this shameless:
Terri Conrad and her husband saw their 4,500-square-foot, five-bedroom home in Carbondale, Colo., foreclosed on last year. They purchased the home for $1.25 million in 2007, but its value had dropped to roughly $700,000 by 2012. Ms. Conrad, who manages finances of affluent families, says the couple tried refinancing but was denied.
So Ms. Conrad was financially literate, fully aware of the recourse nature of her mortgage loan, and she just plain chose to stop paying.
Although they could afford the payments, they decided to walk away because they didn’t want to keep paying for a home that was worth significantly less than the loan.
I am agog with disgust for people like this: they borrowed the money, signed an obligation, got a bargain that was temporarily bad, and just defaulted:
Those reasons, plus the deep and visceral attachment people feel to their homes as extensions of their emotional selves, are why owned homes resist price drops. It’s not a loss if you don’t sell it, it’s just an increase in occupancy cost.
There was thus no financial imperative to default – it was simply a convenience, something Ms. Conrad and her husband thought they could get away with, so why not do it?
They are now renting in Houston and plan to wait at least a couple of years before applying for a home loan again. “I’m worried about who’s going to give me a mortgage,” she says.
You should pray to whatever you hold dear that anyone may give you a mortgage. Now that you’ve proven yourselves immoral, denying you credit is rational, both for you and to encourage the observant herd.
You could have been brave; you chose cowardice
Borrowers who intentionally default—the ones who walked away from their homes—are less likely to be approved for another mortgage soon after.
As shown in the Ultimatum Game studies, if people believe that they are being railroaded, they refuse and become angry.
That applies to banks and loan servicers every bit as much as it applies to subprime borrowers facing spikes in their interest rates. Lenders will work with a borrower who defaults out of necessity and who owns up to it from inception; encounter a payment boycotter and they’re very likely to turn it over to the collection attorneys, with a note saying, Expedite this foreclosure, and publicize it widely.
For the sake of market integrity, I do hope Ms. Conrad and her husband are unable to buy a house on credit for at least a decade.
Bedevere: So, how do we tell whether she is made of wood?
Villager 1: Build a bridge out of her.
Bedevere: Ah, but can you not also make bridges out of stone?
Villager 1: Oh, yeah.
Random: Oh, yeah. True. Uhh…
How do we tell whether she is made of wood?
Forgiveness is earned by penance, and so far I see none.
Forgive me, lord, for I have sinned
Most lenders who offer private jumbo mortgages, which start after $417,000 in most parts of the country and at $625,501 in pricier housing markets, remain very selective and limit themselves to borrowers with the strongest credit profiles.
Gee, I wonder why.
Bedevere: Does wood sink in water?
Villager 1: No. No.
Villager 2: No, it floats! It floats!
Villager 1: Throw her into the pond!
It floats!
Foreclosures stay on credit reports for seven years from the time homeowners default on their mortgage. What’s more, a foreclosure can lower a borrower’s credit score by 100 points, says John Ulzheimer, a former manager at FICO, the credit score used by most lenders.
Ulzheimer’s disease will cost you 100 points on your FICO
Borrowers who were previously always on time with payments would see a bigger drop.
You see the inference?
No. No.
Your default, sudden and without prior symptoms, is evidence of volition, and that means you defaulted out of character, not out of necessity.
Goood!
For instance, someone with an 820 FICO score (FICO scores range from 300 to 850) could drop to 580 following foreclosure, he says. That borrower could need more time to work his or her way back to a top score before getting a mortgage.
As our president (no, not that one, the other guy) said, Fool me once, shame on you. Fool me twice – you can’t get fooled again. Once a borrower has proven he or she is willing to default out of convenience, then the borrower’s trustworthiness is appropriately scored at zero, and the financing is entirely collateral based. So the bank will lend you the money only if your walking away from the house would be nutty and the bank could recover in full:
Cash reserves. The banks willing to work with these borrowers require:
(a) large down payments, ranging from at least 25% to 50%, and
(b) savings that equal at least three months of mortgage payments.
And we can anticipate the savings will be required to be escrowed with the bank, so that should you strategically default, the bank has a three-month running head start toward foreclosing and reselling your house, expecting that its resale value will not have dropped 25% or more in the interval.
Detailed screening. Lenders will often require a lengthy conversation with applicants to figure out the circumstances that led to their foreclosure.
I’ll bet they do.
What else floats in water?
Bedevere: What also floats in water?
Villager 1: Bread!
Villager 2: Apples!
Villager 3: Uh, very small rocks!
Villager 1: Cider!
Villager 2: Uh, gravy!
Villager 1: Cherries!
Villager 2: Mud!
Villager 3: Uh, churches! Churches!
Villager 2: Lead! Lead!
Arthur: A duck!
Crowd: Oooh.
Bedevere: Exactly. So, logically –
Villager 1: If … she … weighs … the same as a duck, then … she’s made of wood?
Bedevere: And therefore?
Even if credit is forthcoming, the new borrower will be penalized:
Higher interest rates. Some lenders say if they do approve these applicants, they are likely to charge higher interest rates to compensate for the extra risk they are taking on.
As I said in strategic mortgage default:
The real defaulting borrower faces these costs and risks.
1. Emotional toll of uncertainty. For a default virgin, this is very high. Stress is debilitating, especially to spouses and children.
2. Financial costs of negotiating with the lender. Even if you do it yourself, time and lost opportunity have a cost.
3. Ongoing damage to one’s credit rating.
4. Risk of eviction and being forced to move on short notice, with attendant costs.
5. Risk of a deficiency judgment, with more and longer-lasting credit-rating damage.
6. Possibility of garnishment of chattel (e.g. cars), attachment of bank accounts (and salary?), seizure of personal property.
Default is not some lah-de-dah walk in the park; it’s serious and grim.
Eventually judgment comes, and no matter how flawed the process, sometimes the judgment is right.
Bedevere: Right. Remove the supports!
[whop]
[clunk]
[creak]
Crowd: A witch! A witch! A witch!
Witch: It’s a fair cop.
It’s a fair cop
Borrowers who overcame a financial hardship that was out of their control and improved their credit profile and are shopping for a mortgage should consider smaller lenders.
Smaller lenders, you hope, are people you can tell a story to.
Valley National Bank and Fremont Bank, which is based in the San Francisco Bay area, say they are open to working with some private jumbo applicants in as little as 2 ½ to three years, respectively, after the date of foreclosure.
Opening up the western banks?
Bedevere: Who are you who are so wise in the ways of science?
Arthur: I am Arthur, King of the Britons.
Bedevere: My liege!
My liege!
