Tuesday, November 27, 2007
Plenty of news articles abound on how to avoid foreclosure
I always wonder who keeps the money in these Coen Brothers-like scenarios of real estate meltdowns. I guess the developers, who got the lenders to pay inflated prices (artificially inflated by too-low or subprime interest rates, balloon arrangements, lack of credit check, etc) for the properties. I wonder why banks are so careless, just as I wonder about this with "mistaken identity" for credit cards. You know, somebody wants a little bit of money, to get something for nothing.
Indeed, it's not always clear who bears the risk. The conventional wisdom of these financial meltdowns is that "nobody can see it." Just take US History in high school and remember that test question on what caused the Great Depression. Memories need to be longer.
Newsweek has a constructive article by Daniel McGinn, Nov. 20, 2007, "Is Foreclosure for You? Deciding to walk away or struggle with mortgage payments," here. He talks about the short sale as a possible option, and this is not the same thing as selling short (or "shorting against the box") in the stock market.
In the past, a lot has been written about deficiency judgments. For example, right now there is an article by Dwan Bent-Twyford and Sharon Restrepo on CRE Online, "Do Homeowners Still Owe Money After a Foreclosure?" here. One point that is made is that the IRS may consider forgiven deficiencies as taxable income.
There was a book published in the early 1990s by James A. Wiedemer: A Homeowner's Guide to Foreclosure. Dearborn Financial Press, 1992, Amazon link here. It contained sobering discussions of deficiency judgments, at least after the regional real estate crash (centered in Texas) in the late 1980s. He writes that "foreclosure became as socially acceptable as divorce" but then lenders got aggressive after some legislation (the Tax Reform Act of 1986 and various obscure rules involving the FDIC and other federal guaranty organizations in the wake of the savings and loan scandal) and attorneys would specialize in serving "letter lawsuits" and getting quick judgments. Even people who sold on assumption could be at risk, but this was supposed to stop once lenders (starting with FHA) insisted that assumption buyers qualify for mortgages (which takes the seller out of the risk). I don't know what happens now in the subprime situation where credit checks and qualification rules were so ridiculously lax in some cases. States vary enormously on how easy it is to foreclose; many states (like Texas) allow non-judicial foreclosure (again with that Coen Brothers movie-like auction on the county courthouse steps and the sheriff coming to evict belongings to the street).
All of this makes it very hard to predict the bottom on the subprime mess. But one thing is clear: consumers thought they could get something for nothing, and banks let them think so. Wages and income simply don't match the home prices.
Now, The Donald and his Trump University have been going around the country offering seminars on how to get rich off of foreclosure. You can also look at "Rich Jerk Real Estate."
Picture: near the Waco 1993 Branch Davidian site.