RESPONSE TO "WHEN YOU CAN'T PAY THE MORTGAGE"
[photo: Tasja via Wikimedia Commons]
[Published March 9, 2011 - 1:25 AM PST]
Today (March 6, 2011), the user Little Owl posted a topical blog on the issues of foreclosure and hyperinflation. In the course of that blog, many good questions were raised. As a former default servicing employee at one of the “big 5” banks, [see article: Whistleblower Says Loan Mods by Big Banks Designed to Expedite Not Slow Foreclosures ] I am probably about as qualified as anyone can be to answer these questions. The questions are quoted below in italics with my responses following.
“Well if you don’t pay, the banks come after you, and if you still don’t pay they take your house. I know this, everyone does, but what I don’t know is what will happen if no one can pay their mortgage. Will the banks take every house?”
Probably not. Banks are not in the business of property management/real estate and they never have wanted to be. That being said, if your home is still worth something they're going to want to foreclose in order to sell it. If you live in an area of severely depressed home values, it makes more sense for them to keep you living in the home (you will after all pay for utilities, keep people from breaking in and stealing pipes, etc. for free, and they may even be able to get you to send them a few thousand dollars now and then... which from their perspective is much better than if they make you move out, can't sell it, and now have to pay those bills themselves). This does not usually mean that they will let you keep living there indefinitely, though depending on the area, we could be talking about multiple years time in the house before the sheriff actually knocks on your door.
“Let’s say, for arguments sake, that one year from now, 70% of all mortgage customers can no longer make their payments. Will the banks foreclose on everyone?”
No. If everyone stopped paying, the banks (not to mention the court system) completely lack the ability to do so. Even with special courts setup to process foreclosures only, and a massive increase in spending by banks in this area, the country is currently “only” processing 1-2 million foreclosures per year. I doubt very much that this number could be substantially increased, especially if the thin veneer of legality is to be maintained.
There are 48 million mortgages in the US today. Even if we managed to quadruple the number of foreclosures to eight million per year, it would take six years to foreclose on all of them. And anyone reading this site should know that six years is a very long time in 2011.
Keep in mind also that at this point the majority of marginal borrowers who were given ARMs during the housing bubble have either lost their homes or are just about to. We are seeing the housing crisis overflow now into previously safe mortgages paid by middle to upper class borrowers who are much less marginalized than the first wave. Not all, but many of these people have access to considerable legal, fiscal and personal resources which they can use to fight foreclosure. This translates into even more expense on the part of the bank, a problem that will only get worse with time.
“Will the banks be able to remain solvent if so many people default at the same time?”
Absolutely not. They are barely solvent as it is. In fact, it would probably only take 20% of customers not making payments to accomplish this. Prior to 2007, mortgage default rates pretty much never exceeded 5%, and when they shot up as high as 10% the banks almost went under. The only thing keeping them afloat is massive government intervention. It's hard to say exactly what will or will not happen, but my guess is that when this happens, the government will step in.
Until now, the government has favored bank bailouts as the way of solving this issue, but at this point I doubt a bailout would even be possible (politically or financially), so my guess (hope?) is that some sort of more meaningful changes are enacted, possibly principal write-downs, or programs allowing people to rent their homes from the bank like the ones we're seeing in Detroit. Keep in mind that the banks' primary motivation is to keep you cutting them the largest possible check every month. That's how they make money.
“In the case of hyperinflation, are our mortgages secretly linked to the gold standard, or will we be able to pay them off with one weeks wage when the value of the dollar is so low that I’m earning $5,000 an hour?”
This is an interesting question, and not one that can really be definitively answered. There are a number of things to consider here:
- Keep in mind that if you're earning $5000/hour, that a loaf of bread will likely cost you more than $2000, and a gallon of gas probably even more. One of the real bitches of hyperinflation is that consumables tend to rise in price much faster than wages increase. If you have money left over or have been very vigilant about storing food/etc., then yes, maybe you will be able to do this.
- I am not aware of any secret linking of mortgages to any standard other than the dollar. In fact, I doubt very much that any such link exists, since mortgages are already secured by a physical asset.
- When things get really bad, it is likely the government will intervene. And if history is any guide, they will intervene to the benefit of the banks. Perhaps the government will explicitly forbid or curtail this type of behavior, or more likely re-adjust the money supply before it reaches this level.
“Will the debt be written off and people just be allowed to keep their homes mortgage free?”
For some people, this has already happened. This only occurs in severely depressed areas where the home has lost more than 50% of its value, and the borrower has missed more than 6 payments. What happens then is the bank writes off the mortgages as a loss, and ceases foreclosure activity. The reason is that after the everyone gets paid to do their jobs (file legal paperwork, kick you out, clean up the property), the bank spends more money than they gain from the sale. The bank does retain a lien against the property in a write-off, so if at any point the house becomes worth something again, someone (likely an investor who scooped up hundreds or thousands of these liens at pennies on the dollar) may come knocking.
If this happens to you, the bank is required to tell you they have written off the loan, but it is not in their best interests to do so since a lot of people will just keep sending checks until they are told not to. More than likely you will receive only one notice, if any. The best way to check for this is to keep an eye on your credit reports, since it will be reported there first. If your mortgage has been written off, stop paying immediately.
As far as this happening to everyone, I doubt very much that our government would ever allow that. Again, the banks' goal is to keep you paying the maximum you can afford every month from now until forever, so look for solutions that accomplish that, not ones that give freebies to the poor.
“Surely the value of property would crash if 70% of all homes were put on the market by the banks trying to recoup the debts on these properties? Are we better off to have a giant mortgage in the hope that a) hyper inflation will sort it out for us or b) that the banks may press the master re-set switch and wipe out the debts and we all start over? Are the people who have no mortgage suckers? Are they going to be the only ones who have actually paid for their house?”
Virtually everyone in America who qualifies for a mortgage already has one. If 70% (or as alluded to earlier, even 20%) of mortgagors lost their homes, there simply would not be enough buyers to scoop up all that inventory. This would lead to massive devaluation of properties until the price hit a level at which enough people could afford a mortgage again (assuming the bank is even willing or able to write more mortgages at all).
I personally have gambled on it working out in my favor. I purchased a home post-crash, and my mortgage payments are significantly less than what it would cost to rent the same house. The simplest answer to your question is to ask another: will you save money compared to renting? For me, the answer is yes, so I have a mortgage. If that answer ever becomes “no,” I will have to seriously rethink my living situation.
Another thing to keep in mind is where you're living. If you live in Florida, for instance, I wouldn't touch a mortgage with a 10-foot-pole. Also, do you plan on buying in the city, suburbs, or country? The farther you live from the city, the more you're going to have to drive, which translates in to additional costs. On the flipside, if you live in the city and there's
a riot, driving a long ways to get supplies may not seem like such a big drawback. Also worth mentioning is that the less you have to tie yourself down, the more adaptable you'll be if shit hits the fan. This is something I worry about, though I obviously chose to take that risk in light of the benefits.
“So do we strive to pay off our debts and our mortgage so that even if we lose everything else, we still own our property (which is certainly the most stress free option) or do we run up our debts and increase our mortgage and hope that we can keep juggling the repayments until a time when the masses default and our own defaulting will be lost in the swell?”
I would not recommend leveraging everything you can at this point. The more debt you have, the greater the degree of control the banks have over you. Bankruptcy laws are being rewritten as we speak. I think you're right that some (perhaps even many or most) borrowers will simply be “lost in the swell” and slip through the debt prison's bars. Or maybe everyone who owes money they can't pay will simply become indentured servants. Or we could see the return of debtors' prisons. Basically, taking on unnecessary debt at this point is a gamble. Maybe you'll come out on top, maybe not. I don't think anyone really knows.
“I did hear once that even though you have agreed to a 25-year repayment plan with the bank, they reserve the right at any time, and without reason or warning, to demand you settle your debt immediately. Would there be a spate of desirable rural properties suddenly having their mortgages withdrawn because there is queue of cashed up folk who will pay over and above the value of the mortgage. Is this true? Can the banks do this?”
The short answer is yes. Many (not all) repayment/modification agreements include a clause that allows the bank to immediately begin foreclosure and demand payment of the entire principal if you miss even one payment. In practice, they aren't doing this now because there are enough foreclosures to deal with as it is. However, that story could change in 5-10 years, and we could be facing exactly the kind of scenario you describe.
If you ever do enter into any sort of agreement with your bank, make sure you read and understand everything you're being offered. If you don't understand it, take the document to a lawyer. If you already agreed without reading the document, that sucks, but there's no time like today to get educated.