so how exactly does foreclosure (house) work?

[imported_Baloo]

Originally posted by: BlahBlahYouToo
hypothetical situation:

so lets say you pay $500k for a house.
you put a down payment of $100k leaving you with a $400k balance.
lets say you lose your job, but you have a couple months of payments in the bank that will keep you going until you sell the house.
you sell the house 1 month later for $500k and you pay the bank what you owe, which is $400k and you have back in your pocket your initial $100k investment.

of course nothing is ever so simple, so you lose some money for closing costs, lawyer fees, agent fees, etc.
so maybe you would be out $25k (not including interest on the principal, RE taxes, etc).

the only time i see a problem is:
1. you owe a lot more on the house than you can get by selling
2. you cannot find a buyer

do i have this correct?

I fail to see how your hypothetical situation has anything to do with foreclosures. Clearly you do not undertand the issue, as the hypothetical situation you describe has no relevance whatsoever. Your numerated points though, have some relevance.

In terms of the current market, and the foreclosures that are happening, it in no way resembles your hypothetical situation. Most of those buyers suffering foreclosure are victims of predatory lenders. They had poor credit to begin with, and had little or nothing for the down payment, and few choices for mortgage terms.. Now, it isn't that they lost their jobs, though some did, rather, a combination of factors, one being that the mortgage they accepted, the mortgage they had to accept as their only other option was to continue renting, was an adjustable rate mortgage that increases dramatically the interest rate after 5 years or so. Because of the republican economy - Oh, I should not say that, this is not P&N, so ignore it. Another important factor is the current economic climate - people aren't buying houses. The housing market is not so good. These adjustable rate mortgages are intenteded to be paid off in 5 years via refinancing. What happens if you can't refinance? That's when you get stuck with high interest mortgage with payments you cannot afford. Which, by the way, is what those predatory lenders are counting on. What happens if you can't sell the house because of the current economic climate - you can't find a buyer, they foreclose on your ass and you are out on the street, or renting again, and you still owe the full amount minus whatever the bank sells the house for.

This is not happening to people with fixed rate mortgages, at least not on the scale of the adjustable rate mortgages. And it's not happening to people who have $100,000 to put down on a new house.

 

[z0mb13]

Originally posted by: amdforever2
Drop the keys off at the bank and you're done?



Right.


You: ZOMG Here's the keys I don't want the house anymore.
Banker: Aww I understand no problem I'll take the house worth $400k even though we gave you $500k to buy it. Merry Christmas!



BULLSHIT


You don't just walk away and take a credit score hit.

The bank can collect the $100K deficiency from YOU!

IIRC they can't do that, they can only take whatever the value is in the property

 

[Evadman]

Originally posted by: z0mb13

IIRC they can't do that, they can only take whatever the value is in the property

They can take whatever you put up for collateral. Generally, that is the house.

 

[Slew Foot]

Originally posted by: Baloo
And it's not happening to people who have $100,000 to put down on a new house.

Unless of course, your house has fallen more than $100,000

 

[Parasitic]

Most housing markets are falling in value nationwide, aside from few prized communities.

 

[alkemyst]

there are a few things why this is happening...all are very easy to research as they are all in the national news.

1) low deposit vs large property value loss. Cheaper to walk away.

2) conspiracy/collusion. agent/seller/buyer/appraiser. Very common in the last couple years to have a team go in and buy up property at the start of the boom. Have an appraiser shoot high, have an agent that charged a bit high and then hit a bank up for the inflated value.

At the table a low sale was recorded with cash back at closing.

1st payment default.

3) poor family going for the offered carrot of a 'stated' loan. Thinking they will improve their financial footprint in the 1-3 years prior to adjustment MAJORLY. Most people lose the the lottery.


None of this has anything to do with no downpayment...even if values drop your payments are set. It has to do with people buying products designed for investors not home owners.

 

[bctbct]

Originally posted by: Slew Foot

Originally posted by: Baloo
And it's not happening to people who have $100,000 to put down on a new house.

Unless of course, your house has fallen more than $100,000

wow, looking at the listings makes the whole thing real.

 

[alkemyst]

normally someone that put 100k down would ride it out. However, the company I work for walked away from about 100 million dollars in land deposits this past year.

 

[Greenman]

Originally posted by: alkemyst
normally someone that put 100k down would ride it out. However, the company I work for walked away from about 100 million dollars in land deposits this past year.

Someone that put a 100k down wouldn't get an ARM.

I got an ARM back in 91 when I bought my house, and had it for 14 years. Mine had a cap on how much it could adjust each year. I don't remember the exact amount, nor how it was reckoned, but the loan worked out very well for me over the years. Though I did refi in 05, just before everything went to shit. Now I have a nice fixed rate.

 

[rgwalt]

Originally posted by: waggy

Originally posted by: JEDI

Originally posted by: BlahBlahYouToo
hypothetical situation:

so lets say you pay $500k for a house.
you put a down payment of $100k leaving you with a $400k balance.
lets say you lose your job, but you have a couple months of payments in the bank that will keep you going until you sell the house.
you sell the house 1 month later for $500k and you pay the bank what you owe, which is $400k and you have back in your pocket your initial $100k investment.

of course nothing is ever so simple, so you lose some money for closing costs, lawyer fees, agent fees, etc.
so maybe you would be out $25k (not including interest on the principal, RE taxes, etc).

the only time i see a problem is:
1. you owe a lot more on the house than you can get by selling
2. you cannot find a buyer

do i have this correct?

$500k house, $500k loan

house depreciates to $400k. even tho you can still make payments, it's nuts to do this financially.

walk to bank, drop off keys to loan officer. you're done.

simple as that

personally i think thats a silly idea. if you thought the house was worth 500k and you can afford it then pay for it (i guess thats if you plan on staying in the area for more then 3 years).

though i don't see why anyone would buy a house when they are only planning on staying in it 2-3 years.

My parent's bought their house at the crest of a housing boom back in the mid-80's. The house depreciated sharply in value within a year or two of moving in. They road it out and the house is now paid for. Trouble is that it hasn't appreciated much beyond what they paid for it, let alone adjusting for inflation. The difference between their situation and the situation posed by the OP is that mom and dad still had their jobs and we still needed a place to live. The house wasn't worth as much as when they bought it, which sucked at the time, but it would have been foolish to walk away from it.

My dad and I were talking about this ARM and forclosure situation. I am going to be thinking about buying a home in the next 12 to 18 months, and hope to capitalize on the current "situation" by finding some properties that are on the market but have depreciated some in value in comparison to several years ago. It may be bastardly to think this way, but I am a capitalist at heart.

OP: Your simple situation essentially describes the problem people are facing. In a world where a house doesn't depreciate or appreciate, your owner would get their $100K back plus any equity they had accumulated via payments minus any taxes/fees. The numbered issues you describe are all potential problems:
1) You cannot afford the mortgage payment and taxes on your house. The house has depreciated in value to the point that you cannot pay the loan off by selling the house. No buyer will give you enough money to cover what you owe.
2) You cannot find a buyer period (this would be a problem no matter if the home had appreciated or depreciated). The reality is that you will always be able to find a buyer, it is just a matter of finding a buyer to pay you what you want, or at least to cover what you owe, so number 2 comes back to number 1.
3) You have an adjustable rate mortgage and a flexible loan payment plan. You had a low interest rate for the first 5 years with an option to pay only the interest on the loan, and not pay down the principle. You bought as much house as you can afford based on the low rate and the ability to pay only interest (lets say only when you "really needed to"). You plan on riding the wave of home inflation of, say, 10% per year for 5 years and then selling your home for a profit. Year 6 is looming on the horizon and you realize that you cannot financially afford the higher rate and loss of flexible payment plan. You try to sell your house, but many other people had the same idea you had 5 years ago, and now the housing market is saturated with too many homes for sale at outragous prices. The people in your same situation cannot afford to buy your house, and people who can notice the market is flooded with overpriced homes. Pricing depresses demand, supply remains constant (everyone wants/needs to sell), so prices must drop. The house of cards collapses, and you cannot find a buyer to cover what you owe. This comes back to number 1.

Essentially, people forclose because they owe more on a property than they can sell it for. It is a matter of whether or not they forclose because they are forced to (cannot afford payments due to increased interest rate in an ARM or because they lose their job) or because they choose not to be upside down on their property.

Hope this helps.

R

 

[spacejamz]

Originally posted by: waggy

Originally posted by: BriGy86
I think a lot of this can be avoided if you simply stay away from ARM loans. at least that's what my dad told me never to get.

yeap. i would NEVER get a ARM loan. just seems a bad idea.

the idea behind an ARM loan was for people with not so good credit to get a 'temporary' loan (one to three years) where they could rebuild their credit score. Once the ARM period was over, the mortgagor should have been able to qualify for a fixed rate mortgage.

However, most of these people did not change their habits and continued spending and paying their bills late, not giving a rat's ass that adjustable rate would kick in. Once the ARM rate was over (which is happening now), these people were scrambling to pay the new higher rate because they cannot qualify for a traditional fixed rate mortgage. their only choice is to walk away from the property.

The mess we are in right now was not very difficult to foresee. There was a push a few years back to extend more credit to people with bad credit and minorities (I am not implying that these groups are mutually exclusive, but the articles I read specifically targeted them in their marketing campaigns) to allow them to become homeowners...this was an untapped market that had the potential to provide higher revenues because they could charge these groups higher interest rates, higher fees (late charges, pre-payment penalties, etc) than people with good credit.

There was no chance in hell of these people being able to down 10 to 20% and get a fixed rate loan. They typically had very poor credit habits and getting an ARM loan was an invitation to delay the inevitable (in the mean time, mortgage brokers were making commissions out the ass closing thousands of loans which they pretty much knew that most of these new homeowners would probably be defaulting when the ARM kicked in)...

fast forward to today to see the shit hit the fan...and it will probably get a whole lot worse before it gets better....

 

[Dr. Detroit]

106% financing!

Yes, many people financed there homes for more than the seller was paid. They used the 6% for closing costs and had no equity in there home. On top of that they did an interest only mortgage so they never paid 1-cent of equity all in the hope they too could "flip that house"



Suckers!

I've been on the sidelines for 3yrs now waiting while my down payment money continues to grow!

 

[alkemyst]

Originally posted by: Greenman

Originally posted by: alkemyst
normally someone that put 100k down would ride it out. However, the company I work for walked away from about 100 million dollars in land deposits this past year.

Someone that put a 100k down wouldn't get an ARM.

I got an ARM back in 91 when I bought my house, and had it for 14 years. Mine had a cap on how much it could adjust each year. I don't remember the exact amount, nor how it was reckoned, but the loan worked out very well for me over the years. Though I did refi in 05, just before everything went to shit. Now I have a nice fixed rate.

not true at all. Someone would definitely put down 100k and choose an ARM if the teaser rate gave them a significant savings until they sold the property prior to the adjustment.

All ARM's have caps/margins etc. What happened in this current situation is teaser rates were very promising

 

[alkemyst]

Originally posted by: spacejamz

Originally posted by: waggy

Originally posted by: BriGy86
I think a lot of this can be avoided if you simply stay away from ARM loans. at least that's what my dad told me never to get.

yeap. i would NEVER get a ARM loan. just seems a bad idea.

the idea behind an ARM loan was for people with not so good credit to get a 'temporary' loan (one to three years) where they could rebuild their credit score. Once the ARM period was over, the mortgagor should have been able to qualify for a fixed rate mortgage.

However, most of these people did not change their habits and continued spending and paying their bills late, not giving a rat's ass that adjustable rate would kick in. Once the ARM rate was over (which is happening now), these people were scrambling to pay the new higher rate because they cannot qualify for a traditional fixed rate mortgage. their only choice is to walk away from the property.

The mess we are in right now was not very difficult to foresee. There was a push a few years back to extend more credit to people with bad credit and minorities (I am not implying that these groups are mutually exclusive, but the articles I read specifically targeted them in their marketing campaigns) to allow them to become homeowners...this was an untapped market that had the potential to provide higher revenues because they could charge these groups higher interest rates, higher fees (late charges, pre-payment penalties, etc) than people with good credit.

There was no chance in hell of these people being able to down 10 to 20% and get a fixed rate loan. They typically had very poor credit habits and getting an ARM loan was an invitation to delay the inevitable (in the mean time, mortgage brokers were making commissions out the ass closing thousands of loans which they pretty much knew that most of these new homeowners would probably be defaulting when the ARM kicked in)...

fast forward to today to see the shit hit the fan...and it will probably get a whole lot worse before it gets better....

you are confusing teaser rates with the ARM product...an ARM is not about financial level, it's about thinking you can out guess the bank.

 

[sao123]

lot of good explainations in this thread... but in essence... someone bought a house that they shouldnt have.


IMO...If you are not going to live in a house long enough to pay the mortgage... unless u can afford a 30yr fixed... thenh you should be renting rather than buying.

 

[Beattie]

Originally posted by: BarneyFife
They "can" collect but rarely do.

The banks sue people for 2000$ credit card balances. They will certainly sue for 100,000$ in your mortgage.

If you are going to sell a house for less than you owe on it, talk to the bank and see if they will negotiate a short sale and make sure you get that in writing. Make sure there's language on there that says that they wont come after you for the difference.

 

[LegendKiller]

Originally posted by: Beattie

Originally posted by: BarneyFife
They "can" collect but rarely do.

The banks sue people for 2000$ credit card balances. They will certainly sue for 100,000$ in your mortgage.

If you are going to sell a house for less than you owe on it, talk to the bank and see if they will negotiate a short sale and make sure you get that in writing. Make sure there's language on there that says that they wont come after you for the difference.

It all depends on collectibility and time. There are many cases where CC companies will just discharge the balance and absolve you of the amount owed. The banks, at this point, just want to write the mortgage off, sell the house, and be done with it. The longer they draw out the process the worse off they will be.

 

[LegendKiller]

Originally posted by: BriGy86
I think a lot of this can be avoided if you simply stay away from ARM loans. at least that's what my dad told me never to get.

ARMS have their purpose and it's a very good one. However, they were abused. For example, if under a 30yr fixed you could afford a 300,000 house under an ARM you could afford a 350,000 house. Which would you choose?

Many people in this speculative bubble chose the 350,000 house, since they could get "more for their money" and realize a higher appreciation rate.

What ARMs were traditionally used for was people who didn't need to lock in a rate for 30 years, thus they didn't want to pay the premium of going out that long. The lower rate was used to lower payments. If you got a 5-year ARM and planned to stay in the house 5 years, then you were good to go. If you chose to stay in the 300k house longer than that, you could afford to carry the resetting ARM since you didn't choose something you could barely afford (350k) under the ARM, but couldn't afford when the rates reset.

This was compounded by the housing downturn, since under both cases the decision may be to stay in the house. The 300k house, with the obligors paying less per month since they didn't "stretch", could afford a 30-year fixed at that point. However, the 350k house, with a low ARM rate faced an uphill battle with a new 30-year fixed, since the payments would undoubtedly go up.

Add in 100% financing and a depreciating asset, you get the rug pulled out from underneath you.

Option Arms with "teaser rates" were nothing more than a product originally used by high-income high-credit quality people who had lower monthly income and high-bonus style income. They maximized their house purchase ability by paying no principal and lower interest (which was capitalized into the balance of the loan), but then when they received their bonus they made large "catch up" payments to bring them on par with a 30-yr fixed or similar loans.

It was only till recently that these loans were peddled as affordability products for lower income lower credit quality people. They combined the double problem of quickly resetting rates, capitalized interest, and a depreciating asset. It isn't long until these types of people are 130%+ LTV (most capitalization is capped at 20% of the original loan value).

 

[LegendKiller]

Originally posted by: spacejamz

Originally posted by: waggy

Originally posted by: BriGy86
I think a lot of this can be avoided if you simply stay away from ARM loans. at least that's what my dad told me never to get.

yeap. i would NEVER get a ARM loan. just seems a bad idea.

the idea behind an ARM loan was for people with not so good credit to get a 'temporary' loan (one to three years) where they could rebuild their credit score. Once the ARM period was over, the mortgagor should have been able to qualify for a fixed rate mortgage.

However, most of these people did not change their habits and continued spending and paying their bills late, not giving a rat's ass that adjustable rate would kick in. Once the ARM rate was over (which is happening now), these people were scrambling to pay the new higher rate because they cannot qualify for a traditional fixed rate mortgage. their only choice is to walk away from the property.

The mess we are in right now was not very difficult to foresee. There was a push a few years back to extend more credit to people with bad credit and minorities (I am not implying that these groups are mutually exclusive, but the articles I read specifically targeted them in their marketing campaigns) to allow them to become homeowners...this was an untapped market that had the potential to provide higher revenues because they could charge these groups higher interest rates, higher fees (late charges, pre-payment penalties, etc) than people with good credit.

There was no chance in hell of these people being able to down 10 to 20% and get a fixed rate loan. They typically had very poor credit habits and getting an ARM loan was an invitation to delay the inevitable (in the mean time, mortgage brokers were making commissions out the ass closing thousands of loans which they pretty much knew that most of these new homeowners would probably be defaulting when the ARM kicked in)...

fast forward to today to see the shit hit the fan...and it will probably get a whole lot worse before it gets better....

As somebody else mention, this is completely incorrect. ARM loans were not for lower scored people.

Also, it wasn't completely to bet against the bank. It's matching your assets and liability timing primarily and also seeing where rates would go.

 

[ahurtt]

Originally posted by: BriGy86
I think a lot of this can be avoided if you simply stay away from ARM loans. at least that's what my dad told me never to get.

That's a blanket statement. Way too generalized. It depends on a persons needs. I have a ARM with a 7 year fixed rate of 5.125%. It's got about 3.5 years left on it at that rate. This is our first home (a townhouse) and we never planned on living in it for more than about 5-7 years before we traded up to a single family home. I could have gotten a 30 year fixed rate loan but not at that low of an interest rate. So why pay a higher interest rate for the long term fixed rate loan when I'm not planning to be in the house for more than 7 years? Hopefully by the time my 7 years has come up, all this crap will have blown over. We also have a clause in our loan papers that state when the loan adjusts it cannot go over predominant market rates at the time. I suppose if rates were really really low again it could adjust downward too, but I think that's pretty unlikely. Bottom line is, just understand exactly what you are getting into. Don't just start signing shit they shove in front of you without understanding what you're signing. And if you don't like it, walk away from the table.

And to address the OP's question, you typically don't put your house in foreclosure as the owner/borrower. The bank forecloses ON the house when the loan goes into default. If you wanted to force your house into foreclosure, just stop making mortgage payments. The lender/bank will eventually foreclose on you.

 

[JulesMaximus]

Originally posted by: child of wonder
My wife and I made sure we did our homework when we got our home over a year ago and didn't bite on the ARM bullshit. Our lending agent was really straight forward and helpful.

What it all boils down to is people living beyond their means and the banking industry happily making that possible -- only this time the banks have let so many people do it that it created an artificial period of prosperity which will be followed be a period of lube free ass pounding as consumers and banks take it hard up the rear.

However, what's upsetting is that this bubble was created only because the American people were doing what the media and government tells them to do: be good little consumers!

There were a lot of investors flipping houses to make a quick buck too which helped drive up demand and thus prices...at least in some areas.

 

[ahurtt]

Originally posted by: JulesMaximus

Originally posted by: child of wonder
My wife and I made sure we did our homework when we got our home over a year ago and didn't bite on the ARM bullshit. Our lending agent was really straight forward and helpful.

What it all boils down to is people living beyond their means and the banking industry happily making that possible -- only this time the banks have let so many people do it that it created an artificial period of prosperity which will be followed be a period of lube free ass pounding as consumers and banks take it hard up the rear.

However, what's upsetting is that this bubble was created only because the American people were doing what the media and government tells them to do: be good little consumers!

There were a lot of investors flipping houses to make a quick buck too which helped drive up demand and thus prices...at least in some areas.

Basically what we have now is a bunch of lower income to middle class people who are going to be indentured servants to the credit companies and lenders pretty much for the rest of their lives. When you take into account the growing amount of personal debt and negative savings in the U.S. currently coupled with the recent bankruptcy law changes which make it much harder for the average person to walk away from debt, you basically have a class of people who now are indebted to lenders and creditors for a very long time. Think you work for your own paycheck? No, you now work to make the lenders and creditors rich. They suffer in the short term and have to write off some losses from some people who are able to successfully declare bankruptcy and walk away, but in the long term, they now own the educated, working middle class portion of the population who live at least partly paycheck to paycheck. Maybe they have a little savings but not enough to dig themselves out of debt and still be able to save for retirement. These are the people who will not be able to walk away from their debt because they are capable of working it off. The poor and worthless welfare leeches of society will walk away scott free as they have nothing to lose anyway and little the creditors can take.

 

[ShockwaveVT]

Credit Card companies and Banks sell their receivables to collections agencies all the time. Just because the bank doesn't want to spend the time tracking you down for that $100k doesn't mean they won't sell your debt to a collections agency for $20,000. Then you get to deal with the collections agency.

 

[BlahBlahYouToo]

Originally posted by: Fmr12B
106% financing!

Yes, many people financed there homes for more than the seller was paid. They used the 6% for closing costs and had no equity in there home. On top of that they did an interest only mortgage so they never paid 1-cent of equity all in the hope they too could "flip that house"



Suckers!

I've been on the sidelines for 3yrs now waiting while my down payment money continues to grow!

so i take it you're living at home with your paren... i mean roomates?

 

[BlahBlahYouToo]

Originally posted by: Baloo
I fail to see how your hypothetical situation has anything to do with foreclosures. Clearly you do not undertand the issue, as the hypothetical situation you describe has no relevance whatsoever. Your numerated points though, have some relevance.

In terms of the current market, and the foreclosures that are happening, it in no way resembles your hypothetical situation. Most of those buyers suffering foreclosure are victims of predatory lenders. They had poor credit to begin with, and had little or nothing for the down payment, and few choices for mortgage terms.. Now, it isn't that they lost their jobs, though some did, rather, a combination of factors, one being that the mortgage they accepted, the mortgage they had to accept as their only other option was to continue renting, was an adjustable rate mortgage that increases dramatically the interest rate after 5 years or so. Because of the republican economy - Oh, I should not say that, this is not P&N, so ignore it. Another important factor is the current economic climate - people aren't buying houses. The housing market is not so good. These adjustable rate mortgages are intenteded to be paid off in 5 years via refinancing. What happens if you can't refinance? That's when you get stuck with high interest mortgage with payments you cannot afford. Which, by the way, is what those predatory lenders are counting on. What happens if you can't sell the house because of the current economic climate - you can't find a buyer, they foreclose on your ass and you are out on the street, or renting again, and you still owe the full amount minus whatever the bank sells the house for.

This is not happening to people with fixed rate mortgages, at least not on the scale of the adjustable rate mortgages. And it's not happening to people who have $100,000 to put down on a new house.

based on the replies, i think i do have a good grasp of the concept.
my hypo situation should've been explained as how to avoid a foreclosure.