Thursday, July 2, 2009

Predatory lending....it's back!


Predatory lending is back, this time the predator is the government though. Our brilliant leaders have now decided that Obama's foreclosure prevention legislation did not offer enough help with it's 105% LTV refi limit. The brainiacs in Washington have increased the loan to value limit all the way to 125%. Bravo, it only took them 2 years to forget that programs like this is why we are in this mess. Not that 125% LTV will help many Calfornians. We will need 200% LTV before it helps.

Another government program designed to turn homeowners into debt slaves. Most homeowners are not that financially savy. That's part of the reason they are in the mess they are in. They didn't take the time to find out that they could never hope to afford a home that was 10x their yearly income. A broker or agent told them, "I can make your payments $xxxxx" and that was all they needed to hear. The same thing will happen with this loan program. A banker or broker will tell them "I can get you into a fixed rate loan for $xxxx/mo" and they will take it. They will then be trapped in a home, unable to sell for a decade or two. And the worst part is they will probably have traded a non recourse purchase loan, that they could have simply walked away from, for a recourse loan. A loan the bank can garnish their wages, take their car, their stocks and their beloved singing fish in order to satisfy when they default. And the banks are not going to tell them about that because they get fees from the refi and a nice big fat check from the government for every refi they do under this program.

Aint it grand, you and me get screwed twice by the same program. It will slow down the correction, AND our tax dollars to towards the payment the bank recieves from the government.

9 comments:

Tyrone said...

Ahhh, yes, gotta get that recourse. How else will the banksters enslave the ignorant masses?

FairEconomist said...

This isn't predatory lending at all. The 125% LTV only applies for refinancing of loans already guaranteed by the federal government. The predatory part was the original loan; this is just allowing refinancing to lower the interest rate and make the loan somewhat less predatory.

OSA said...

where in the loan docs will it state if it is recourse?

FairEconomist said...

Recourse is a matter of state law and of business custom. Neither has to show up in a loan document. Refis are recourse in California even though purchase loans aren't. However, almost all loans are *effectively* non-recourse because lender don't bother to pursue defaulters even when they can (which is always, in 45 states). That used to be perfectly sensible, because people only defaulted when they couldn't pay and thus rarely had anything to go after. With "strategic defaults" becoming more common I would think it would sometimes make sense to go after defaulters but that doesn't seem to be happening.

Oldtimer said...

Over 99.9% of foreclosures in CA are non-judicial (i.e. not ordered by a judge in a foreclosure lawsuit).

Because CA has a one-form-of-action rule, lenders taking back homes through non-judicial foreclosure have no recourse to the borrower or guarantor, regardless of what the note says. Purchase, refi, cash-out, whatever...

The only time a lender would consider a judicial foreclosure is when the property is near worthless and the borrower is well heeled (e.g. collateral is raw land near Hemet and guarantor is KB Homes).

alex said...

Oldtimer-

what about all the 2nds and HELOCs?

They may get wiped out by the FC by the 1st, but they still have 5 (?) years to come back and file a lawsuit, no?

Oldtimer said...

2nds and HELOCs are a bit thornier. But if you refi your mortgage (or your 1st and 2nd mortgage) into a new single mortgage, it is still not, for all practical purposes, a recourse loan in CA. If the lender takes back the property in a non-judicial foreclosure (99.9% of the time), the lender cannot pursue a deficiency.

Some insight on 2nds/Helocs

If the 2nd was part of the purchase financing, it gets wiped out - no recourse. If the 2nd or HELOC was not part of the purchase (e.g. taken out later to buy jet skis), then it becomes an unsecured claim.

Formerly secured debts typically trade at a few pennies on the dollar (3 to 5), and are usually settled for a few more pennies. Typical pitch is - don't you have some room on a credit card? You want to be a good guy, right?

a said...

Great info Oldtimer, what about the tax implications of forgiven debt in California?

Oldtimer said...

You should talk to a CPA (I'm not one). I believe tax laws and implications have changed a lot in recent years.

It used to be that if you walked on a $500K mortgage on a house, you were assumed to have sold it for $500K. So if you bought it for $300K, the IRS and CA Board of Equalization assessed you with $200K of debt forgiveness income.