Balky Lenders: Part 2–What happened to Del Phillips?

July 14th, 2010 by Mike Hinshaw

[Editor's Note: This is the conclusion of a two-part look at the difference between home mortgage delinquencies of the wealthy--which are on a dramatic rise--and alternatives for the less well-to-do. Part 1 is here.]

Maybe ‘shrewdness’ is breaching class lines

One guy who doesn’t care about credit ratings and FICO scores–anymore–is a former public affairs worker named Del Phillips who tried to stay in his Chicago home by working out a loan modification, even after he had lost his job.

This is a from a June 25 piece in the Chicago Tribune, and, boy, talk about sneaky…check out this lender:

Phillips bought the one-bedroom condo, tucked into a Lakeview courtyard building, in May 2007 for $212,500, securing a first mortgage of $159,375 and a $53,125 second note, both from Chase Bank, according to county records. In January 2009, he lost his public affairs job, began drawing on his savings and, in April 2009, after the government began its Home Affordable Modification Program, applied for a mortgage loan modification from Chase.

Customer service representatives with Chase, he said, told him to keep paying the monthly mortgage of about $1,400 while he awaited a decision on his application. In September, the still-unemployed Phillips was turned down for a modification because, as the letter stated, his hardship “is not of a permanent nature.”

It’s a common, Catch-22 tactic that lenders commonly use: pressure the homeowner to maintain regular payments regardless of the personal hardship and sacrifice, only to later deny a loan mod because the homeowner has maintained payments–thereby demonstrating no financial hardship.

And the lender had yet more tactics at its disposal:

Phillips decided to stop paying the mortgage and try to sell his condo in a short sale, in which a homeowner sells the property, with the lender’s approval, for less than the amount owed on the mortgage. A short sale typically does not tarnish an individual’s credit history as much as a foreclosure.

Short sales and second notes

Short sales can indeed be an alternative, but not with a balky holder of a second note as explained here, in May 2009 FindLaw piece: “Going back to the issue at hand, what is a short-sale? We discussed the basics of a short-sale in a blog post last year. A short-sale is a foreclosure alternative for distressed homeowners, whereby a distressed homeowner can sell their home for less than they owe on their mortgage, if the lender agrees to the sale.

“A problem with short-sale solution, however, lies in the second mortgage, where it might not always be so easy to convince the holder of a lesser mortgage (for example, a home equity line of credit (HELOC)) to drop the loan. As a result, the short sale remedy isn’t used as much as it could be, to assist distressed homeowners.”

But, lo and behold, Phillips got a decent short-sale offer and dang if the lender didn’t approve it.

Well, of course, with a catch: “Chase notified Phillips that it would still have the legal right to pursue him at a later date for the approximately $54,000 owed on the second mortgage.

” ‘A short sale may satisfy the first lien, but the customer could still be responsible for the second lien,’ said a spokesman for Chase, while declining to discuss Phillips specifically.”

‘He did everything right’

Finally Phillips sought help from a federally approved housing agency, where counselors brought up the alternatives of filing for protection under the bankruptcy code. He didn’t like the idea and resisted “but after consulting with an attorney, in late February he filed for Chapter 7 bankruptcy, not the Chapter 13 that would have negotiated his debts, including those with Chase.”

In other words, he chose not to try to save the house under Chapter 13 and enter a repayment plan to creditors. Instead, the lender will probably be forced to take whatever it can get for the condo–without any recourse to go after Phillips for the second note. He told the Times he couldn’t stand the thought of not only losing the home in a short sale but also then repaying the lender $54,000 on a home he no longer lived in.

” ‘My other option was to say I’ll roll the dice with the bank,’ Phillips said. ‘Will they really come after me? I wouldn’t put it past the bank industry to do that. It’s going to kill me to pay a bank for a house I no longer owned. I was, like, there’s no way I’m going to pay the bank another dime.’ ”

He now regrets paying in good faith “the more than $12,000 he paid toward his mortgage while he sought a loan modification that never materialized.” The lender sent notice of loan default in late May, but Phillips expects to stay in the condo for several months while the legal system works, using unemployment benefits to pay condo association fees and stay alive while job hunting and considering a move to another state.

” ‘ (Phillips) did everything right. He had good credit, and then he lost his job,’ said Michael van Zalingen, director of homeownership services for Neighborhood Housing Services. ‘If your lender isn’t interested in helping you, or the only thing you qualify for hurts your household, I don’t think you have any moral obligation to stay bound in that mortgage or paying to that company when it no longer makes economic sense for you.’ ”

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The bankruptcy reform act of 2005 increased the complexity of the law, but if you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”), bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, you should be aware that some of those laws have changed recently, too. Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13

Balky lenders face results of consumer-grade bankruptcies even as rates of wealthy “walk-aways” go through the roof

July 13th, 2010 by Mike Hinshaw

[Editor's Note: This is the first of two parts looking at the difference between home mortgage delinquencies of the wealthy--which are on a dramatic rise--and alternatives for the less well-to-do.]

A recent headline in The New York Times:

Biggest Defaulters on Mortgages Are the Rich

If you’re thinking, yeah, well–what else do you expect from the Times? OK, here’s basically the same story from Fox:

Wealthy Walk Away From Mortgages

Reading both accounts, one will notice a  shared theme, namely the question  “what’s best for the community?”

Community and neighborhood interests are crucially important. Hence our posts about the nonsensical behavior of institutions that lets home after home slide into foreclosure, which affects property values like bombing a pond. Aanymore, this ain’t about ripples from a pebble. What really hurts a neighborhood more? Owner-driven bankruptcy–or bank-driven foreclosure?

Property-value loss cascades through neighborhoods

Foreclosed properties littered through a neighborhood affect property values throughout the entire community, not merely the adjacent homes.

On the other hand we’ve all seen major league bankruptcies, from big players such as The Donald to major automakers. Not to mention the current, wadded-up mess with the Texas Rangers baseball club…

How is it that when “the big boys” do it, it’s a business decision?

Yet, when consumers file for bankruptcy protection, they are somehow…sneaky?

Unemployment data say ‘no progress’

Let’s look at the numbers of the so-called recovery: Since June of last year the unemployment rate is virtually unchanged, whether you look at the so-called “official rate” (row U-3 in the labor department’s Table A-15) of 9.7 per cent in June 2009 versus 9.6 per cent last month. Ok, that’s not “seasonally adjusted.” The seasonally adjusted figures show a slightly better picture: 9.5 percent in June 2009 versus 9.5 per cent last month–which means even when we consider the lesser numbers of jobless people counted in the “official rate,” there’s no change in a year.

And the same holds true for row U-6, which is the actual “total unemployed” rate. The not-seasonally-adjusted rate in June 2009 was 16.8 per cent in June 2009 and 16.7 per cent last month. Again, a .1 per cent difference. The seasonally-adjusted rate was 16.5 per cent in June 2009 and 16.5 per cent last month. Same pattern.

On the bright side, last month’s rate is down in both columns from a peak in April, when the “official rate” was 9.9 per cent and the actual rate was 17.1 per cent.

So we’ve progressed to the point that we’re back to where we were a year ago–with total unemployment actually closer to 20 per cent than it is to the claimed “official rate” of nearly 10 per cent.

Wealthy ditch mansions as business decisions

And now even the wealthy are sending “jingle mail” to their mortgage servicers, sending in the keys to their mansions (some primary, some secondary homes–and some that were intended as investments) and heading off to, well, wherever the rich go. What’s sort of fascinating, though, is that they’re ditching these high-end properties in significantly higher measure than the less well-to-do have been.

According to the July 8 Times piece, “Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.”

The article cites data showing that “[m]ore than one in seven homeowners with loans in excess of a million dollars are seriously delinquent” while only “[a]bout one in 12 mortgages below the million-dollar mark is delinquent.”

So basically “homeowners with less lavish housing are much more likely to keep writing checks to their lender.”

Lends a new meaning to “there goes the neighborhood,” doesn’t it? Makes one wonder what the brainiacs behind credit ratings and FICO scores are going to do with these data.

The data were provided by analytics firm CoreLogic to the Times, who says, “Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

“ ‘The rich are different: they are more ruthless,’ said Sam Khater, CoreLogic’s senior economist.”

The Fox account shares a similar perspective concerning the data: “As for those investment or second homes, Corelogic says delinquents on those topping the million dollar mark sit at 23%, while it’s just 10% on the cheaper ones.”

But the Fox writer tries a reverse spin: now that the wealthy are acting like the plebe sub-primers, suddenly having mortgage problems isn’t a class sin. But it just goes to show how the salt-of-the-earth middle class endeavors to persevere, against all odds.

“So to me this isn’t just an excuse to bash the wealthy, ” writes Gerri Willis, “… but a testament to the middle class…”They understand the value of a dollar and the value of a contract.

“Many are just too proud to throw up their hands and wave the white flag — for better or for worse.”

In other words, Willis seems to be saying, C’mon guys, even if it makes no business sense and the banks refuse to work with you, keep making those payments and honoring those contracts!

(In Part 2, we’ll have a look at what happened to Del Phillips and his condo.)

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The bankruptcy reform act of 2005 increased the complexity of the law, but if you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”), bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, you should be aware that some of those laws have changed recently, too. Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13