EquineCPA started an interesting thread, or rant, about clients who are contemplating bankruptcy, or are unable to make payroll, or are otherwise in financial distress. Or those were some of the topics that came up in the thread, anyway. EquineCPA's original post referred to clients that were "negotiating through an attorney to see if they could just let the banks take [the properties]." This idea became the source of a lot of indignation. What happened to integrity, why don't people feel obligated to pay their debts, etc.
EquineCPA didn't say whether the borrowers (her clients) were underwater, i.e., whether they owe more than the property is currently worth. So my comments are not directed specifically toward EquineCPA, or her clients.
But when it comes to borrowers who are deep underwater on their primary residence, or even on rental/investment properties, there is something that I think has gone largely unnoticed, or unaddressed...
In many areas of the US, it is not uncommon to see cases where someone bought a property for, say, $300K, and it is now worth only $200K, due to the collapse of the real estate market. These people cannot sell without doing a short sale, or coughing up the difference in value, and they can't refinance, because they are too far away from the standard benchmark, i.e., the amount borrowed generally should not exceed 125% of the value of the property.
Most people who work with money, taxes, or accounting are familiar with these situations. But what you may not realize is this:
The unlawful and deceitful behavior of the banks contributed to, and in fact was one of the main causes, of the collapse of the real estate market.
The dramatic drop in property values was caused by the actions of the world's largest banks.
And I'm not just talking about banks that did a lot of loans to people that shouldn't have qualified for them. That was certainly a significant factor. But there's more to it.
The banks packaged the loans into securities that were sold on the secondary market, called CDOs, or collateralized debt obligations. And they flat-out lied about the quality of the loans that were in these packages. And they got the ratings agencies, such as Moody's and Standard and Poor's, to back up their lies.
When the world discovered that these CDOs were loaded with low quality, high risk, subprime loans, and not the safe, "investment-grade" loans that the banks had claimed, this triggered a chain reaction, which ultimately resulted in a massive drop in property values.
The entire affair is a lot more complicated than this. What I have presented here is a tiny snapshot. I don't think I understand it all. But I do think that the big banks, through their unlawful and deceptive practices, are directly responsible for the drop in property values.
Several different mechanisms are used to get borrowers out of an underwater mortgage. One is foreclosure, followed by sale of the property at auction. Another is the "deed in lieu of foreclosure," where the bank agrees to "just take the property." Another is the short sale. Another is modification of the loan, with a principal reduction. This mechanism is theoretically available through HAMP, the Home Affordable Modification Program. But most banks are not doing principal reductions. Another option is bankruptcy.
All of these mechanisms have roughly the same outcome. The bank can only recover what the property is worth, or in some cases, up to 125% of the property value.
Many borrowers who avail themselves of these processes are entitled to some form of relief from their debt, under basic principles of fairness and equity. The banks do not have clean hands. The banks are getting what they deserve. The banks caused this mess, and now they have to live with the consequences.
I'm have a feeling this post is going to generate a very lively discussion...
BMK
EquineCPA didn't say whether the borrowers (her clients) were underwater, i.e., whether they owe more than the property is currently worth. So my comments are not directed specifically toward EquineCPA, or her clients.
But when it comes to borrowers who are deep underwater on their primary residence, or even on rental/investment properties, there is something that I think has gone largely unnoticed, or unaddressed...
In many areas of the US, it is not uncommon to see cases where someone bought a property for, say, $300K, and it is now worth only $200K, due to the collapse of the real estate market. These people cannot sell without doing a short sale, or coughing up the difference in value, and they can't refinance, because they are too far away from the standard benchmark, i.e., the amount borrowed generally should not exceed 125% of the value of the property.
Most people who work with money, taxes, or accounting are familiar with these situations. But what you may not realize is this:
The unlawful and deceitful behavior of the banks contributed to, and in fact was one of the main causes, of the collapse of the real estate market.
The dramatic drop in property values was caused by the actions of the world's largest banks.
And I'm not just talking about banks that did a lot of loans to people that shouldn't have qualified for them. That was certainly a significant factor. But there's more to it.
The banks packaged the loans into securities that were sold on the secondary market, called CDOs, or collateralized debt obligations. And they flat-out lied about the quality of the loans that were in these packages. And they got the ratings agencies, such as Moody's and Standard and Poor's, to back up their lies.
When the world discovered that these CDOs were loaded with low quality, high risk, subprime loans, and not the safe, "investment-grade" loans that the banks had claimed, this triggered a chain reaction, which ultimately resulted in a massive drop in property values.
The entire affair is a lot more complicated than this. What I have presented here is a tiny snapshot. I don't think I understand it all. But I do think that the big banks, through their unlawful and deceptive practices, are directly responsible for the drop in property values.
Several different mechanisms are used to get borrowers out of an underwater mortgage. One is foreclosure, followed by sale of the property at auction. Another is the "deed in lieu of foreclosure," where the bank agrees to "just take the property." Another is the short sale. Another is modification of the loan, with a principal reduction. This mechanism is theoretically available through HAMP, the Home Affordable Modification Program. But most banks are not doing principal reductions. Another option is bankruptcy.
All of these mechanisms have roughly the same outcome. The bank can only recover what the property is worth, or in some cases, up to 125% of the property value.
Many borrowers who avail themselves of these processes are entitled to some form of relief from their debt, under basic principles of fairness and equity. The banks do not have clean hands. The banks are getting what they deserve. The banks caused this mess, and now they have to live with the consequences.
I'm have a feeling this post is going to generate a very lively discussion...
BMK
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