Thursday, October 28th, 2010

The Rain in Spain Something Something on the Debt-Ridded Homeless

I'm not quite sure what the Times means by "personal liability mortgages" in their fascinating story today on the insanity of foreclosures in Spain, because that phrase doesn't really exist in English. But, yow, I did have no idea that repossession wasn't the end of owing money on loans and mortgages, and that mortgage debt was excluded from bankruptcies in Spain. Maybe there are actually ways in which the U.S. looks out for individuals that is better for people than they way it is done in Europe! Huh. Still, it is hilarious to look back at this BusinessWeek article from 2007, which declares Europe's mortgage and housing and banking industries to be sound and untouchable, while now we are talking about "Spain’s giddy real estate boom" and 1.4 million people there are facing foreclosure.

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Astigmatism (#1,950)

One of the most sickly ironic twists of fate at the beginning of the crisis in late 2007 was that people in the US who owed more than their homes were worth and whose homes were foreclosed on ended up owing taxes on the difference as "forgiveness of debt income". Believe it or not, Congress actually passed a useful law to correct that problem and help people out (though it expires in a couple of years). Can you imagine?

Smitros (#5,315)

Bankruptcy tends to be a more forgiving arrangement overall in common law countries than it is in Napoleonic code countries, where the stigma attached to bankruptcy is higher and presents a permanent rather than temporary handicap, especially for entrepeneurs.

BadUncle (#153)

Yeah, don't you go to jail in France if you fail on a credit card?

Government officials say Spain’s system of personal guarantees saved its banks from the turmoil seen in the United States.
It is a pox on the nation that our banks experienced such turmoil. Let's hope the new Republican leadership tightens up the foreclosure loophole that lets people people walk away from the mortgage after their house is no longer.

Actually I remember reading about this in the U.S. It's called a deficiency judgement and it allows the bank to come after you if your house is worth less than your loan amount. A super shady looking website lists these states as those that allow it:
North Carolina
Rhode Island
South Dakota

katiebakes (#32)

I miss the days when itself could be defined as "a super shady looking website."

Also this: (don't know how to link to shit)
Can they come after you?
Whether banks can and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there's a second mortgage or other liens. But if borrowers ignore the possibility of deficiencies, it could haunt them.

"Once they have a judgment, they can pursue you anywhere," said Richard Zaretsky, a board-certified real estate attorney in West Palm Beach, Fla. "They can ask for financial records, have your wages garnished and, if you fail to respond, a judge can put you in jail."

In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms.

Some states, such as California, are "non-recourse" and don't allow deficiency judgments. But, even there, if the original loan was refinanced, some or all of it may be subject to claims.

Deficiency judgments on short sales and deeds-in-lieu can happen in many more places. In these cases, extinguishing the debt is often a matter of negotiating with the bank.

But even when lenders are willing, many borrowers may not be aware that they have to ask for release. So, if you are pursuing a short sale, be sure your attorney asks the bank to release you from any further obligation.

"People shouldn't have a false sense of security that a deficiency judgment may not be later sought," Zaretsky said.

He expects many will be filed over the next few years, based on the fact that banks have sold many of these accounts to collection agencies and other third parties, at discount.

"The parties who bought those notes wouldn't have paid money for them unless they had the intention of acting," Zaretsky said.

Ticking time bomb
What can be scary is that the judgments don't have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.

It doesn't have to be a large amount of debt for a lender or collection agency to come after borrowers. Richard Varno and his wife short sold their Nashville home back in 2004 after he lost his job.

It wasn't until 2008, when the second lien holder asked him for $25,000, that he realized he still was liable.

r&rkd (#1,719)

Right, but the difference from Spain (at least as described in the NYT piece) is that, in the U.S., the debt can be discharged through bankruptcy (if you can afford the up-front fees for filing). And even having a judgment against you isn't too bad: wage garnishments typically top out at 15% of wages and, while you effectively have to live paycheck-to-paycheck, many households live paycheck-to-paycheck anyway.

Right, I'm not saying that it is exactly the same. Whether they can do this at all depends on the state, the type of foreclosure, and whether the house was the primary residence. Also, in the article I pulled the second bit of info from, the banks sometimes wait things out until people recover financially. Then they hit them with this. I don't think a lot of people are aware of this, and it would really suck to go through the foreclosure process and still be on the hook financially for what could amount to a lot of money depending on the market. Also, if you are living paycheck-to-paycheck I'm sure every dollar counts.

Also, I can see how having harsher penalties for defaulting on mortgages would leave their leadership to believe that their market was more stable, but that kind of gets tossed out the window when the home ownership rate is above 80% and the unemployment rate is at about 20%, right?

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