San Diego Housing Bubble News and Analysis

Let me see if I have the right idea -

I'm an F'd buyer about to go into foreclosure - I let the bank foreclose on me

Bank forecloses on my property and immediately places it in escrow with me as the buyer?

New purchase price is the short sale amount - ie, amount of the mortgage?

Is that the idea?

Yeah you got it.
you buy a house 500k

you can't afford it so you go into default

Bank then allows you to sell it fror 400k as a short sale

You buy it off the bank for 400k.

This would never be kept a secret for long nor would any shareholders stand for this. It's just a rumor.

Not a stupid idea really. If the foreclosure costs are much more expensive than the forgiven amount, this might make sense. In the example aboove, if the house goes through foreclosure, erodes in value due to brown lawn/green pool/vice den issues, it may bring $200,000 eventually. Why not settle for $400,000 now rather than $200K a year from now?

What about the possibility that they may just settle for $400,000 now AND for $200K a couple years down the line when the buyer defaults AGAIN?

We must quit kidding ourselves here: the people living in homes that cost $400K today are NOT making $114,000 in income (the income required to support a 3.5 times income buying ratio)

I think it would be a pretty boneheaded idea. It would set an extremely bad precedent. For a 20% discount why not default on your loan? And if I correctly understand how this works, you wouldn't be taking the ding to your credit because it was a short sale and not a foreclosure.

And what about 2nd mortgages or HELOCs on the house?
Don't those have to be paid off when the house is sold?

This all has the stink of disaster.

This is interesting as basically seems like a way to get the bad financing cleared out and replaced with new debt that is ostensibly manageable without having to make the people move, leave a big mess and have to sell the property and probably most important you don't have to negotiate anything with the current mortgage holder, the process is known and clear and pretty clean.

There is still probably the 1099 issue for the mortgage holder as they did get their debt reduced.

If the FBs could pull this magnificient stunt off a few times over, they could eventually buy the house and own it outright, for free. What a country!

Sounds like lipstick on da pig to me. Of ALL the people on the planet to give a massive discounted house to, it should NOT be the one's who originally stopped paying for it in the first place.

BSR they still go through the entire foreclosure process. In order to resell the property again, it has to clear title. There is no shortcuts being avoided.

Your point in that it makes sense still is valid though.

What I don't understand is if it opens up any liability issues.

SD Realtor

As crazy and bizarre as it sounds, this MIGHT be the best strategy for all concerned. As Mr. Brightside noted, it probably results in the smallest and "easiest" loss for the bank.

The issues are as follows: (1) By doing this "short sale-re sale" strategy CW is still lowering the comps for its REO properties (and other properties, generically), (2) CW still has to take enormous hits to its capital to absorb these losses (and the hits may turn out to be too great), and (3) Are other lenders going to follow suit with a similar strategy.

If I were running CW, this is probably the strategy I'd try to use, which is simply a variant of, "What can we do to keep you in this house so that you can (probably) actually make payments that aren't completely ridiculous relative to your real income?" It probably means lowering the mortgage by 10%-30% and/or lowering the interest rate somewhat. All of this absolutely sucks for CW, but it's probably better than the alternatives. Which just goes to show you how screwed up things really are.

I wonder how Bank of America feels about this strategy?

I have not heard of this but it makes sense that it is at least being considered. If there is a 2nd mtg it would be wiped out by a foreclosure so no need for any approval from 2nd position (it's not a true "short sale"). No 1099 if CW doesn't issue one. Very interesting. I'm certain we'll hear of additional creative strategies moving forward.

Let me say it again (with a bit more development of the thought):

We must quit kidding ourselves here: the people living in homes that cost $400K today are NOT making $114,000 in income (the income required to support a 3.5 times income buying ratio) and therefore NECESSARILY will default again.

It does not make sense, because:

1. It creates moral hazar.

2. On the resale, I supposed the home owner's credit is shut ? Could they still quialify the same loan/terms they had before ? If their credit is still good and sound, then why not "default" again ? If it is shut, would they be able to afford 9 -10% interest rate at 20% off price ?

pepsi,

1. CW doesn't care about moral hazard in the generic sense. They are trying to survive. They could implement this program and STILL not survive, but moral hazard is not something they're concerned with right now. They're just trying to figure out a way to maybe, just maybe, live to fight another day.

(The larger issue is that they will come under pressure from other, more creditworthy borrowers to get better terms and conditions for their mortgages as well. Don't get me wrong, this strategy would lead to a HUGE mess, but it might be a smaller mess than just "letting the market work," so to speak.)

2. Forget about "qualifying," "credit," etc. These would be irrelevant. The only question in this situation would be, "How can we structure a mortgage that these people can (perhaps) repay?" If CW goes down this road it will be about survival, plain and simple, in the generic sense, not about optimizing the terms and conditions of each individual loan.

Now I'm going to say this again - this will still lead to a messy bloodbath, but it is probably better than just simply foreclosing on everyone and letting the market decimate all concerned. It's hard to imagine, however, that CW's balance sheet would survive this strategy.

RUMOR

...nuff said.

I'm sure this doesn't work for every distress case however, assuming the original mortgage has been sold by Countrywide to Wall Street and it's resident is some MBS somewhere then really Countrywide isn't losing any money directly on the bad mortgage (sorry hedge funds) but they are stuck with a servicing obligation which is a bit of a problem and this could be a way out of a fraction of bad deals. They also would make some level of profit on the workout loan. All that said these loans would almost assuredly have to be held in the portfolio so there is a limit to how much you could do this.

Interesting situation but as noted it's rumor. The market will come up with ways to try and manage its way out of this situation.

Net net my guess is less than 5% of the foreclosures fit this model. Anything investor owned is going to to the REO route.