Can Anybody Verify This?

[Doofrat]

Nor-La-Temecu-SD-GUY posted this on another thread, but I’m wondering if this is the standard case with loans, and what are the chances of a bank actually leveraging this option against people?

Submitted by Nor-La-Temcu-SD-GUY on February 20, 2007 – 6:19am.
A Rich Dad Quote,

Where Deflation Does Its Damage

In a deflationary market, the value of your home can drop. If the value drops, the bank may call in your loan. Even if you’ve never missed a payment, and even if you’re ahead on the payment schedule, the bank can call in your loan if they feel the value of the property is lower than the loan amount.

For example, say you buy a house for $100,000 and put 20 percent down and borrow $80,000. If the market deflates and the value of your home drops to $70,000 (because everyone else is selling their homes to get out of debt), the lender may ask you to pay the $80,000 you owe immediately.

If such deflation happens, cash will become king. There will be half-price sales on BMWs, expensive restaurants will close, and people will be out of work. And anybody who caters to people with dumb money will be in trouble. As I said before, deflation is much worse than inflation.

[asragov]

It seems unlikely that a bank would require you to pay off your mortgage if you are still making payments (I am not even sure that they can). A bank would buy itself a large headache in a market that is so depressed, and typically loses about 20% in the operating costs (realtors, holding costs, legal fees, etc.) workout process. If you walk away, certainly the amount of debt forgiven would be considered income, and they would send you a 1099 for that “income” ($10,000 in this example).

Also, the second mortgage / equity lines of credit are usually the ones that have a clause regarding curing a large fall in the price of the collateral (and I think you might have to just make up the difference, rather than pay it all off). I don’t think that first mortgages work that way.

[The-Shoveler]

This quote was from Robert Kiyosaki (Rich Dad) from an artical on Yahoo Finance.

[kewp]

What is the lender going to do, break your legs if you can’t pay?

The house is the collateral, so I expect most folks will just toss the keys and walk if they can’t make the payments or find a buyer. The bank the sells the property for whatever they can get, keeping what payments have already been made. Not a loss for them in the short term.

Note thats its foreclosure sales that can deflate a market in a hurry. The bank has no emotion involved and just wants to liquidate the asset as soon as possible.

I’m not sure this could lead to deflation, unless the supply exceeds demand by so much the prices really go in the toliet. Always possible, though.

My question is what sort of consequence this will have on the FB. Bad credit? Bankruptcy?

[kicksavedave]

Where is the legality in a bank signing a contract that says you have 30 years to pay off the loan, then changing their minds after a year and saying you now have 30 days. BS! I would never sign a loan document that had such a clause. Who would? Only someone who doesn’t read the fine print.

There are specific reasons stated in a contract that qualify you as defaulting. The home value dropping a little, I’ve not seen that. Has anyone else actually seen that clause?

[Diego Mamani]

There is a very simple explanation for this. A few mortgages are of the “callable” type, which means that the lender can ask you to repay the full amount at virtually any time, or under certain conditions, whatever the contract stipulates.

Such callable mortgages are rare, that’s why most of us haven’t heard of them. However, in recent years, some of these products may have been pushed to less sophisticated borrowers. Like prepayment penalties, balloon payments, etc., callable mortgages may yield fatter commissions to the loan agents.

[Bugs]

Those loans aren’t THAT rare. There are a lot of borrower who are subject to those terms but who don’t realize it. It’s like the credit card companies that have the right to jack up the interest rate on your CC if you fall behind with one of your other creditors.

It’s extremely unlikely that a lender would foreclose on a property just because the borrower is upside down. Some of those borrowers will soldier on anyway. The lenders truly don’t want to be in the business of owning and selling RE assets. They’ll only foreclose if they think they have no other recourse for getting paid. The process of foreclosure itself costs them a lot of money, as does the maintenance and marketing.

[Author]

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