The foreclosure mess got messier over a month ago, when GMAC, Bank of America, and others were caught faking (essentially) affidavits supporting their foreclosure lawsuits. The irony of banks acting irresponsibly with their finances was not lost on the media. Of course, robo-signing, as it was soon termed, was already commonplace in another kind of business: debt buyers.
Strategic default—walking away from your home and mortgage—is getting more common. The interesting part is who is doing it: according to a recent study, people with good credit. For such consumers, strategic default may be the best of a range of bad options.
The same study found that 588,000 people walked away from their mortgages in 2008, far more than the industry thought. And most of them seem to understand what they are doing—they just do not have any better option.
Displaying their continuing failure to make any intelligent business decisions, banks apparently try to identify potential strategic defaulters, and then avoid offering them loan modifications. If this group is defaulting strategically, they would probably stay in their homes if it made sense. Maybe the banks ought to try making sense, for a change.
Homeowners who ‘strategically default’ on loans a growing problem | LA Times (via Consumerist)
More consumers are falling behind in their bills. 6.6% of all credit cards are more than 30 days late, and delinquencies tracked by the American Bankers Association are the highest since it began tracking them in 1974.
The rise in defaults—which is really not news, at this point—will inevitably lead to an increase in debt collection activity, including abuse and harassment, and even more bankruptcies, which are already on the rise (despite a slight dip in June).
In other words, the need for stronger consumer protections is greater than ever. The Fair Debt Collection Practices Act must be strengthened and updated, and Congress should approve the President’s plan for a Consumer Financial Products Administration (CFPA).
Once a debt is in default—meaning you stopped paying it—one option is to attempt to negotiate a settlement with the creditor. (You can try this before you go into default, but creditors are rarely willing to play ball until you prove your poverty—and before they rack up some more fees.)
You could just pay the full amount of the debt, but that probably means paying a bunch of fees that bear little relation to your debt. And hey, it never hurts to ask.
When you make the call to negotiate a settlement, consider the following.
“Misleading practices by credit card issuers will come back to bite them, say report author Gregory Larkin and Laura Nishikawa, as uninformed consumers who wind up facing surprise interest rate hikes and fees will be more likely to default on their loans.” Credit cards at the tipping point? | The Red Tape Chronicles
I am teaching two continuing legal education seminars on consumer law in June. My presentations tend to be engaging (I don’t have the patience for boring presentations even when I am giving them), informative, and well-attended. Register early!
I am teaching four other CLE seminars in the next three months focusing on practice management. For more information, visit my firm website.
If you’ve been paying the least bit of attention to the news lately, you know that the subprime mortgage industry is causing all sorts of problems. There is a lot of talk about the problem, and a bit about large-scale solutions. But when you get right down to it, every homeowner has the solution. Did you get an adjustable-rate or negative amortization mortgage? (Check and find out, if, like one in three homeowners, you don’t know.) Are you up for an adjustment this year? If you are, and if that you will have a hard time affording the new payment, be proactive: call your lender before they call you.
Refinance to a fixed-rate loan. You can probably get one lower than what your rate will adjust to. If you can’t do that, consider selling your house. You will probably make more than you lose, if you do.
From the New York Times article about this very subject:
The smart thing to do is to take action before the lender does. The homeowner should initiate the contact with the lender. So first thing: know when your loan resets are scheduled and by how much and how often. Read those loan documents you got at closing.
Then 90 to 120 days before the loan resets start talking to the lender. Lenders usually approach their borrowers 45 days before a reset. That is not enough time for a borrower to act. Here is an online calculator so you donâ€™t even have to bother to count the days by hand[.]
If you started out with a 5.5 percent interest rate, it will adjust to something like 7.75 percent. â€œIf you want to wait and get that rate you can,â€ said Joe Rogers, executive vice president for the sales and service systems office of Wells Fargo Home Mortgage. â€œOr you could get a 6 percent fixed loan now.â€
If you have no equity in your home, or you are upside-down on your loan, it’s time to think seriously about what benefit you are getting from “owning” that home. In essence, none. It might be your best move to call your lender, tell them the situation, and say you are willing to walk away for a deed in lieu of foreclosure. Either the lender will work something out, or if nothing else, you walk away having basically paid tax-deductible rent since you moved in.
There are other options, as well, but most of your options evaporate once the bank starts the foreclosure process.