Friday, April 22, 2005

Looking Back On The London Crash

This NZCity link explores the experience of homeowners in London after the last boom. "Homeowners were walking into banks and tossing the keys to the home on the bank manager's desk, saying: 'It's all yours now.' And then they learned one of the brutal facts about home ownership; you cannot hand your house back to the bank and walk away from your mortgage."

"The banks took the keys, sold the house and then sued the owners for the difference between the selling price and the mortgage debt."

In telling the tale, it seems like the writer works for the LA Times. "Income growth was strong. Borrowers were able to obtain higher loans relative to housing values. Demographic trends were favourable with stronger population growth in the key house buying age group. The supply of houses grew more slowly. Interest rates fell. The very experience of housing appreciation reinforced expectations of further gains and the market had become a classic speculative bubble. The house price to income ratio, which stood at the second highest peak in the post-war period."

Then it all unwound. "The bust was the result of the reversal of most of these factors. Interest rates rose. Income growth and growth expectations weakened. Demographic trends reversed. Mortgage lenders tightened up their lending criteria. Not even the major falls in nominal interest rates were sufficient to revive UK house prices. UK housing remained very bad for very long. When property crashes, it is far more painful than a share market crash."

15 Comments:

At 8:42 AM, Blogger Nayrab said...

This comment has been removed by a blog administrator.

 
At 8:45 AM, Blogger Nayrab said...

It would be funny, yet sad too if speculators tried to give the keys the bank; only to have the banks turn around and sue for losses once prices correct.

With the new bankruptcy laws, it may happen. I would feel somewhat sorry for the homeowner actually living in the house, who leveraged himself in order to have a home. I would not feel one bit sorry for the flipper/speculator who helped drive the market into mania.

 
At 8:59 AM, Blogger deb said...

I know in most (all?) states you cannot be pursued for additional money beyond to sale of your home if you are foreclosed upon, as long as it is a "purchase money" loan. If a borrower (homeowner) refinances and takes even one dollar more than their original "purchase money" loan balance, does that then open them up to being pursued for additional money?

I don't know the answer, maybe some of you do. It seems to me it is possible that vast numbers of people have refi'ed and exposed themselves financially in a way they never imagined.

I know this scenario applies on a HELOC. If the second forelcoses, they can pursue you for the cost of the first and the second, I think???

 
At 9:01 AM, Blogger dwr said...

"Mortgage lenders tightened up their lending criteria."

This is the part I feel most people don't realize or appreciate. Imagine "qualifying" for a loan today for $500,000, paying interest only for three years, trying to refinance at that time and being told you now only qualify for $300,000?

 
At 9:16 AM, Anonymous Anonymous said...

Earlier this week someone posted an excellent article about judicial vs. non-judical foreclosure. I'm not sure if it was just in CA or not, but the jist of it was: if a bank lends the entire purchase price, they can only foreclose and sell the house, if a bank lends less than the purchase price they can seek a judical foreclosure and go after the borrowers other assets.
I recommend hunting down the article/link as this is not my area.

 
At 9:16 AM, Anonymous Anonymous said...

Earlier this week someone posted an excellent article about judicial vs. non-judical foreclosure. I'm not sure if it was just in CA or not, but the jist of it was: if a bank lends the entire purchase price, they can only foreclose and sell the house, if a bank lends less than the purchase price they can seek a judical foreclosure and go after the borrowers other assets.
I recommend hunting down the article/link as this is not my area.

 
At 9:40 AM, Blogger deb said...

It doesn't have to do with the purchase price, but whether or not it was a purchse money loan, a loan obtained to purchse the property. I think a loan continues to qualify as a "purchase money" loan as long as you do not refi for a higher amount, ie "cash out". With a purchase money loan, the borrower can not be pursued for additional money.

I wonder if by refinancing for even one dollar more, the borrower has jepardized their loan's status as a "purchase money" loan and by doing so lost the protection from lender recourse. This could come back to haunt many homeowners.

 
At 11:35 AM, Anonymous hellboy said...

(I wonder if by refinancing for even one dollar more, the borrower has jepardized their loan's status as a "purchase money" loan and by doing so lost the protection from lender recourse. This could come back to haunt many homeowners.)

Please, someone answer Deb's question. This could be vital in bubble cities were there has been a lot of refi activity.

 
At 11:41 AM, Anonymous Anonymous said...

http://www.bob-taylor.com/forclose.htm
Not a legal advice

Deficiency Liability. A deficiency occurs when the property sells at the foreclosure for less than the amount of the loan balance. For example, if the loan balance is $200,000 and the foreclosure sale amount is $175,000, there is a deficiency of $25,000 for which the borrower is potentially liable. Fortunately, for a complex set of legal and accounting reasons, there is rarely a deficiency in a residential foreclosure and even if there is it unlikely to become an obligation enforceable against the borrower. For example, in California most lenders, when bidding at the foreclosure sale on their loan, will 'credit bid' all or nearly all of the loan balance regardless of the actual value of the property. Furthermore, California has .anti-deficiency' protection for the borrower in Code of Civil Procedure 580d which prevents the lender from obtaining a deficiency after a foreclosure of residential property under a deed of trust. Since most foreclosures of residential property occur under a deed of trust (and not a judicial foreclosure) there is no liability for a deficiency.

 
At 11:48 AM, Anonymous hellboy said...

I always wondered why it was so easy to walk into the bank manager’s office and toss him the keys. It makes perfect sense if you’re “under water” and struggling to just call it quits especially if the bank can’t come after you for the difference.

If Deb’s hunch is correct about the refi of a purchase loan to get cash out is correct then this may ultimately affect the number of properties put on the market when the bust finally hits. It might mean less property on the market due to the fact that selling or going into foreclosure might trigger legal action against the homeowner for the difference which in some cases could be very substantial. This might force people to stay in there homes at all cost? I don’t know if it would work this way but just trying to think through different scenarios.

 
At 11:50 AM, Anonymous hellboy said...

To last anon, thanks for the post.

 
At 12:08 PM, Anonymous Anonymous said...

http://www.stimmel-law.com/articles/CA_AntiDeficiency_Statue_ProtHomeOwnMonJudge.html

This one has even better explanation about foreclosure.

Junior Lien Holders (Second Deeds of Trust, etc.)



Note that if the holder of junior liens secures notes not used to purchase the property (thus are not purchase money mortgages) that the protection of this statute would not apply. (Thus “equity lines” used to purchase other things would not require the financial institution to comply with the anti deficiency statute.)

The “Dwelling” Requirement



Note that the protection is only afforded the dwelling of the borrower on the purchase money mortgage but that the building can be up to four family dwelling buildings thus would cover the standard duplex, triplex or fourplex IF the holder of the Note also lives there. The protection does not exist for non dwelling security, e.g. commercial property or rental property in which the borrower does not dwell.

Waiver of The Protection:



A common mistake of those seeking protection under Section 580b is to assume that the protection cannot be waived. It is true that the protection of 580b cannot be waived in advance, e.g. in the Note or Deed of Trust executed. However, the protective provisions can be waived by subsequent conduct of the debtor including a written agreement to so waive. The leading case is Russell v Roberts (1974) 39 CA 3d 390 in which an agreement with the creditor for an extension of time to pay in return for the waiver was upheld by the Court.



Thus the most critical time for the debtor normally occurs during the weeks after default is declared on payment of the Note and the creditor suggests various ways that the foreclosure can be delayed or stopped if the debtor merely agrees to pay some additional sums and/or waives the protection of the anti deficiency statute. All too often the debtor, hoping to rectify the situation, signs documents that end up waiving vital protections, not fully understanding how dangerous that can be.
Again not to be considered as legal advice

Madhu

 
At 1:08 PM, Anonymous hellboy said...

Sounds like homeowners can walk as long as they don't unwittingly waive their 580b rights but speculators...er "investors" will not have the 580b rights. Seems to confirm what many say will happen; investors dumping first to cut losses fast. Thanks for this info anon, it has been helpful.

 
At 1:13 PM, Anonymous Anonymous said...

Even the investors who have bought houses using their home equity loans or cash out re-fi will probably loose both homes , if they dont have enough cash to cover the deficiency in their second home, that is while making payments on the cash out re-fi.

It is adouble whammy , isnt it?

Madhu

 
At 2:20 PM, Anonymous Anonymous said...

Great post, thanks 12:08 anonymous.

"There is also danger for the financial institutions in the event the market truly deteriorates. Their security is only as good as the equity on the property. With people borrowing up to ninety percent of the value of the home in an appreciated market, any real deterioration of property values means that the banks will quickly lose any value to their security and the anti deficiency statute means that they will not be able to proceed against the other assets of the borrower."

As I've read before, this sounds like a good argument for either having your home free and clear or else mortgaged to the hilt, with the equity taken out and parked somewhere else (provided one has the discipline to save/invest it, not spend it). Equity left in the house is nothing but a cushion of safety for the bank, not the "owner".

 

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