US home loans. Do they all work like this?

[alchemysa]

We've been hearing of course about the financial crisis in the US and in particular about all the problems with home loan failures. I never knew that in the US you have a system whereby someone can 'simply' walk away from a home and leave the bank with the home and the debt. Here in Australia the debt stays with you, so even if you can't maintain the payments and the bank takes back your home, you are still responsible for the full original loan. The only way out of it is the 'last resort option' of declaring bankruptcy.

I'm wondering if I've got this story straight, or is it that only some US home loans work under the system I described.

I can see 'positives' with both systems. 'Your' system certainly lets low income earners get into the market but perhaps there's less incentive to work out what you can really afford, and then fight to keep it when the going gets tough.

 

[turbo36]

We've been hearing of course about the financial crisis in the US and in particular about all the problems with home loan failures. I never knew that in the US you have a system whereby someone can 'simply' walk away from a home and leave the bank with the home and the debt. Here in Australia the debt stays with you, so even if you can't maintain the payments and the bank takes back your home, you are still responsible for the full original loan. The only way out of it is the 'last resort option' of declaring bankruptcy.

I'm wondering if I've got this story straight, or is it that only some US home loans work under the system I described.

I can see 'positives' with both systems. 'Your' system certainly lets low income earners get into the market but perhaps there's less incentive to work out what you can really afford, and then fight to keep it when the going gets tough.

Our system is the same as yours; if you walk away from the loan you still owe the money and will get sued by the lender. They can go after any resources and income you have ( with a few exceptions).

 

[RoyJackson]

Filing bankruptcy is about the only way one can get away from a mortgage. Of course, one's credit rating will be zip for about 10 years.

I blame most of this crisis on the real estate/banking industries themselves with their adjustable rate mortgages and overvalued real estate. I am very sorry they're getting a bailout. I do hope those bail outs have a provision banning bonuses and those outrageous "golden parachutes".

 

[Jimbrown]

The basic problems that a whole lot of loan companies made loans to people that should have never gotten loans, with no collateral and when they default they have nothing for the loan company to sue for.

 

[Redbug]

Just thinking about it some more Roy,

I have wondered...Why do the boards of these large companies set such large salaries and bonuses of the CEO's? I think us stockholders should look and demand more in line and reasonable salaries of the CEO's. That would mean higher dividends to the stockholders. Also, I have heard it said on TV that part of the problem of the home loans defaulting is home owners buying more than they can afford. The banks let that happen. $money$. I think that now that the govt has stepped in, there needs to be much more regulation. The free market did not work in this case.

Alchemysa, is your home market booming in your country? I wonder what controls are in place in Australia that make it different than over here? (Other than a bunch of crooks running the Fed and in Govt like over here).

 

[pennwalk]

Remember when there were rules for getting mortgages. Like that you could qualify for a mortgage equal to two times your gross income and that you had to put 20 percent down. If "bankers" had stuck to the rules there wold be no problem. The whole thing is unbelievable. There are so many "bankers" across this country who truly need their a$$es kicked that If we started right now it would take us years. It just goes to show if you are going to screw up make sure you screw up really,really big and you will get away with it. Why is it more and more in this country the guilty never get punished? You know I really don't want to pay for this. It feels like robbery.


Chris

 

[kenmac]

No doubt that the CEO's had a hand in it.They pushed the lending people into making loans that home buyers couldn't afford to get big loan #'s so, they (the CEO's) could get a larger bonus

 

[ultrarunner]

Purchase Money First Deed of Trusts are most always Non-Recourse loans... at least in my State of California.

Non-Recourse means the lender Cannot go after the Buyer, other than putting a Black Mark on the Buyer's credit in the case of default. The lender's only security is the asset which is the home itself. This type of loan applies to Owner-Occupied 1 to 4 units.

The moment a house is refinanced or other loans, such as a Home Equity Loan is placed on the property, the new loans are no longer Purchase Money loans and the lender now can go after the borrower(s) personally. This is where Bankruptcy comes into the picture.

Don't kid yourself for a minute that the powers that be didn't see this coming. Several years ago the US made sweeping changes to Bankruptcy laws.

Part of the problem is also Regulation... at least in my little corner of the world, East Oakland CA.

When I bought my first homes it REQUIRED 20% down plus closing costs, 6 months of estimated living expenses in the bank, 3 years on the job, good credit and the home had to have a clear Pest Control Report and supporting Appraisal High enough to justify the lenders collateral in a market not in decline.

Lenders routinely avoided East Oakland and were not shy about it. Several Lawsuits against Lenders caused Regulation forcing lenders doing business in the State to lend in ALL areas and they were judge in or out of compliance by how many loans made in my city.

The Banks making the loans now had pressure and incentive to make as many loans as possible... Pressure from the Federal Community Reinvestment Act and Incentive because of the profit without risk due to selling the loans to Freddie and Fanny and insured by AIG.

I'm not a Finance Guy so everything above is based on my own experience buy and selling many homes in Oakland CA over the last 26 years.

 

[RonMar]

SO if the government is in debt, where is the money for the bailout comming from? I am a little fuzzy on this apparent "smoke and mirrors" bailout concept... I am also a pretty simple SOB and know I can't spend money I don't have, or at least expect to earn in a given ammount of time.

 

[MikePA]

I have wondered...Why do the boards of these large companies set such large salaries and bonuses of the CEO's? I think us stockholders should look and demand more in line and reasonable salaries of the CEO's. That would mean higher dividends to the stockholders. Also, I have heard it said on TV that part of the problem of the home loans defaulting is home owners buying more than they can afford. The banks let that happen. $money$. I think that now that the govt has stepped in, there needs to be much more regulation. The free market did not work in this case.

Fannie Mae and Freddie Mac were following the direction of Congress and urging banks to loan money to people who should never have qualified for home loans in the first place. If banks didn't do this, there were penalties. Please get your facts straight.

Fannie Mae and Freddie Mac are not private corporations even though they have CEOs. They are backed by the federal government so they had zero risk. In other words, this is not a failure of the free market. It's simply one more example of the federal government screwing things up by meddling in the free market. Several former executives were charged and fined for what they did. Some of these same executives are advising a presidential candidate now.

Why anyone would think that MORE regulation would make things better is beyond my ability to comprehend. The same federal government who caused this mess, is supposed to get even more power to regulate? Insane.

 

[kenmac]

SO if the government is in debt, where is the money for the bailout comming from?

I guess it's down to the old printing press to print more $$ Wish I cound print more when I run out

 

[scott_vt]

Fannie Mae and Freddie Mac were following the direction of Congress and urging banks to loan money to people who should never have qualified for home loans in the first place. If banks didn't do this, there were penalties. Please get your facts straight.


Why anyone would think that MORE regulation would make things better is beyond my ability to comprehend. The same federal government who caused this mess, is supposed to get even more power to regulate? Insane.

Good Afternoon Mike,
Thats true and I dont disagree, but what Im confused about is why the mortgage lending practices were changed from years past ? I mean why would Alan Greenspan endorse these changes to the lending industry to begin with ? Knowing full well that something like what we are seeing right now could happen and knowing what the impact would be on the economy and the American taxpayer !

 

[alchemysa]

Alchemysa, is your home market booming in your country? I wonder what controls are in place in Australia that make it different than over here? (Other than a bunch of crooks running the Fed and in Govt like over here).

Redbug. No its not booming. I believe that home sales, and approvals for new buildings are at pretty low levels compared to a year or two ago. But I think house prices are generally holding up. I doubt that its good management that (so far) we've escaped this crash. More likely its just dumb luck. We had a couple of big bank crashes over here about 15 years ago. My State is still only just getting over that! Perhaps our banks have been a bit more conservative because of that.

 

[DocHeb]

I think that now that the govt has stepped in, there needs to be much more regulation.

At the risk of turning political, the current crisis did not occur because of a lack of government supervision. Freddie and Fanne Mae had been under government supervision and regulation for years, and this happened under Congress' watch. Congress decided that it sould be policy to make it easier for people to get loans to buy houses, and there were a lot of loans that should have never been originated.

 

[MikePA]

Good Afternoon Mike,
Thats true and I dont disagree, but what Im confused about is why the mortgage lending practices were changed from years past ? I mean why would Alan Greenspan endorse these changes to the lending industry to begin with ? Knowing full well that something like what we are seeing right now could happen and knowing what the impact would be on the economy and the American taxpayer !

Hi Scott,

The regulations were changed in the Clinton administration in order to be able to pander to one of their constituent groups, "We're allowing more people to become home owners. No more 'redlining'." Well, some areas and some people were redlined and denied loans for good reasons. Now we know what those reasons were.

 

[alchemysa]

Purchase Money First Deed of Trusts are most always Non-Recourse loans... at least in my State of California.

Non-Recourse means the lender Cannot go after the Buyer, other than putting a Black Mark on the Buyer's credit in the case of default. The lender's only security is the asset which is the home itself. This type of loan applies to Owner-Occupied 1 to 4 units.

This must be what I'm hearing about. I've never heard of anything like that over here. How widespread is this? Do the lenders insure these loans and is that what's caused the AIG crash?

 

[DocHeb]

... Clinton administration ...

I was trying to keep it as apolitical as possible, but since you broke the ice, don't forget to mention Bush's attempt in 2003 to try and tighten the regulations in this matter, and it was rejected by Congress...

 

[mjarrels]

BUT, the good news is, don't have to watch many countrywide morgage, WAMU, or AIG commercials on TV anymore!

mark

 

[MikePA]

How widespread is this? Do the lenders insure these loans and is that what's caused the AIG crash?

A small percentage of mortgage loans are in default. No and no.

 

[vsteel]

I am also going to stir the pot a little and say that some of the blame has to go on the homeowners that brought without thinking. I personally know of two separate people that are under houses I have no idea how they are going to get out of other than go bankrupt. They have house payments that are a HUGE amount of their income.

I am not talking about people who lost jobs or something happened so they switched jobs. These are people still at the same income as they were before. They assumed rates would drop and never come back up. You have to plan for the bad times. Nothing stays great forever.

I know when I got my house loan they tried hard to push the variable rate loan, I said I would only take the 30 year fixed. Looking back I am still glad I went down that path.