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Irvine Housing Blog

Irvine Housing Blog

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Delinquent mortgage squatters: the legacy of the housing bubble

Posted: 21 Jun 2011 03:30 AM PDT

Delinquent mortgage squatters living in shadow inventory are obtaining the benefits of ownership while paying none of the costs.

Home Address ... 1 STARLIGHT Isle Ladera Ranch, CA 92694
Resale Home Price ......  $1,100,000

Racing faster.
Escape disaster.
Partners in crime will leave their mark.
We make our own way.
No thoughts of yesterday.
Black hearts of chrome and battle scars.

Black Veil Brides -- The Legacy

Strategic default is often the wisest course of action for a family to take. Lenders are hoping to escape disaster while borrowers and attorneys partner to leave their mark on lender's balance sheets. In the future, the threat of strategic default should make lenders more reluctant to make stupid loans with payments greatly exceeding comparable rents (more on that soon).

However, after a strategic default, what is the borrower to do? I think they should get out and move on with their lives because once they quit paying, it is only a matter of time before they must leave. This lingering uncertainty takes an emotional toll on families that isn't necessarily offset by the savings.

Most borrowers in default don't move into a rental and move on with their lives. Those borrowers are intent on gaming the system for as long as possible to obtain the financial benefit of no housing costs. These delinquent mortgage squatters are the legacy of stupid lending in The Great Housing Bubble.

Backlog of Cases Gives a Reprieve on Foreclosures

Published: June 19, 2011

Millions of homeowners in distress are getting some unexpected breathing room — lots of it in some places.

In New York State, it would take lenders 62 years at their current pace, the longest time frame in the nation, to repossess the 213,000 houses now in severe default or foreclosure, according to calculations by LPS Applied Analytics, a prominent real estate data firm.

Clearing the pipeline in New Jersey, which like New York handles foreclosures through the courts, would take 49 years. In Florida, Massachusetts and Illinois, it would take a decade.

Ponder those statistics for a moment. At the current rate of resolution, states with judicial foreclosure will have lingering problems for decades.

In the 27 states where the courts play no role in foreclosures, the pace is much more brisk — three years in California, two years in Nevada and Colorado — but the dynamic is the same: the foreclosure system is bogged down by the volume of cases, borrowers are fighting to keep their houses and many lenders seem to be in no hurry to add repossessed houses to their books.

“If you were in foreclosure four years ago, you were biting your nails, asking yourself, ‘When is the sheriff going to show up and put me on the street?’ ” said Herb Blecher, an LPS senior vice president. “Now you’re probably not losing any sleep.”

Borrowers can obtain free housing if they merely stop making their payments. Strategic default is bound to expand under such circumstances. If given the option to obtain shelter for a huge payment or for no payment, many will chose no payment, particularly if they can stay in the property indefinitely.

When major banks acknowledged last fall that they had been illegally processing foreclosures by filing false court documents, they said that any pause in repossessions and evictions would be brief. All of the major servicers agreed to institute reforms in their foreclosure procedures. In April, the Office of the Comptroller of the Currency and other regulators gave the banks 60 days to draw up a plan to do so.

But nothing is happening quickly. When the comptroller’s deadline was reached last week, it was extended another month.

New foreclosure cases and repossessions are down nationally by about a third since last fall, LPS said. In New York, foreclosure filings are down 85 percent since September, according to the New York State Unified Court System.

Mark Stopa, a St. Petersburg, Fla., specialist in foreclosure defense, has 1,275 clients, up from 350 a year ago. About 75 clients have won modifications, dismissals or sold their properties for less than they owed. All the other cases are pending.

“Banks aren’t even trying to win,” said Mr. Stopa, who charges his clients an annual fee of $1,500.

An annual fee? WTF? This guy has stumbled upon a great business plan to take advantage of the amend-extend-pretend policy of lenders. The longer this process drags on, the more money he makes. Right now, he has 1,200 clients paying him $1,500 per year. That's $1,800,000 per year he is making from assisting squatters.

J. Thomas McGrady, the chief judge of Florida’s Sixth Circuit, which includes St. Petersburg, agreed. “We’re here to do what we’re asked to do. But you’ve got to ask. And the banks aren’t asking,” he said.

A spokesman for Bank of America said, “Any suggestion that we have a strategy to delay foreclosures is baseless.”

LOL! I watch the foreclosure market nearly every day. Each day 90% or more of the scheduled auctions are postponed or canceled to prevent too much product from entering the market. Further, the percentage of delinquent mortgage squatters that have not made payments in over two years continues to grow. Lenders are clearly executing a strategy of delaying foreclosures, and assertions to the contrary don't pass the giggle test.

A Wells Fargo spokeswoman blamed changes in state laws governing foreclosure for any slowdown. A GMAC spokeswoman said it was following “regulatory and investor expectations.” JPMorgan Chase declined to comment. Servicers said some of the decline in foreclosures could be traced to an improved economy.

Bullshit by any other name would smell as sweet.

There are many reasons that foreclosure, which has been slowing ever since the housing bubble burst, has been further delayed in many states.

The large number of cases nationally — about two million, plus another two million waiting in the wings — have overwhelmed many lenders and the courts.

Lenders, who service loans they own as well as those owned by investors, tried to circumvent the time-intensive process by using “robo-signers” who mass-produced documents, many of which made inaccurate claims. When the bad practices were discovered last fall, the lenders were forced to revisit hundreds of thousands of cases.

Over the last two years, most defaulting homeowners were people who had lost their jobs. Housing analysts say these homeowners are more likely to hire a lawyer and fight repossession than borrowers who had subprime loans that swelled beyond their ability to pay.

The link to unemployment is nonsense. Homeowners are hiring lawyers to game the system because it works. Paying a lawyer $1,500 a year is certainly cheaper than paying $1,500 a month in rent after a foreclosure. If the lawyer gains the squatter even one month of free housing, it was a good investment for the borrower. If it gets them a year of free rent, the payback is twelve fold. With such a good return on the money, it shouldn't be too surprising borrowers and attorneys are teaming up to screw the banks.

Judges these days are also more inclined to scrutinize requests for eviction rather than automatically approve them. The so-called foreclosure mills — law firms that handled many of the suits for the banks — are in retreat under law enforcement pressure. And some analysts suggest that banks are reluctant to take too many houses onto their books at any one moment for fear of flooding a shaky market.

Fear of flooding the market with REO is the primary reason lenders are not foreclosing and processing as fast as they can.

In New York, lenders seeking to repossess face additional hurdles. The legislature has mandated that borrower and bank meet to discuss terms under the auspices of the court, but these conferences have turned out to be anything but brief or simple. Instead of one conference, 10 are often needed, court officials say.

Borrowers are not going to be in a hurry to resolve anything since they are getting free housing. I imagine many borrowers and their attorneys have difficultly fitting these conferences into their busy schedules, and when they make no progress, they reschedule another one for six months from now. A requirement for conferences is guaranteed to add significant time to the process to the benefit of the squatter and the detriment of the bank.

And many foreclosure lawyers seem unable to meet a requirement, made last October by the New York Chief Judge Jonathan Lippman, to affirm the accuracy of their documentation.

“The affirmation has had a pretty chilling effect,” said Ann Pfau, New York’s chief administrative judge. “The attorneys for the banks tell us they can’t get through to the right people at their clients who can verify the information.”

Last September, before the documentation crisis, nearly 1,500 New Yorkers lost their houses as a result of foreclosure, according to LPS. The average over the last six months: 286. That is far lower than at any point since the recession began.

I discussed the problem of foreclosure delays in New York in the recent post: Free housing: the new bankster entitlement in New York City.

Similar foreclosure cases can have different fates. To increase their odds of staying put, the foreclosed who can afford it are hiring lawyers, a move that can drastically slow down a case.

Mr. Stopa, the Florida lawyer, said he divided his clients into three groups. Some are unemployed or disabled and just getting by. Others are able to save money and improve their financial situation as their case drags on. The third group are those who have strategically defaulted. They can afford to pay but are taking advantage of the banks’ plodding pace. Often the members of this group rent out the foreclosed home and keep the proceeds.

For as reprehensible as this behavior is, as long as this behavior is disclosed to the renter, I don't have a problem with it. Lenders created this situation, and they could stop it by foreclosing and taking the property back as REO. If the renter knows what they are getting into, then everyone is making choices based on full knowledge and disclosure. If the renter doesn't know, then I have a real problem with what the owners are doing.

Though delays in foreclosure might seem like a gift to those behind on their mortgage, the foreclosed themselves do not necessarily feel that way.

Margaret Bellevue waited nervously in a Miami courtroom early this month. She and her husband, Roland, an architect, are among 97,000 households facing foreclosure in Dade County, where the average time to foreclose is 738 days and climbing, according to LPS data.

Ms. Bellevue was on her third lawyer in a case that has stretched on as many years. “A friend of mine got her mortgage lowered through a modification,” Ms. Bellevue said. “I’d like to do that too.”

I imagine she would. The woman overpaid for her house, but she wants to keep it by having her debt reduced. When she and millions of others made a foolish and irresponsible purchases, they drove up prices and crowded out more prudent buyers. They should be forced to move out of their properties so there are some consequences for what they have done. Lenders are more culpable than borrowers, but it doesn't mean borrowers should have no consequences at all.

When her case came up, the judge told the lawyers they should try to work out a deal. They huddled outside the courtroom and agreed to meet again.

What is there to work out? The lender needs to foreclose, and the delinquent mortgage squatter needs to get out. It should be any more complicated than that.

Squatting is not just for the little guy

When you read stories about delinquent mortgage squatters, there is an implicit assumption that it involves lower income subprime borrowers. Nothing could be further from the truth. Many posers levered themselves into beautiful high-end mansions, and when the Ponzi borrowing ran out, they simply stopped making payments and squatted.

I can understand why they stay. Who would move out of a multi-million dollar property they can stay in for free and find another where it would cost $5,000 or more in rent? What is shocking is how long lenders have let this go on.

Lenders have made the argument that leaving occupants in a property prevents it from deteriorating. I call bullshit on that one. Properties deteriorate more quickly if they are being used and improperly maintained. What possible incentive does a delinquent mortgage squatter have to invest any money to upkeep a property? When they accidentally knock a hole in the drywall, will they spend money to patch it? At least a renter is going to call the landlord if there is a problem. A delinquent mortgage squatter will let small festering problems grow into large repairs rather than spend their own money fixing up the place.

Today's featured property is not in Irvine. The owner paid $2,265,462 on 8/24/2006 -- the peak of the bubble. He used a $1,811,696 first mortgage from Countrywide, a $226,462 HELOC, and a $226,842 down payment. The owner had another property at the time in Aliso Viejo with several hundred thousand dollars of mortgage equity withdrawal.

A reader called this property to my attention. The haircut is enormous and newsworthy on its own, but what's more interesting is that the lender has allowed this owner to live there for over three years now without making any payments, and they don't appear to be in any hurry to foreclose.

Foreclosure Record
Recording Date: 06/23/2010 
Document Type: Notice of Sale   

Foreclosure Record
Recording Date: 12/03/2008 
Document Type: Notice of Sale   

Foreclosure Record
Recording Date: 06/24/2008 
Document Type: Notice of Default

The first NOD was filed in June of 2008 which means this owner stopped making payments sometime before March of 2008. He has been living there ever since and enjoying his entitlements.

While you were making your onerous house payments or paying your rent, this owner has been living for nothing in what was a $2M+ house. His neighbors must feel like chumps for continuing to pay their mortgages, particularly as his short sale pummels their property values.

Irvine House Address ...  1 STARLIGHT Isle Ladera Ranch, CA 92694    

Resale House Price ......  $1,100,000

House Purchase Price … $2,265,000
House Purchase Date .... 8/24/2006

Net Gain (Loss) .......... ($1,231,000)
Percent Change .......... -54.3%
Annual Appreciation … -14.9%

Cost of House Ownership
$1,100,000 .......... Asking Price
$220,000 .......... 20% Down Conventional
4.49% ............... Mortgage Interest Rate
$880,000 .......... 30-Year Mortgage
$190,869 .......... Income Requirement 

$4,454 .......... Monthly Mortgage Payment 
$953 .......... Property Tax (@1.04%)
$708 .......... Special Taxes and Levies (Mello Roos)
$229 .......... Homeowners Insurance (@ 0.25%)
$0 .......... Private Mortgage Insurance
$400 .......... Homeowners Association Fees
$6,744 .......... Monthly Cash Outlays

-$1062 .......... Tax Savings (% of Interest and Property Tax)
-$1161 .......... Equity Hidden in Payment (Amortization)
$365 .......... Lost Income to Down Payment (net of taxes)
$158 .......... Maintenance and Replacement Reserves
$5,045 .......... Monthly Cost of Ownership 

Cash Acquisition Demands
$11,000 .......... Furnishing and Move In @1%
$11,000 .......... Closing Costs @1%
$8,800 ............ Interest Points @1% of Loan
$220,000 .......... Down Payment
$250,800 .......... Total Cash Costs
$77,300 ............ Emergency Cash Reserves
$328,100 .......... Total Savings Needed

Property Details for 1 STARLIGHT Isle Ladera Ranch, CA 92694
Beds:  5
Baths:  6
Sq. Ft.:  5882
Property Type: Residential, Single Family
Style: 3+ Levels, Colonial
View: Canyon
Year Built:  2006
Community:  Ladera Ranch
County:  Orange
MLS#:  S624677
Source:  SoCalMLS
Status:  Pending
Fantastic 3 stories including very large 13,000 Square foot lot. Gated courtyard has casita with separate entrance. Wolf appliances, Subzero fridge, Wood floors, gourmet kitchen w/ butlers pantry, granite countertops, built-ins, intercom and security system. Property includes high ceilings a large driveway, and plenty of bedrooms. Large basement with great area for a home entertainment.

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