Jingle Mail, in Practice
Felix Salmon
About this author:
A textbook case of jingle mail:
I got an agreement of sale today from a realtor looking for a prequal on a shortsale, the buyer lives next door, he has a current mortgage for $800,000 on a home he purchase in 2005 with no money down, the home he has under contact is right across the street from his present home, the offer is for $500,000 and it looks like the bank will accept it
The borrower plans to buy it as a primary, once he moves in, they will stop making payments on the $800,000 loan that they have with Countrywide
He qualifies full doc and has a 770 FICO , he figures letting his credit tank is not a big deal when he is lowering his mortgage debt by $300,000 .
In English, I live in an $800,000 house I bought with no money down. I can buy an identical house across the street for $500,000. My credit's great, since I've never missed a mortgage payment. But as soon as I buy the house across the street, I have every intention of never making a mortgage payment on my present place again. Since my mortgage is de facto non-recourse, and since I don't need to pay taxes on forgiven debt, the cost of default is basically zero, while the benefit of default is $300,000 in lower total indebtedness.
The loser here is Countrywide (CFC), which lent $800,000 to a man with good credit and will now have to sell his house, out of foreclosure, for maybe $500,000 if they're lucky. After costs, they could easily be sitting on a loss of $400,000.
Alternatively, the loser is whomever ultimately bought Countrywide's loan.
I don't know whether this is fraudulent or not, and frankly it doesn't really matter. Note that this has absolutely nothing to do with subprime: everything in this scenario is a prime loan. There are a lot of people who would be more than happy to wreck their prime credit in return for hundreds of thousands of dollars. Credit score simply doesn't appear in the formula:
Negative equity + Non-recourse debt = Very nasty price dynamics and mortgage losses.
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This article has 12 comments:
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The Loanman
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1 Comment
Jan 03 10:00 AM-
Arohan
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39 Comments
My Website
Jan 03 10:41 AMarohanvalue.blogspot.c...
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Presidio
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1 Comment
Jan 03 10:47 AM-
jaymes60
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1 Comment
Jan 03 12:35 PMAnother unintended consequence of government being "helpful"!
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whisperonthewind
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219 Comments
Jan 03 06:19 PM-
montza
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1 Comment
Jan 03 06:54 PMSummarily, this is exploiting consumer protection and poor lending practices for financial gain, would I do it? Probably, but all depends on the circumstances.
It will come back to bite at many future points, be it the declined car loan, higher credit card interest rate or whatever... Just have to keep thinking back to the $300k gain... How far do you push the moral boundaries... Bahamas anyone?
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vfsv
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1 Comment
Jan 04 03:29 AMwww.viewfromsiliconval...
Thanks!
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Yoski
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18 Comments
Jan 04 05:55 AM-
gk
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1 Comment
Jan 04 09:22 AMI would hope any level headed lender with reasonable standards would realize this person is not worth doing business with. When will they learn.
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gone2pot
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6 Comments
My Website
Jan 04 03:42 PM-
Sean Olender
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14 Comments
Jan 04 09:42 PMWhile I don't think that this is a great situation, it was banks, real estate agents, mortgage brokers, and Fed monetary policy from 2003 to 2004 that caused this situation much more than it was greedy borrowers. There were unbelievable nonstop ads, phone calls, faxes, junk mail, the television news wouldn't shut up about it. It was hard not to behave irresponsibly because people thought you were nuts if you didn't borrow as much money as you could to buy the most expensive home you qualified for. The "experts" on the financial news were regularly advising people to "consolidate"... consumer debt at "much more favorable rates" by borrowing against their homes (and financing toasters and handbags over 30 years).
Home prices have to come down, or the price of everything else has to go up. Either way, it is going to be highly unpleasant for everyone. But if a flood of loose credit drives up the price of everything so home prices only drop 5% or 10%, then we're all going to be much, much poorer.
And although I customarily like Mr. Salmon's writing, I'm still a little peeved by him calling me a "nutcase" in his review of my San Francisco Chronicle article of December 9, 2007.
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Sean Olender
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14 Comments
Jan 04 10:04 PMI think some of these bailout proposals and these Hope Now phone numbers are at least as much to keep people from finding out about their right to walk as they are to allegedly help borrowers. Many borrowers would be better off walking. Credit scores are important if you need or want to borrow money. Americans have become incredibly preoccupied with their credit scores because many people finance almost every aspect of their day to day living. The median American family pays 17% of income in interest payments.
There are two ways out of this uncomfortable situation: either home prices fall far, or the price of everything else rises. Either way will be unpleasant, but reckless monetary and fiscal policy to encourage price inflation will be much worse and will render every American poorer (except those with investments outside the United States).
Moreover, the longer this takes, the worse it is going to be. Many sellers are still balking at lowering prices. "But my home IS worth more. It's not like those other homes that dropped in value, just look at my home! It's really nice." If this disconnect between buyers and sellers continues, prices may remain flat for or decline slowly for a while until foreclosure auctions take them abruptly lower in a highly uncontrolled manner.
Although I think that the place housing has come to occupy in the American economy is inappropriate and is a mis allocation of resources, continued drops in home sales will too abruptly rattle things and not allow enough time for other areas to grow absorbing unemployed construction workers, real estate agents, mortgage brokers, and even the economy around home improvement, furniture sales, home electronics, etc.
A drop in prices may also encourage longer term "doubling up" where people move in together - whether with parents, roommates, etc. A trend over the past few decades has put fewer Americans in each housing unit. Some of this is vacation homes, but most of it is fewer people having roommates, or living with relatives. High, sticky prices in a sluggish or recessionary economy may reverse that trend and that will have far reaching and much longer term consequences. We could end up with eight or ten million too many homes.
If nationwide prices, and especially prices in California drop far, we'll have a recession and maybe a nasty one. But a nasty recession is something that ends relatively quickly - a year, even two years is a relatively short time. Major structural changes in how people live can last decades.
Also, I like Mr. Salmon's writing usually, but I'm still a bit peeved that he called me a "nutcase" in reviewing my December 9, 2007 article in the San Francisco Chronicle. The idea that investment banks, bond rating agencies and originating banks may have communicated back and forth about how to maximize ratings while minimizing the likelihood that any could be left holding the bag is far from a conspiracy theory. Bond rating agencies worked closely with investment banks selling this junk and the investment banks paid them to rate it. They paid them billions. The bond rating agencies need an excuse to give a high rating. Perhaps stated income was one of the hooks. "If originators could generate more stated income loans, we could rate the bonds as if the borrowers really had the income they asserted and then disclose on page 149 of the prospectus that we can't independently verify the validity of the borrowers' income and that the rating is based on an assumption that the borrower told the truth." Then the investment bank talks to the originator and explains what they need to do to get the higher prices for their loans. I think if worked for an investment bank and I was getting several hundred million or even billions of dollars in mortgages from an originator, I'd be on fairly good speaking terms with those folks.
Anyway, I have little doubt that every possible means will be used to shut down efforts to get to the investment banks because they own the people who would do the investigating. It's more than a little interesting how the Circuit Court shut down Andrew Cuomo and now a friendlier agency is doing the investigating. We can probably expect a big fat "suggestion" as a penalty for the investment banks, "we think you need to be more careful in the future, okay?"