I Can Be the Bank: Individual Investors Buy Busted Mortgages
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Residential is seen as an easier path to being a landlord because the capital requirements are lower, but I caution everyone considering buying a rental property to ask a very simple question: "Are you willing to kick someone out of their home?" Would you be prepared to evict a human being not that different from yourself, who may have lost their job, have kids, medical problems, etc?
In addition most jurisdictions stack the laws against residential landlords (I'm in Canada) for both legitimate and populist reasons. It's not quite as blatant with commercial.
Buying delinquent mortgages that are so underwater that lenders will sell them to collection requires a whole new level of commitment. You will need to become one of those people who call at dinner every single day, call employers, stalk online, harrass, even threaten - you're literally trying to squeeze money out of the people who have the least to spare. I'm not going to judge the collectors, debtors or the business model, but it's definitely not for me.
Sure enough every few years that particular motorcycle dealership has a going out of business sale and move locations, so it seems like a pattern. But the point is even in commercial real estate you may be completely in the right and still get ripped off by professional scam artists or left spending tens of thousands pursuing justice in the courts as my in laws had to do.
1 day late on rent with no heads up from the tenant? Start the eviction process.
If you give an inch, they’ll take a mile and pretty quickly you’re running a charity.
Shady as hell though.
MA enforces what I think is a reasonable policy: the landlord must send a written notice to quit to end the tenancy, and may not file an eviction case until a 14-day notice period ends. The tenant cannot be evicted if they pay the owed rent with interest by the end of the notice period.
So I agree with what you're saying; certainly you should contact the tenant beforehand with a friendly, "Hey, I haven't gotten the rent this month yet." But I wouldn't wait long to begin the pre-process, let's call it, of giving written notice. Also, I don't think you would have to start the formal legal process as soon as the notice period ends, so you can be flexible at that end if appropriate; but giving notice early gives you the immediate option to start the process if you deem it appropriate, but with lower latency once the notice period is over.
The grandparent comment was responding to starting eviction process one day after rent was due. I don't see how contacting the tenant and waiting a week equates to giving lifetime free rent.
Why is it morally acceptable for someone to hang out in the landlord's house without paying, even if something really bad happened to the tenant (lost job, medical bills, auto repair bills, whatever)?
You've got to remember that the landlord's downside can be both large and happen quickly.
So many of the contracts I've had to sign have been filled with half-assed provisions that the landlord refuses to follow up on. If the landlord tried to hold my feet to the fire over something so banal as rent being slighty late I would lawyer up immediately.
A great example is that a few years ago I signed an apartment lease that indicated the community was supposed to be gated. Now I didn't particularly care about that fact, but that's how it was advertised and sold to me.
When I arrived, the gates were broken and had been broken for over a year. Two years later when I was moving onto my next job, the gates were still broken despite it being advertised and in the lease.
This never became an issue for me because the location was flexible in other ways but it's an example of where had they been a hardass to me, I would've responded with equal tenor. Flexibiliy can be a two way street.
By the way, your claim that "landlords that foster adversarial relationships like that are doomed to be burned even harder by tenants" is, unfortunately, not been my experience. Being lenient and understanding only got us a year of lost rent and an apartment destroyed. But you're right that landlords should uphold their end of the bargain, too.
Being nice and kind and understanding and sympathetic with tenants will rapidly drive you into financial ruin.
I’ve owned multiple units for over a decade and it’s definitely given me a different view on the trustworthiness of the average individual. A surprising number of people lie, steal, and cheat without any apparent hesitation or remorse, regardless of how well you’ve treated them.
The only thing that works is being fair but firm. Stay detached and professional and enforce the contract you both agreed to. If you give people much leeway, at least half the time it’ll be worse next month or the month after. Downward spiral and pretty soon you’re out thousands of dollars.
When we bought our own place our landlord at the time was really sad to see us go and she said we were her best tenants ever. At first I thought she was being cordial but after hearing other renter stories I think she really meant it. 2 years on time and we got 100% of our deposit back.
Getting rent from you is the only reason the landlord is doing the whole enterprise in the first place! It’s not a banal side detail of the deal.
And how do you think they pay their bills? Using your rent. If you pay late what do you think they have to do? You could cause them to default on something else.
Really? So you can pay $500+/hr to be told pay your rent....
And I would argue that someone that wants to lawyer up because they dont feel they have to pay their rent on time is a tenant you want out of the house.
The reality is once you send the notices most people will pay their rent and be less likely to be late in future as boundaries are set. And as someone that has tenants, there are people that need this treatment or you become their overdraft account and it will only get bigger and bigger until you send the eviction notice.
And that's not to say there are exceptions. I've told someone to stop paying while they took time off work for cancer treatment, even thought they said they had savings as I know they didn't have much and wanted to take stress on them.
Which is ultimately what I'm getting at. In reality I've never encountered a landlord that actually adheres to their contractual obligations fully, and depending on how they act towards me informs in turn how I act towards them.
And again, at that point I would be both seeking somewhere else to live as well as taking them to court to break out of the lease due to them not fulfilling their obligations. Now if they actually do everything right on their end then I have less of a problem with them being strict to their tenants.
If you were in breach of contract (which is far from "banal") I seriously doubt you would be the first one "lawyering up". You certainly wouldn't win in any case.
And as I keep mentioning but it seems to be conveniently ignored landlords are allowed to get away with breach of contract all the time in my experience as a renter. Which gets back to the point I keep belabouring: Tenants are expected to be perfect while landlords are not. Now can you explain why this is the case?
Suggestion: pay your rent on time and none of this will ever be an issue. And I wouldn’t bother “lawyering up” when you fail to pay your rent and get an official demand to pay what you owe. The law is not on your side and most courts will take a very dim view of the excuse that the gate is broken, especially when you never cared enough to complain.
Since you seem intent on missing the point people take an absolutist view towards a tenants responsibilities while taking a lax one towards landlords.
I don't think we're going to see eye to eye, and you've also never been a landlord or had any exposure to any of the legal side of this. It's all fine and dandy to claim that you'd "lawyer up" based on some hypothetical, but you wouldn't, and you'd lose quickly and embarrassingly if you did. I've evicted tenants, sadly, and never once did I worry that some minor maintenance issue from months before that they never complained about would even slow the process down, let alone stop it.
And you've probably never had to deal with shitty landlords judging from your response.
We also have a mortgage, so I'd fall into that 77% / 40% even though my financial situation is perfectly healthy.
The hard part, of course, is getting someone to sell it to you without their knowledge.
You just have to deal with Debt Collector harassing you for 2-3 years, and take a pretty big hit to your credit, and you can often settle debt for nothing more than the original principal loaned.
Of course, good luck trying to borrow money for the next 7-8 years...
Everyone telling you it's "pennies on the dollar" are missing your point. Someone so delinquent on their debt that the bank is about to foreclose probably doesn't even have a penny, much less pennies.
This trick may work if you have a relative who has money and is willing to bail you out. Another person this might work for is someone who has protected assets that the bank doesn't know about. Yet another option could be if the house was bought under a corporation/LLC that has gone bankrupt but the owner of the company still has plenty of cash.
Credit score doesn't matter if you don't need credit.
In the 2008 mortgage crisis, a lot of speculators just walked away from underwater mortgages, not because they couldn’t pay, but because it made more financial sense for them to give up the asset in return for being released from the loan.
Foreclosure != bankruptcy
No. There is Deed in Lieu of Foreclosure, which sounds like what you are talking about, but that is not a unilateral option you exercise by mailing keys...you need the banks permission, which they usually don’t give, especially when the property is underwater.
If people could unilaterally turn in keys and escape the debt you can be sure the banks would have gone under during the Great Recession. As it was the Federal Bailout essentially covered the legal fees for banks to foreclose on these toxic assets and recover what they could.
Still even then (like parents hypothetical) if a bank foreclosed and $300k was owed and they sold the property for $130k the next step was a separate filing for deficiency judgement (the difference or $170k in this case).
Edit: A quick google told me that there are 12 "non-recourse states" for "most residential mortgages": Alaska, Arizona, California, Iowa, Minnesota, Montana, Nevada, North Carolina, North Dakota, Oregon, Washington and Wisconsin. https://www.arklawgroup.com/blog/how-do-i-know-whether-my-mo...
You can find many articles about California, for example, where they will say someththing like “in California, in most foreclosures banks can’t go after borrowers for deficiency judgement”, but it’s misleading. California has both judicial and nonjudicial foreclosure, and judicial foreclosures allow deficiency judgments and nonjudicial foreclosure generally don’t. So why don’t all lenders go for the judicial foreclosure and for the deficiency judgement? Time and Money! It simply takes longer and costs more to go the judicial route and why do that if you ultimately can’t collect from the borrower?
The thing is the banks/borrowers have so much data, their automated systems are pretty good at knowing if they will likely be able to collect enough to cover the extra cost of the judicial foreclosure in which case they go that route and then for the deficiency judgement. Once they have that they can garnish wages, attach accounts, etc...
This is more misleading than what it “corrects”, which is actually entirely correct for the case usually of interest (and which the articles are almost always specifically addressing), owner-occupied residential properties. Its true that California allows deficiency judgements for judicial foreclosures except as barred by the State anti-deficiency statute. But that statute prohibits all deficiency judgements for purchase-money or refinance loans for residential property with up to four units when the owner/borrower resides on the property (and, unlike most anti-deficiency statutes, covers second and subsequent mortgages for that purpose, not just first mortgages.)
>Is my understanding really untrue and the banks can go after your other assets in all US states?
My response is not misleading by any means.
Especially when that question came as a direct response to the same person who originally broadly stated you can just mail your house keys to the bank and walk away.
My point is simple and fairly obvious...don’t mail your keys to the bank and think you can walk away, even if you are in a non recourse state.
I used California as a perfect example of a non recourse State that has both judicial/nonjudicial foreclosures and in judicial foreclosures allows...recourse (deficiency judgments).
Yes you included a few rules outlining where deficiencies would not be available, but the fact defiency judgments are available at all - especially in California, which is ultra stringent even amoung non recourse states - is the much bigger point being discussed.
Yeah, that's generally a fair point and there are lots of good examples you could have pointed to; California, however, isn't one of them.
> Yes you included a few rules outlining where deficiencies would not be available
A few rules, which happen to encompass the entire category usually discussed with the “mail your keys” thing: any single-family house you own, with one or more purchase or refinance mortgages, and live in.
(And, well, more than that category usually at issue, because it also includes small multifamily units with the same other conditions.)
No it doesn’t encompass “the entire category”. Even in California deed in lieu of foreclosure cases (eg the bank agrees you can mail your keys in) banks can and do obtain defiency judgments in 5% of such cases.
It reminds me of student loans, where lawyers and layman constantly say student loans are not dischargeable in bankruptcy. But they are. Student loans have a higher standard to discharge than most other debts. I guess people can say it’s misleading to say student loans are discharable -but they are- even if it’s a low percentage. The important part of the discussion is again it’s possible.
A deed-in-lieu is an agreement—a contract supplementing the mortgage contract and agreeing it's terms—not a foreclosure, and whether or not a deficiency judgement is available is determined beitherms of the agreement (or the mortgage itself), not the foreclosure rules.
OTOH, the prohibition on foreclosure deficiencies on the whole class of mortgages at issue in California gives borrowers considerable leverage on getting a deed-in-lieu without deficiency permitted (or a short-sale without that), since in a foreclosure the bank won't get a deficiency and will bear additional costs that they don't have with the deed-in-lieu. But, yes, if you agree to give the bank privileges they wouldn't have in foreclosure because you are desperate to avoid foreclosure, you will need to fulfill that agreement.
Also, note that stats that aren't extremely new can be misleading, because the extension of the anti-deficiency statute to refinance mortgages as well as purchase money mortgages only happened in 2012, and cases take time to make it through the legal system. This affects both actual foreclosures and deeds-in-lieu, because without the foreclosure protection, the leverage for deed-in-lieu agreements wasn't there, either.
A deed in lieu can occur without a foreclosure taking place, but it can also occur during the foreclosure proceeding (ie it’s a type of settlement within the active foreclosure case). But it’s not like the defiency judgment is memorialized in these agreements, the 5% I cite are statistics from the courts, this the 5% are court ordered defiency judgments...not part of the original settlement (deed in lieu).
You are not wrong a savvy borrower who may have potential liability for a defiency can include in the deed in lieu a waiver of the lenders right to pursue the diffidence, if any. But lenders don’t need to agree, and won’t if they believe they could collect. But again these deeds in lieu are negotiated instruments and not triggered by mailing keys to the bank.
>Also, note that stats that aren't extremely new can be misleading, because the extension of the anti-deficiency statute to refinance mortgages as well as purchase money mortgages only happened in 2012
Agreed, and I was actually going to bring this up before, because despite the additional protections against defiency judgments in the Code for 2nd mortgages/HELOCS courts in California are still upholding the lenders right to get a defiency after judicial foreclosure cases where the homeowner took cash out from refinancing 2nd mortgage/HELOC (and to pedantic - still subject to those limitations you added). Eventually this will be clarified through appeals and those protections will either be upheld or those laws won’t have as much teeth as a blanket protection for all such class of notes. I believe the 5% stats are for 2007-2016 for deed in lieu.
All this is so far beyond the pale of the actual discussion. And I think for the benefit of non lawyers, should be left to:
California is a non recourse state. Even amoung non recourse states California is known for having very protective laws for the borrower. Yet, even being a non recourse state and having some of the best protections for borrowers, mailing your keys/deed in lieu (whether during actictive foreclosure litigation or before the filing of any cases) carries risks of a deficiency. Nevertheless the idea of mailing keys wasn’t specific to California, and California was only used to highlight the possibility of a deficiency judgment in non recourse state. More generally the majority of states (38) are recourse states where the banks can come after you for the defiency as a general rule and amoung the 12 non recourse states, defiency judgments are allowed in at least some cases.
Like many other things, it depends on the state.
In Washington, for example, the lender can use a simplified process (that gets used over 99% of the time) for a foreclosure that makes it non-recourse.
The other option is to go to court, something that banks will only bother doing if they are fairly certain you have especially large assets that they can seize to make it worthwhile.
Yes it’s the difference between judicial and nonjudicial foreclosure.
But reworded: In Washington 100% of Banks can go for deficiency judgements after judicial foreclosure, but the banks have so much data they make the strategic choice of waiving that right in 99% of cases by going the nonjudicial route and foregoing the potential of the deficiency judgement. Further, in 1% of cases the bank has data that suggests the borrower has assets, income or even potential future income/assets that make the added time/cost of judicial foreclosure worthwhile.
In general it makes sense a defiency judgement isn’t worth the paper it’s written on...or he borrower wouldn’t have been foreclosed but in that 1% of (Washington cases) banks see people with income/assets who can pay trying to get out from an underwater property.
No, only 15 states generally prohibit mortgage deficiency judgements (and those prohibitions mostly apply only to first mortgages, and some are limited even there), in the rest the creditor can come after you for the unrecovered balance after a foreclosure sale.
https://www.legalmatch.com/law-library/article/anti-deficien...
Additionally, a borrower who is paying on an underwater mortgage is much better than a foreclosure where the bank gets an asset worth less than you owe. Every month that you make a payment improves the bank’s position, since your payment is going to reduce the deficit between loan amount and home value.
Sorry, US banks can't issue margin calls on conforming home loans.
It was amended in 2016 I believe to allow some purchases if they met specific criteria.
The "usual" way to getting around these things has been to create a company and have the company buy it. Companies are nominally 'new' people and don't have family or relatives.
in bankruptcy, you can buy back your own debt for pennies on the dollar (among other options), intermediated by (and with the approval of) a judge (or mediator). i dimly recollect that in certain cases your primary residence can be retained in exchange for other remedies.
The hard part is likely purchasing your specific debt. Often times, transactions in the consumer debt markets are intermediated by a broker, who may give you very limited information on the debt you're buying. Additionally, consumer debts are often sold in bundles/tranches where it is not uncommon for 50+ debts to be sold as a single portfolio.
In the best case scenario, the firm collecting on your debt wouldn't be using a broker, and they would allow you to look into the details of the debts to asses the risk of the portfolio.
Most, near all of those things are explicitly illegal.
> I'm not going to judge the collectors, debtors or the business model, but it's definitely not for me.
In that case, I would definitely judge them.
It is a hard business to be in, no argument. And as long as you are certain that you are running a business and not a charity (different values, income sources, taxes, meetings, relationships etc etc), these "difficult" decisions come quite easily, to be honest. There are people depending on you, yourself (largely undervalued statement), your family, your employees, your employees' families, your contractors, your suppliers. There are a lot of nuances in this business.
It IS hard. There is no such a thing as "easy business". There will be tough moments and difficult decisions, and if you are not ready for that, quite shortly you'll be reporting an apology to your CUSTOMERS live on youtube, holding back tears, just like we saw earlier in one of the posts with the article from Bloomberg.
You wouldn't have done well in Maoist China.
"Landlords" are to Chinese communism as "capitalism" is to the most extreme American leftists, the source of everything evil in the world.
In https://en.wikipedia.org/wiki/To_Live_(1994_film), there's a scene in which a family is publicly executed for the crime of having owned property pre-revolution.
In the steamed buns scene, the protagonist's daughter is giving birth. There are complications, and she requires a doctor, but there are no doctors available because they're all rotting in prison for being educated. The daughter's husband, a Red Guard, is able to have a doctor pulled out of jail to help with the birth. He arrives, but, since humane treatment of class enemies is not a priority, he hasn't eaten in days. The protagonist, appalled, goes out to buy buns for the doctor. He returns with a big bag of buns, and the doctor immediately devours them all, then goes more or less insensate. The daughter dies.
Every part of the movie is like this.
It's easy to imagine that the abuses in China were even greater, and it's easy to see why many people wouldn't mind their landowner hanging from a streetlight. You could even argue it was justified.
Yes. A tennent's inability to fulfill a contract, even through no fault of their own, will cause me the inability to fulfill contracts* of my own, through fall of my own.
*My bills, my rent, my mortgage, etc.
I don’t have much sympathy for people who portray landlords as greedy assholes for not letting tenants camp out indefinitely for free. If you’ve been a landlord for awhile, you see the situation more clearly.
Maybe some countries are super lax but i would have thought most western countries don't just allow people with no valid agreement to stay somewhere.
> “I only owned it for nine weeks and the house burned down,” Ms. Greenberg said. Thanks to an insurance payout, though, she said she made a profit of $27,000.
> Ms. Greenberg took that as a sign she should make loan investing her day job. She now owns 58 mortgage notes, as they’re often called, totaling more than $2.4 million in unpaid principal.
I wonder how she's doing now.
There has always been a brisk market for real estate paper ("notes"). This might be someone that lent on a second mortgage and now needs his cash back, so he enters the note market and takes a hefty discount to turn his stream of income into a lump sum. Or someone that just sold their house with owner financing, and wants to be free of the hassle of servicing the loan for the next fifteen years, so they sell on the open market. Supply and demand determine the prices, and the discounts are easily 40% off the net present value of that mortgage note's stream of income.
- `A` loans $100,000 from `B`.
- `A` cannot pay the loan, and therefore `B` sells to loan to `C` for $10,000.
- `C` then donates money to a charity set up by `C`.
- The charity then offers to pay off `A`s loan, and the money comes back to `C`.
At this point, `C` "donates" (i.e. cycles the money) enough to make their taxes $0 per year. `A` has their mortgage slowly but surely forgiven. Win-Win, but the IRS losses.
While morally grey, what might the legality be?
Does receiving a payment on a loan not count as income? After brief searching, and the usual IANAL disclaimer, it would seem you'd still be liable for interest on the loan as income (so some small percent of your 'donations' cancel out?). Further, you can only claim so much charitable donations per-year (but it can roll over for 5 years).
It's an interesting strategy if it works. I'd love to hear someone more educated on the topic weigh in.
That isn't a charity. It violates the Federal laws about tax exempt organizations.
The best scheme I can come up with is this:
Make the note performing again by giving the creditor a small amount of money. Claim that it is now worth significantly more than $10k due to being a performing loan. Donate the loan to a controlled charity, pocket the tax deduction for the "fair market value" of it, and then stop paying to make it be "performing" and have the charity take the losses on it. The IRS will still fault it, probably, but it lets you actually get ahead on your taxes.
NB: this system can be a price support for rare artwork getting sold in distress. If you think you can claim to the IRS that a piece of art is worth $100M later, and you pay a 30% marginal tax rate, then the post-donation after-tax price is essentially $30M less.
Can any individual buy mortgages and become a lender in the US ?
The most surprising part of entire article is that it is very hard to enforce foreclosure for missed payments in many states. The delinquent borrowers can stay in homes for months and often years! As mortgages are essentially sponsored by US government, this whole market runs on twisted economy.
The basic question is why more people aren't taking advantages of these laws and twisted economics? For example, you can live in Hawaii, buy a house, just don't pay any mortgages, declare bankruptcy and stay in the house for next 4 years for free. Or even better: buy many houses, put them on AirBnB, collect income and never pay any mortgages!
> A scrappy breed of independent investor
> During the boom before the bust, lenders made mortgage loans to countless buyers who couldn’t afford them. Lenders later wrote off many of the loans, but borrowers’ obligation to pay remained. Today, in an improved economy, a rag-tag group of individual investors, plus some Wall Street giants, is buying these old loans and trying to tease value out of them.
It's a feel good story of the year! A group of scrappy rag-tag enterpreneurs, with a can-do attitude, hustling by ... going after people who were already fucked at least once.
> Others use loan servicers to try to get mortgage payments restarted so they can feed the loans back into the Wall Street mortgage securitization machine.
Yes, feeding things to a machine definitely sounds like a morally neutral proposition.
I'm not sure it's so clear cut. The last anecdote in the article was a civil engineer with savings and a good salary, who thought his entire mortgage was forgiven by PNC and he got a free house. At least in that case, he should be obligated to pay his mortgage.
These entrepreneurs may use shady tactics but it doesn’t change the fact that they are living for free in a house they don’t own, can’t sell, and don’t have the title to.
When I was house-hunting after the crash, I noticed that the loan history of most of the short sales (underwater mortgages) I looked at followed the same pattern:
- Buy house with minimal down payment. - Over 5-10 years or so as the market climbed, refinance with ever-larger cash-out mortgages. - After the crash, apply for short sale, forcing the bank to take a loss.
So, for example, I might see a house with $750k loan on short sale for $350k. But on closer inspection of the history, find that they put $15k down on a $250k house, then pocketed $500k in cash-outs. Sure, they "lost their home", but at the end of the day it feels more like bank robbery to me.
Now they probably didn't have all that cash sitting in a bank somewhere. It was probably all spent on one thing or another. But they still got the advantage of spending that $500k. (Not necessarily wisely. The one I remember details of lost both his house and his wife because he blew it all on racing toys.)
Yes, there were certainly plenty of people who were legitimately burned in that whole mess. I'm just mentioning that from what I saw, more often than not there were huge cash-outs involved.
Now that I think about it (and these are pure anecdotes), at the time I heard tales of people using the money from refinancing to buy a smaller home with cash. Then they'd move into that and let the first house get foreclosed on (because their paid-in-full primary residence is protected in bankruptcy).
People who were given money and didn’t repay it. Why should that loan just be forgiven?
People default on the mortgage but keep living in the property. That’s not the way to go.
The problem is that most likely foreclosure is not profitable for investors, so in order to collect money, they have to make life miserable for people. But this is just messed up, because mental health is as important as physical health. So if someone stresses people out to get their money, why the taxpayer/family had to get stuck with economic externality?
Imagine instead of stressing people out, we cut their limbs if they don’t pay.
Nobody is paying for a house twice or losing the house and paying the mortgage.
It's far from truth.
I know some guys purchase them to negotiate frequent sex with the Tennant and other favours. You'll be surprized how many people are completely unware of the law and make it seem like they are providing a fair deal.
https://news.ycombinator.com/item?id=10178989
https://hn.algolia.com/?sort=byDate&dateRange=all&type=comme...
https://blendle.com/i/wsj-com/a-decade-after-the-housing-cri...
Edit: Also once you pay you can decide to rescind your payment if it is click bait or not good. Also no relationship with them I just want to see a paid web content model succeed.