Underwater Mortgages – What’s the “Right Thing” to Do?
Categories: For Buyers, For Sellers, Legal Matters
I seldom, if ever, repost articles in their entirety from other sources but I thought this article by Roger Lowenstein from yesterday’s New York Times was really worth a read:
Walk Away From Your Mortgage!
John Courson, president and C.E.O. of the Mortgage Bankers Association, recently told The Wall Street Journal that homeowners who default on their mortgages should think about the “message” they will send to “their family and their kids and their friends.” Courson was implying that homeowners — record numbers of whom continue to default — have a responsibility to make good. He wasn’t referring to the people who have no choice, who can’t afford their payments. He was speaking about the rising number of folks who are voluntarily choosing not to pay.
Such voluntary defaults are a new phenomenon. Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?
Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)
The moral suasion has continued under President Obama, who has urged that homeowners follow the “responsible” course. Indeed, HUD-approved housing counselors are supposed to counsel people against foreclosure. In many cases, this means counseling people to throw away money. Brent White, a University of Arizona law professor, notes that a family who bought a three-bedroom home in Salinas, Calif., at the market top in 2006, with no down payment (then a common-enough occurrence), could theoretically have to wait 60 years to recover their equity. On the other hand, if they walked, they could rent a similar house for a pittance of their monthly mortgage.
There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. But in a market society, since when are people responsible for the economic effects of their actions? Every oil speculator helps to drive up gasoline prices. Every hedge fund that speculated against a bank by purchasing credit-default swaps on its bonds signaled skepticism about the bank’s creditworthiness and helped to make it more costly for the bank to borrow, and thus to issue loans. We are all economic pinballs, insensibly colliding for better or worse.
The other reason is that default (supposedly) debases the character of the borrower. Once, perhaps, when bankers held onto mortgages for 30 years, they occupied a moral high ground. These days, lenders typically unload mortgages within days (or minutes). And not just in mortgage finance, but in virtually every realm of our transaction-obsessed society, the message is that enduring relationships count for less than the value put on assets for sale.
Think of private-equity firms that close a factory — essentially deciding that the company is worth more dead than alive. Or the New York Yankees and their World Series M.V.P. Hideki Matsui, who parted company as soon as the cheering stopped. Or money-losing hedge-fund managers: rather than try to earn back their investors’ lost capital, they start new funds so they can rake in fresh incentives. Sam Zell, a billionaire, let the Tribune Company, which he had previously acquired, file for bankruptcy. Indeed, the owners of any company that defaults on bonds and chooses to let the company fail rather than invest more capital in it are practicing “strategic default.” Banks signal their complicity with this ethos when they send new credit cards to people who failed to stay current on old ones.
Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.
In some states, lenders also have recourse to the borrowers’ unmortgaged assets, like their car and savings accounts. A study by the Federal Reserve Bank of Richmond found that defaults are lower in such states, apparently because lenders threaten the borrowers with judgments against their assets. But actual lawsuits are rare.
And given that nearly a quarter of mortgages are underwater, and that 10 percent of mortgages are delinquent, White, of the University of Arizona, is surprised that more people haven’t walked. He thinks the desire to avoid shame is a factor, as are overblown fears of harm to credit ratings. Probably, homeowners also labor under a delusion that their homes will quickly return to value. White has argued that the government should stop perpetuating default “scare stories” and, indeed, should encourage borrowers to default when it’s in their economic interest. This would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms. In theory, this could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis.
No one says defaulting on a contract is pretty or that, in a perfectly functioning society, defaults would be the rule. But to put the onus for restraint on ordinary homeowners seems rather strange. If the Mortgage Bankers Association is against defaults, its members, presumably the experts in such matters, might take better care not to lend people more than their homes are worth.
This article has been revised to reflect the following correction:
Correction: January 10, 2010
An essay on Page 15 this weekend about underwater mortgages misstates the parties who believe their homes will go up in value quickly. It is the homeowners — not the “mortgagees,” who issue mortgages.
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Is “Procuring Cause” Cause for Trouble?
Categories: About Realtors, For Buyers, Hoboken Condos, Legal Matters
Going To Look at Some Open Houses This Weekend? Beware!
We all know the drill. You’re not ready to commit to really start house hunting but you want to get a feel for the Hoboken condo market, so you decide to go to some open houses. As you walk in, the hosting agent asks you to “sign in”. Not wanting to give your info for fear of being hounded by the agent and inundated with emails, you make up a name or email or just scribble illegibly. No problem with any of that, but what happens when you see a place you really like?
On several occasions recently, I’ve had a potential buyer contact me because they found a property at an open house they were thinking about buying. You might think that, as a real estate agent, such a call would make me happy. Wrong. Too often, the buyer went to an open house, spoke at length with the hosting or listing agent, and maybe even told that agent that they wanted to make an offer. Sometimes the buyer mentions that they have their own agent, sometimes they don’t. Then the buyer calls me. So what’s the problem? It’s called procuring cause.
Reasonable people can disagree about what is the procuring cause of a sale. Would the buyers not have made an offer had they not seen the property at the open house? Or did the buyers’ own agent convince them by providing advice, comps and/or by showing them other similar-but-inferior properties that the property was a good deal and worthy of making an actual offer? The answer may be “it depends.”
Procuring cause is the sine qua non of the sale. But for the efforts of the procuring agent, the sale would not have happened. Whether an agent is the procuring cause of a sale must be factually determined on a case-by-case basis. Many factors impact a determination of procuring cause, but no one factor is by itself determinative.
Not surprisingly, the listing agent wants to sell her own listing (and get both halfs of the commission) so she is going to claim that the buyer is “her customer” and that she the procuring cause. The other agent will say that the buyers walked into the open house on their own (or may even have been sent by their agent) but he or she did the groundwork, showings and educating that led to the offer.
There is also a very valid debate whether it is a conflict of interest to be a seller’s agent and also work with the buyer (that’s worthy of a post of its own). Nonetheless, doing both sides of a deal is allowed and legal in New Jersey. So what should a buyer do if the buyer sees a nice property but does not want to deal with the seller’s agent? Here are a few suggestions:
- When you go to an open house, tell whomever is hosting it “I have a realtor that I am already working with“. You need not give a name. You need not even be telling the truth. But stating it upfront and clearly protects you from having the host (who is the seller’s agent) “claim you are theirs”. In fact, when they ask you to sign in, write “I HAVE MY OWN AGENT WITH WHOM I AM WORKING” on the sign in sheet right next to your name.
- If you have questions about the property after seeing it, do not call the listing agent directly. Find an agent you like and with whom you want to work, if you don’t already have one, and let your agent call the listing agent for you. (Remember, the listing belongs to the agency so the agent has to be from another agency entirely).
- If you think you might be in the market for a property, shop for an agent first. Call and talk to a few, or ask for recommendations from happy customers. You can still go to open houses on your own, you can still scour the internet, but when you see something that catches your interest, you’ll have your own agent to call the listing agent on your behalf.
Recently, a buyer went to an open house and had some conversations with the listing agent. The buyer then called me to make an offer on the property. He had learned that the property was owned by the listing agent’s spouse. The buyer felt that the listing agent couldn’t really represent him especially given the ownership issue, (which should have been disclosed in the listing, but wasn’t). After asking many questions and explaining the procuring cause issue to the buyer, I guess the buyer went back to the listing agent to tell him he didn’t want to make the offer through him. The listing agent told the buyer he would sue and that buyer would not get the property if he used a different agent. I ran quickly in the other direction wanting nothing to do with the deal.
As a buyer, if you wish to keep your options open and want to be able to use what ever agent you choose, take my advice – be very careful when you go to open houses or call about an ad or something you see on the internet. You may find yourself working with an agent who is not in the best position to represent you since they work for the seller.
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We All Love to Discuss the Hoboken Real Estate Market And So We Shall
Categories: Hoboken Condos, Legal Matters
Hoboken Real Estate News
This blog is written by, and is purely the personal opinion of Howard and myself. We primarily discuss the Hoboken real estate market, among other things. It is not affiliated with, nor does it in any way reflect the opinions of Prudential Castle Point Realty, The Liberty Board, The Hudson County MLS (”HCMLS”), the New Jersey Association of Realtors (”NJAR”), the National Association of Realtors (”NAR”), or any other person or organization. While we happen to be real estate agents, we do not and have never sold real estate on this blog. In our opinion, this site is not commercial and we have never ”advertised” MLS or any other property listings, or ourselves on this blog. There is no search engine for properties or “find a home” function here. There never has been. We believe that by providing useful advice and information, intelligent, thoughtful buyers and sellers will recognize our skills and the value we add and will seek out our services and listed properties on our fully-conforming agent website hobokensbesthomes.com.
The HCMLS asserts that by including links to MLS listings in our analysis we violated one of their rules. The rule prohibits “advertising” of a listing that is not ours without the prior permission of the listing agent and the listing agency. (The listing is the property of the ageny, not the agent). It is not feasible to obtain the prior permission for every property on the market prior to publish the link to each listing. That is why the HCMLS initiated the Internet Data Exchange (”IDX”) system. IDX allows an agent to pay the HCMLS for a data feed of the MLS listings. We have been told we are permitted to put a search engine for the IDX feed on our agent website or here. The resulting listings say “courtesy of Coldwell Banker or Weichert Realtors” and have the listing agents name and phone. Although we could pay the HCMLS to put IDX on this site, we don’t find IDX very useful. It is a very elementary program that does not allow us or you to sort, analyze or compile the resulting information in any meaningful way.
In our posts we had been including a link to the ‘customer copy’ of the MLS listings. This copy is generated by HCMLS’s computer program. It can be emailed by any agent to anyone. The customer copy is an attenuated version of the ‘agent report’ that agents access through the MLS computer program. The agent report includes the listing agent and agency and the commission amount and the number of days the property has been on the market. Agent reports cannot be emailed. The HCMLS determines what fields of information appear on the customer copy. It now has only the name and contact info of the agent who generates the report at the bottom of the page. Since the content of the information on each customer copy is exactly what is provided on a listing searched through the IDX feed, it would seem that if a brokerage granted permission for its listings to be included in the IDX feed it would also apply to the customer copy. The substance is the same, the information is just accessed and presented in a different form. If the HCMLS were worried that a consumer would be mislead and think that every single listing in Hudson County were ours, (or any other agent’s who thought to post the links) the HCMLS could include the listing agent info on the customer copy but they haven’t.
The HCMLS has fined us $50 a day for posting the links. They threatened to deny us access to the MLS, which would effectively put us out of business, unless we removed them going back for a 30 day period, which we have done. While we can no longer post the links, the HCMLS allows all agents to email the very same link to anyone who requestes said info. As such, from now on we will email reports with links, but only upon request so as not to violate any rules. Last week we published the Weekly Wednesday Wrap Up without the links (as we will continue to do) and asked you to email us if you wished to receive the report with the links. We received HUNDREDS of requests this week. My inbox was a mess. We are creating a private email distribution list. My apologies for the one email that accidentally had email addresses in “To” instead of “bcc”. I was a bit overwhelmed by this whole episode. The only thing that will change on this blog is that we will not post MLS links. The weekly Open House Google Map is going to need some tweaking as well. We’re working on it and appreciate your patience. Everything else will continue as always.
We are licensed real estate agents and abide by the regulations of our governing bodies with respect to selling real estate, which we do on our official agent website, hobokensbesthomes.com. The HCMLS and the NJ Real Estate Commission (which is a governmental agency) can surely regulate the time, place and manner of our commercial speech. They can possibly regulate the content of our speech when we are selling real estate. We have made and will continute to make every attempt to comply with their rules and regulations with regard to our commercial site. There are scores of agents in Hoboken with agent websites that are in screaming violation of the HCMLS and RE Commission rules.
I studied First Amendment law as a student at Boston University Law School where I was on the Law Review and graduated magna cum laude. I spent two years as a law clerk to a judge in Federal Court in the District of Columbia. When I was a practicing attorney, I served on the New York State Bar Association First Amendment committee with Floyd Abrams. (I am still a member of the bar of the State of New York in good standing, officially of retired status). Some of our readers are attorneys and may be experts but I do know a little about free speech. Hobokenrealestatenews.com is our personal blog on the subject of Hoboken real estate. We express our observations and opinions of the Hoboken real estate market, community and local economy. It is not commercial speech. We appreciate your support. I wish I had the time to respond to each and every one of your individual messages saying how much value you find in our information. We will continue to do everything we can to provide open, honest, transparent information.
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