[santoshalper]

I have spent about 20 years in the mortgage and housing industry, a decent amount of that in servicing and default. I have seen some shady shit including borrowers who committed mortgage fraud and lenders who made loans they knew would ultimately blow up in someone's face (not theirs!).

That said, 99% of defaults are very simple: At the time of the loan, the borrower could afford to make the mortgage payment. Later down the road, something changes in their circumstance, and they can no longer afford to make the monthly payment (or anything close enough to work out a deal). The most common reasons are a loss of income or severe medical issues.

Mortgage servicers and investors almost never want to foreclose on a home. An extended default leading to a foreclosure is very costly, and the servicer is usually fronting the money to the investor the entire time. Everyone loses when a foreclosure happens (though only one party doesn't have a home anymore).

I am profoundly sympathetic to anyone who gets evicted, but lenders only make mortgage loans because the property is collateral. How else would someone front a normal borrower hundreds of thousands of dollars?

[Sohcahtoa82]

Maybe you have some insight over something that's always confused me.

During the 2008 crash, I heard of a lot of people seeing their home value plummet, end up underwater on their mortgage, and decide to just abandon it. I've never understood why someone would do that, rather than ride it out and keep paying while the value recovers?

I could MAYBE understand going "Nope, I'm out" if you had an adjustable-rate mortgage and your rate skyrocketed and now you can't afford the payments, but every housing bubble pop is temporary.

But like...I see my mortgage payment as more than just a payment on a loan, it's simply the cost of having a roof over my head. Whether I'm paying $2,000 to the bank, or $2,000 to some landlord (Really, I'd be looking at $2,800/month for a house like what I have now), I'm paying $2k/month. So why not just keep paying my mortgage, even if the value is less than what I paid?

[dredmorbius]

Balloon mortgages and an inability to refinance on attractive terms.

It wasn't a matter of holding the property. Most simply couldn't make payments.

Walkaways worked because real estate debt (in most of the US) is non-recourse debt. You leave the mortgage, the bank (or present mortgage holder) gets the property. Debt is settled.

(Lender in this case, or the present mortage holder, itself a rather complex question given mortgage-backed securities and fast-and-loose assignments of title, gets stuck holding the bag. Eventually values climbed again, at least outside economically-blighted zones.)

[throwaway2037]

    > Walkaways worked because real estate debt (in most of the US) is non-recourse debt. You leave the mortgage, the bank (or present mortgage holder) gets the property. Debt is settled.

It is rare this simple. You will likely be required to file bankruptcy, or something equally disruptive to "walk away". And, it will trash your personal credit rating. What is the incentive for banks to allow walk aways? It is very low. The administrative burden of taking ownership of a home, then trying to sell it will nearly guarantee losses for the lender. In most US states, if you cannot pay your mortgage, the bank will sell the home. Most of the time, any shortfall can be forgiven, but not easily. If there is a gain, you will be repaid, minus expenses, but this is exceptionally rare.

[Sohcahtoa82]

> Balloon mortgages

I remember seeing those. As far as I was concerned, I thought they were an absolute scam and I can't believe anybody chose one.

> It wasn't a matter of holding the property. Most simply couldn't make payments.

I know that was the case for most people, but I certainly heard about people that still could, but chose not to, simply because they were underwater. I was trying to understand those people.

> Walkaways worked because real estate debt (in most of the US) is non-recourse debt. You leave the mortgage, the bank (or present mortgage holder) gets the property. Debt is settled.

Wait, really?

This is actually news to me. I had assumed that you would still owe the bank the difference between the remaining balance and the value of the home. ie, if you bought the house for $500K, made payments for a few years, then walked away when the house dropped to $400K value, but you still owed $450K, then if the bank foreclosed, you'd still owe $50K to the bank.

[sgerenser]

Look up the difference between “recourse” and “non-recourse” states. In a non-recourse state, the mortgage lender gets the house in a foreclosure, and there is no other recourse available (like suing for the remaining debt). Only 12 states are non-recourse, but some of the big players in the 2008 financial crash are among them (California, Arizona, Texas).

[throwaway2037]

I wasn't aware of the divide between recourse and non-recourse states. Google tells me: <<Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas (sometimes), Utah, Washington>>

Ref: https://www.financialsamurai.com/non-recourse-states-walk-aw...

It looks like resource vs non-resource also impacts the likelihood of foreclosure.

[nunez]

ARMs were insanely popular before the GFC and were what most lenders pushed onto customers, if I understand the history correctly. This + many customers budgeting for the bottom of the ARM = hurricane of foreclosures.

[hervature]

@dreadmorbius already mentioned nonrecourse loans but even recourse loans it should be obvious that if something made your property worth $0 (say Chernobyl real estate) then paying any amount of money to the bank is just a waste. Now, it may not be worth it to declare bankruptcy to absolve yourself of the loan, but the example is meant to illustrate that if the value loss is large enough, the recovery slow compared to other investments, and the payment is large relative to your income, then walking away can be the right choice.

> Whether I'm paying $2,000 to the bank, or $2,000 to some landlord (Really, I'd be looking at $2,800/month for a house like what I have now), I'm paying $2k/month. So why not just keep paying my mortgage, even if the value is less than what I paid?

I think you're missing the point that in a crash like 2008 the market rents would go from $2,800 to $1,400. Also, a reminder to anyone reading this that you cannot compare mortgage payments to rents. The down payment could have gone into another investment (like a tax-advantaged 401k) and so you need to take into account the opportunity cost of not getting S&P 500 returns. In the US, this is normally offset by the fact that the government tries to make mortgage rates very close to the Fed rate and the fact that the system allows you to lever up 4x (20% down) to 99x (1% down) to minimize the opportunity cost of other investments. In general, if you plan to live a house for at least 5 years, you should probably put it on a mortgage.

[BehindBlueEyes]

> if something made your property worth $0 (say Chernobyl real estate) then paying any amount of money to the bank is just a waste.

depends why the value goes down too: chernobyl real estated has a cost on health probably giving it a negative value, whereas if the economic value drops but the place doesn't actually poison you, the house is still the same house to live in. That's not value of 0 regardless what the price tag says.

The problem there is we use housing as an investment which is at odds with basic needs of having a roof over one's head/a safe place to live.

[throwaway2037]

    > In the US, this is normally offset by the fact that the government tries to make mortgage rates very close to the Fed rate

I assume you are talking about Fannie Mae, Freddie Mac, and Ginnie Mae. To me, there true purpose is the allow US home loans to be predominantly fixed rate. That is exceptionally rare in the world. In most countries, it is hard to get a fixed rate for longer than 10 years. In the US, 30 year fixed is normal. Part of the magic is unwritten gov't guarantees and clear rules that allow commercial banks to sell risky (fixed rate) loans to them. Mind you: This isn't free. It requires expert level interest rate risk management by those big three orgs. As we saw during 2008 GFC, they failed.

[jarsin]

Factor in the fact as the years go by you will see coworkers and neighbors buy houses for way less than you paid.

In my area those that bought the top in 07 are now just back to break even. Think about that for 15+ years everyone around them is making equity while they just dig out of the hole.