Monday, September 06, 2010

Before the Recession/Depression

On the White House site, I found a copy of the weekly address from the President - this one, celebrating the Working Man/Woman, in honor of Labor Day today.  As I read the first paragraph, one thing caught my attention - Obama talked about:
working Americans, who were fighting harder and harder just to stay afloat – often borrowing against inflated home values to pay their bills
I don't want to burst his bubble more than declining prices sank the housing market, but he is wrong - and that worries me, that he could be so ill-informed about the way that home equity mortgages were used.

Both from observations of friends, neighbors, and relatives, and reading the business sections of news, I've seen that home equity loans were seldom taken on to meet daily bills.  Rather, having sunk oneself into a morass of consumer debt, many used them as a "rob Peter to pay Paul" scheme.  And, since they were Peter, it seemed more a matter of shuffling around their own cash from one pocket to another.

But, then came the bursting of the housing bubble.  [For those who aren't familiar with the term, a bubble is an inflated market, that has little or no relation to the underlying value of the goods.  It is vulnerable to sudden collapse, rather like the soap bubbles for which they are named]

Housing prices fell - to a truer estimation of the houses' worth.

And, millions of home-owners found themselves "under water" - owing more than the house could be sold for.  That's where the lenders started getting nervous - whereas, they SHOULD have been concerned about the vast sums of money they had been loaning out.

In some states, you can walk away and stick the bank for the money owed, if sale of the house is not sufficient to cover the mortgage.  From Mortgagereliefformula.com:

These are all the mortgage walkaway trustee sale states, meaning they are non-judicial foreclosure states.
In those states, generally, when they foreclose on you, they cannot pursue you for their financial losses.
Alaska 
Arizona 
Arkansas 
California 
Colorado 
District of Columbia (Washington DC) 
Georgia 
Hawaii 
Idaho 
Mississippi 
Missouri 
Montana (as long as non-judicial foreclosure is used)
Nevada - note that the lender CAN get a deficiency judgment (See below)
New Hampshire 
Oregon 
Tennessee 
Texas (but even in a non-judicial foreclosure, the lender can pursue a deficiency judgment)
Virginia 
Washington 
West Virginia
These are states that also allow non-judicial foreclosure, and/or where non-judicial foreclosure is more common and deficiency judgments can be obtained more easily: 
Michigan 
Minnesota 
North Carolina
Rhode Island 
South Dakota 
Utah
Wyoming 

In all of the above states, the working man/woman DIDN'T lose out - they were able to use the inflated value of the home to live large, then walk away once the cookie crumbled.  They could hand over the keys, take all other possessions, and live in a rental for a while.  If they owned another home prior to the foreclosure, they could move in there, and go on with their lives.

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