A Hidden Impact of the Mortgage Crisis

Miscellaneous and Personal Stuff I Must Share
1

This might turn into a debate but at the moment I only consider it an interesting anecdote that I want to share. I’m not looking for pity; the deed is done and I have already dealt with the consequences. I’m not looking for armchair legal advice; I know my options and I think that pursuing them would cost far more than I would get. I just suspect that some economy watchers might be interested.

So two years ago my home was pretty heavily damaged in a hurricane (not Katrina) and generally not being happy with Florida I decided to relocate. Since I was leaving Florida the cost of living expenses were almost guaranteed to be dropping sharply and sure enough I located a fairly nice place that gave me more than what I had for a lot less than I had been paying before.

My new landlord had an entire street of duplexes. There’s eight buildings with sixteen units all together. It’s a quiet place nestled in some hills so I enjoyed it elevation being something of a novelty to someone who lived in Florida the majority of their life and spent time in their youth in Houston, Kansas, and Nebraska.

A year passed and though I hadn’t really settled I was comfortable enough to renew my lease. Another year passed and that brings us to two weeks ago.

I knew something was up since there were for sale signs in front of some of the duplexes. Several of the units had been sitting empty and one of my neighbors told me that when they renewed their lease it was changed from yearly to month-by-month so that the duplexes could be sold. I also knew that the landlord had been in and out of the hospital several times recently.

I think you can all see where this is going. Let me go through the motions at least.

So my lease was up and the landlord’s wife came by with the new lease. As mentioned it had changed to a month-by-month lease. So I signed the papers and then she said, “Oh by the way, the bank is foreclosing on the property in forty-five days.”

Yes everyone on my street is being foreclosed on. Naturally I ran out and started looking for a new place immediately and there were a lot of rental properties. A mean a whole lot. I live in a housing development that’s in a semi-rural area and there were more than twenty within a half mile of me. And every single one of them wanted quite a bit of money for the place.

Going by the people I talked to rents had gone up fifty percent here in the last two years. I saw some real hell holes that people thought they would be able to get significantly more than I had been paying (It would interrupt my story so I won;t tell you guys about them now but if you ask and I have an Internet connection I’ll regale you with those stories).

Well I found a new place that was a little bit less than I was paying, had more space, and is located in a very quiet area. So a happy ending for me.

My long winded point to this is that it seemed to me that a lot of people bought places for “investment” that they used as rentals and as the mortgage crunch hits they’re scrambling. Some renters are getting kicked out on their landlord’s problems and landlords trying to cover their inflating premiums are digging themselves holes. It’s an aspect to this whole thing that I never saw until it hit me.

2

May I ask a naive question?
Why did you have to run out and find a new place to live?

If the bank forecloses, doesn’t that mean that the landlord is bankrupt, and the landlord (not the tenant) loses everything he owns? Even though the investment failed, doesn’t the bank still want as much income as it can recoup?
Wouldn’t the bank prefer that you stay in the apartment , so it can take your monthly payments as the new landlord? A little bit of cash income is better for the bank than zero cash income from re-posessing an empty building.

Naturally, you would have to re-negotiate your monthly payment, and the bank would try to increase it. But if there are lots of other foreclosures(i.e. empty buildings) in the area, than shouldn’t it be to your advantage? You could tell the bank that if they increase your payment, you will leave, and they will be left with nothing, (which is what happened, right?)
So why wouldn’t the bank be willing to let you keep living there, at the same rent you were paying before?
(I don’t live in America, so maybe my question seems childish: obviously I’m misunderstanding something basic. I need some ignorance fought)

3

If the bank becomes landlord and keeps the tenants then it must act as a landlord, fulfill any landlord responsibilities (upkeep, snow removal in winter, middle of the night calls about plumbing problems. etc.), and assume liability.

Some banks are equipped to do this (usually by way of a property management division or some sort) but most are not. Therefore, the decision may be made (and frequently is) that the bank is better off evicting the tenants (eliminating all that annoying maintenance stuff, as well as wear and tear on the property and liability) and just occasionally hiring someone to mow the lawn.

4

Banks do not want to be in the real estate business. They’re there to make money transactions. Owning a house is the last thing they want to do…I think Atomicktom has some insight on this.

So, no, if the landlord loses his rental property to foreclosure, the tenant is SOL. I’m glad you found a new place to live.

5

One unexpected and long-term effect of the housing crisis is the effect it has on young first-time buyers. Two of my children are in their 20’s and both are absolutely convinced they will rent for many years before they buy a house. This crash has scared a whole generation of new customers.

6

Being scared of buying property is probably a good thing (to some extent). Taking on a property and the mortgage and responsibilities therein is something that should have never been taken as lightly as it has been in the US. My husband and I live in what was recently one of the hottest markets in North America, and we approach real estate with fear and respect.

Interesting story, Just Some Guy. It makes sense; as people get kicked out of properties they had no business being allowed to buy, they’ll have to live somewhere.

7

I’m 26. I’m not going to buy if I can help it.

8

Hmm… seems to me that I might have approached the bank about buying the place at a knock-down price. After all, the banks insist that mortgagees purchase insurance…

9

The subprime crisis boils down to one thing: lots of individuals were buying more than they could afford. That should not prevent anyone else from buying a house in a smart fashion, i.e. 25% down, 25 year mortgage.
If you’ve got to stretch to a 40-year mortgage, or you’ve got to finagle an interest only payment, you just can’t afford the house you’re looking at.

10

Barbarian just said it perfectly. Too many buyers, especially young and first-time, buying more than they could afford.

Trouble is, in some markets 1-5 years ago, the cheapest starter condo was $300k, and for a lot of people wanting to own but having typical entry-level job income, buying anything at all was buying beyond their means.

That being said, even in the fiercest markets, going in as an informed buyer willing to make the occasional concession (ex.: we bought a nice townhouse in a growth location without crime, but over a divider fence is a train track that gets commercial and commuter use). It’s not going to be a dream house the first time out. Too many people bought beyond their means because they failed to understand or accept that.

11

Let me preface my comments by stating that I am only familiar with the foreclosure process in Florida. Other jurisdictions may have different laws and methods.

Having said that, foreclosure does not mean that the landlord/owner is bankrupt, and that owner does not lose everything they own. Foreclosure is merely a remedy that exists for the lender (called a mortgagee) against the borrower (called a mortgagor) when the loan isn’t being paid. By foreclosing on the property, the bank secures a lien on the property (equivalent to what the bank is owed), and the property is then sold by the court to satisfy that lien. If the house is sold for less than the lien, the bank could (but rarely does) seek a deficiency judgment against the mortgagor for the remaining balance owed. If the house is sold for more than what is owed, anybody else with a financial claim in the property (including the homeowner/mortgagor) can claim their right to this surplus.

In my experience, there are many mistakes about this process. For one, as I’ve said, the home is sold (in a public auction) at the courthouse to satisfy the bank’s debt. The bank is entitled to bid on the property, but so is anybody else. While it is true that the bank can pledge the amount of its debt (i.e. if the bank is owed $250K, the bank can bid up to $250K without offering additional money, since their debt will be satisfied by their bid), and is thus in a superior position to win the auction, it is not a given that a foreclosure means the bank will get the property. Nor is it true that the bank will “take back” the house since, at least in Florida, the bank never owned the property prior to the auction - they merely held a lien on the house.

There is also a business aspect to this process. Banks don’t always bid their total debt at the auction, which seems to me to imply that they often don’t want to buy the property. As has been stated upthread, there are carrying costs and attendant liabilities association with property ownership - for every day you own a house, you had to keep it insured, and you have to pay its property taxes. You also are responsible for its maintenance and repair. And, as a landlord, you are responsible for keeping the house habitable in order to be able to enforce your lease.

Thus, banks have generally decided to not be in the business of renting properties. If they buy them at a foreclosure auction, then they try and turn around and sell them as soon as possible (oftentimes at a loss). While I am not privvy to the deliberations that have decided on this policy, I assume that the banks have decided that this is better than to have to collect rent from whoever may live there.

As a result, tenants generally get evicted at a foreclosure (I say generally because a third party who buys the house at the foreclosure auction may want to keep the tenants in the house, and will be willing to negotiate a new lease). As I stated in another thread, I consider tenants to be the innocent victims of foreclosure. It is an inherent risk in renting that your lease is only as good as the landlord’s right to rent out the house.

If there is one saving grace to this, at least as far as the OP is concerned, its that the tenants have to be joined in the foreclosure lawsuit in order for the court to have the jurisdiction to evict. So, unless and until the tenant is served with the foreclosure suit, and is then kept informed of the progress of the lawsuit by the bank (via motions to the court for judgment, notices of hearing, etc.) the tenant isn’t within the court’s power to kick them out. That’s not to say that you want to wait until the bitter end, but a sherriff won’t come to your door until after you’ve been given proper notice.

I’m sorry for the rambling…I hope I’ve been of some benefit.

12

Heh, this has me thinking we should buy sooner rather than later. While we’ve got a good price for the apartment we have, we could probably get a decent house for the same payment. And I’d rather buy while the market is down.

Of course, we’re also in a good position with no student loans or car payments (yet) and my husband got a pretty good (and stable) job right out of college.

13

There are definitely people who will profit from your mortgage crisis, Jayn - no reason you and your hubby shouldn’t be among them. (We’re thinking about Arizona properties with an eye for a winter house ourselves!)

14

I agree-but I also think that misses the (modern) point-people have bought houses for the last few years not just to live in, but as investments. The primary point is that (almost) everyone is leveraged on their home. The young people understand that and are very concerned about price drops. In the early years a relatively small price drop can wipe out all the money one has. Having 25% down is a cushion, but losing 10-15% of that money is frightening nevertheless. My son, who owns a house, isn’t in danger of not making the payments, he is just afraid of losing his shirt when he sells. He doesn’t plan to take that chance again any time soon.

15

There’s an adage – or if not, there should be – that what’s good for one person can really suck if everyone does the same thing. Applies to sacred cows, bathing in the Ganges, town commons, and using a house as an investment.

It makes a hell of a lot more sense to buy a house as a place to live, and to buy stocks as investments that will grow. Gradual purchase of stocks also allows the investor to take advantage of dollar cost averaging. Putting all your eggs in the housing basket means you don’t just lose your shirt, you lose the roof over your head.