Did anybody catch the story about Kevin Martin's house in the Bee the other day?

[LWP777]

http://www.sacbee.com/2011/04/05/3528243/ex-king-martin-loses-rocklin-home.html

The guy makes 11M a year and he lets his house go to foreclosure. The fact that he was even trying to short sell it is a huge douche move IMO. Just because a house is underwater doesn't mean you can legally give it back to the bank without being on the hook for the balance. Of course, tons of people who are broke and/or unemployed have done this but when you make 11M a year, pay your debts and move on. I hope the lender goes after him for the unpaid balance.

 

[Alacron]

It's hard to blame someone for doing something that is both legal and in their best interests. Maybe the problem is the system that recreates this moral hazard millions of times over across the country?
~~

 

[Glenn]

Has anyone gone through this? This will end up in court and he will lose. The legalities I suppose are very complicated as these things tend to be but the general principle is that if you have the money, you pay. If you don't have the money, you don't pay. A person with the money to pay his house off cannot walk away without paying. It just will not work.

It's like trying to file bankruptcy when you have a $100,000 in the bank and $10,000 of debt. You can't just say, "nope, not going to pay. I'm bankrupt."

 

[Arco Arena]

Really stupid that this is even conceivable.

Although... "Don't hate the playa, hate the game" applies here.

 

[kennadog]

http://www.sacbee.com/2011/04/05/3528243/ex-king-martin-loses-rocklin-home.html

The guy makes 11M a year and he lets his house go to foreclosure. The fact that he was even trying to short sell it is a huge douche move IMO. Just because a house is underwater doesn't mean you can legally give it back to the bank without being on the hook for the balance. Of course, tons of people who are broke and/or unemployed have done this but when you make 11M a year, pay your debts and move on. I hope the lender goes after him for the unpaid balance.

Actually, you can give it to the bank and be off the hook. Most mortgage loans are non-recourse loans, meaning the lender's only recourse for repayment is the secured property.

Generally, on a short sale, the amount forgiven by the bank is considered a taxable gift to the homeowner, although the feds suspended that for a year or so during the current crises. I don't know how the IRS views the unpaid balance of a foreclosure, though. Probably don't consider that a gift. It's a bad debt, not a gift from the bank.

Plenty of people are walking away from their homes every day, mainly in the hardest hit markets. The houses aren't worth the amount they owe. They'd have to pay the difference out of "other funds." Most people don't have other money to use to pay off thousands (or millions) they still owe and won't get from the sale of the house. As a matter of fact, you should look in your mortgage documents for the non-recourse language. Hopefully it's in there.

 

[Glenn]

Walking away? Right. Wait until you are dependent on Social Security.

 

[Bricklayer]

As far as I know many/most home loans are tied to the property -- that's the collateral. They can't just randomly come after your other assets. In fact the great American fetish with owning a home aside, you'd be fairly foolish to agree to any other type of loan, at least if I was advising you.

 

[Glenn]

As far as I know many/most home loans are tied to the property -- that's the collateral. They can't just randomly come after your other assets. In fact the great American fetish with owning a home aside, you'd be fairly foolish to agree to any other type of loan, at least if I was advising you.

IS there any other kind of loan? Going a bit astray here, I suppose. On a short sale, I still might be on the hook for some money. In Kevin's case, I think this is the part that made him choke. Poor baby!

 

[rhythmless]

http://www.sacbee.com/2011/04/05/3528243/ex-king-martin-loses-rocklin-home.html

The guy makes 11M a year and he lets his house go to foreclosure. The fact that he was even trying to short sell it is a huge douche move IMO. Just because a house is underwater doesn't mean you can legally give it back to the bank without being on the hook for the balance. Of course, tons of people who are broke and/or unemployed have done this but when you make 11M a year, pay your debts and move on. I hope the lender goes after him for the unpaid balance.

Actually, that's exactly what it means. Are you a homeowner? You can give it back at anytime, because they sure will take it back at anytime you don't make payments. That's the contract, thats the rules.

If I was kmart, I'd probably do the same thing. It's the smart financial thing to do. He takes a hit on credit, but what kind of multimillionaire NBA player really needs a good credit score while he is still playing?

 

[rhythmless]

IS there any other kind of loan? Going a bit astray here, I suppose.

Auto, boat, motorcycle? Arena loan? If you can dream it, you can do it (as long as you have another person willing to do it with you).

Your house is only worth so much. When you need more capital for whatever reason, no one is going to lend you 50k to be 5th in line on your house.

 

[JJ22L]

Actually, you can give it to the bank and be off the hook. Most mortgage loans are non-recourse loans, meaning the lender's only recourse for repayment is the secured property.

Generally, on a short sale, the amount forgiven by the bank is considered a taxable gift to the homeowner, although the feds suspended that for a year or so during the current crises. I don't know how the IRS views the unpaid balance of a foreclosure, though. Probably don't consider that a gift. It's a bad debt, not a gift from the bank.

Plenty of people are walking away from their homes every day, mainly in the hardest hit markets. The houses aren't worth the amount they owe. They'd have to pay the difference out of "other funds." Most people don't have other money to use to pay off thousands (or millions) they still owe and won't get from the sale of the house. As a matter of fact, you should look in your mortgage documents for the non-recourse language. Hopefully it's in there.

Hmm. I don't think this is 100% accurate. During my tenure as a law-firm manager, (50% of our revenue was derived through bankruptcy-related services) I learned one thing: there is ALWAYS some sort of contingency/back-door. In other words, quite often it depends on what position the deed of trust is in, if it is a first position DOT that has been reaffirmed/refinanced and cash has been taken out, etc.

In response to the "IRS" comment, it is classified as "phantom income." Again, this depends on the type of loan (1st position w/re-fi), among other things. For a vast majority of foreclosures, the unsecured portion of the debt is "forgiven."

 

[Glenn]

I was talking about a house.

 

[kennadog]

Walking away? Right. Wait until you are dependent on Social Security.

Hey, I'm getting close. When I retire, I'm going to have to sell my house for a ton less than I bought it for. I'll get maybe half the price I paid, if I'm lucky. I can wait a bit, but it probably won't get back to that value for a very, very long time.

Some people can't see making payments on a house that may not be worth what they borrowed. It may be years before it's value rises enough to cover the loans and give them no equity. If its a big loan payment, it makes it harder. And if you've had pay cuts or someone in the house has lost a job, it may be impossible to keep the house.

It's really hard on people who need to move for job, family or other reasons. Part of the unemployment problem is people can't move as easily to get a job in another part of the state or country, because they are stuck in homes they can't sell for what they owe.

Hopefully, a lot of people have learned from this economic swoon. Be a very conservative borrower and be happy with what you can afford as a very conservative borrower. We almost all need less than we think we do.

 

[Alacron]

If Kevin makes a contract with another party that says "I will pay you X amount, or will give up Y as collateral," and then chooses to give up Y as collateral per the terms of the contract, I just don't understand the hate on Kevin for "reneging" on the deal as if he's cheating someone. If Y is worth less than X, what rational person wouldn't choose to do that?

The fault is that of the lender for making a (presumably) non-recourse loan in an amount that had the very real danger of not being covered by the value of the asset.
~~

 

[rhythmless]

If Kevin makes a contract with another party that says "I will pay you X amount, or will give up Y as collateral," and then chooses to give up Y as collateral per the terms of the contract, I just don't understand the hate on Kevin for "reneging" on the deal as if he's cheating someone. If Y is worth less than X, what rational person wouldn't choose to do that?

The fault is that of the lender for making a (presumably) non-recourse loan in an amount that had the very real danger of not being covered by the value of the asset.
~~

I think the real problem is that a lot of people really have no clue about what a mortgage loan really is and how it works. Definitely a factor in the bust. People thought it was all free money.

 

[kennadog]

Hmm. I don't think this is 100% accurate. During my tenure as a law-firm manager, (50% of our revenue was derived through bankruptcy-related services) I learned one thing: there is ALWAYS some sort of contingency/back-door. In other words, quite often it depends on what position the deed of trust is in, if it is a first position DOT that has been reaffirmed and cash has been taken out, etc.

In response to the "IRS" comment, it is classified as "phantom income." Again, this depends on the type of loan, among other things.

I've done a lot of single family mortgage loans and reviewed countless others. It might be different on if it's an equity loan or a line-of-credit loan, as I haven't done those, but most basic home purchase mortages are non-recourse. And there are people everyday, especailly in the Sacramento region, walking away from their homes. They are not all declaring bankruptcy.

Even in a bankruptcy, though, loans secured by mortgages or deeds of trust survive, don't they? A bankruptcy doesn't remove those liens against your home, I don't think.

On the other hand, if the home actually goes into foreclosure and is sold at auction, the first position lender gets to claim what's owed them. Any lender in a subordinate lien position only gets what's leftover after that, if anything, and all liens are erased from the property. Second or third lien position mortages or deeds of trust seldom get paid anything out of a foreclosure and I would venture to say never recover all that's owed to them. Nevertheless, after the foreclosure all lender liens are gone.

 

[chief bromden]

IS there any other kind of loan? Going a bit astray here, I suppose. On a short sale, I still might be on the hook for some money. In Kevin's case, I think this is the part that made him choke. Poor baby!

Federal Student Loans cannot be walked away from and/or washed away with bankruptcy. This is mainly due to the stance that a person cannot offer themselves as collateral.

 

[JJ22L]

I've done a lot of single family mortgage loans and reviewed countless others. It might be different on if it's an equity loan or a line-of-credit loan, as I haven't done those, but most basic home purchase mortages are non-recourse. And there are people everyday, especailly in the Sacramento region, walking away from their homes. They are not all declaring bankruptcy.

Even in a bankruptcy, though, loans secured by mortgages or deeds of trust survive, don't they? A bankruptcy doesn't remove those liens against your home, I don't think.

On the other hand, if the home actually goes into foreclosure and is sold at auction, the first position lender gets to claim what's owed them. Any lender in a subordinate lien position only gets what's leftover after that, if anything, and all liens are erased from the property. Second or third lien position mortages or deeds of trust seldom get paid anything out of a foreclosure and I would venture to say never recover all that's owed to them. Nevertheless, after the foreclosure all lender liens are gone.

They don't necessarily survive. Often times if the home goes back in foreclosure the debt is wiped. Depends on the timeline. Technically the debt goes from secured to unsecured (since the security interest has been "satisfied" through the reposession of the home), and the remaining debt is wiped out as if it were a credit card/non-priority/schedule F claim or what-have-you. (again, depends on the loan and timeline.)

In regard to your other question: Ah! Then you get into semantics ;-). In a chapter 13 bankruptcy you can file adversary preceedings to a bankruptcy case to strip second/third/fourth position deeds of trust if you can prove the "secured debt" is actually 100% unsecured. Even more interesting is that the government was about to enforce a "cram down" in a chapter 7/13. That would have changed the entire landscape.

I am only really knowledgeable about how loans are affected through BK. You are defeinitely the guru in non-bk related proceedings .

 

[kennadog]

I think the real problem is that a lot of people really have no clue about what a mortgage loan really is and how it works. Definitely a factor in the bust. People thought it was all free money.

There were multiple problems and lenders and borrowers both made mistakes that led to the mess. I knew back in the late 90s and early 2000s that the loans being done in the regular market were very risky and had the potential to lead to a real mess. No one wanted to hear it, though.

Being a governement program providing second lien postion loans behind first position private lenders, at the time, I really didn't want to take a big risk of taxpayer dollars behind questionably underwritten first position loans.

Some of the generally bad ideas for the majority of borrowers: ARMs; 1, 2 or 3 year interest rate buydowns; no interest (for 5 years) loans; little or no down payment. Also, be careful of "free" appraisals paid by your real estate agent or broker. You are paying for them. It's hidden in the difference between the stated interest rate and the actual annual interest rate or APR. Other bad ideas: exceeding the standard debt ratios (front or back end) by using questionable "compensating factors."

Other bad ideas: borrowing against equity with the exception of college costs or big medical costs. Too many people kept refinacing or taking out equity loans as their house values were sky-rocketing, leaving them no cushion at all in the downturn.

Home loans can be exceedingly complicated and lenders are always finding sneaky new ways to hide what they are actually doing in a deal. They were also doing questionable underwriting.

Everybody just assumed that double digit inflation of home values was an immutable law or even a right. Really bad assumption.

 

[chief bromden]

This is correct. Student loans are a schedule E "unsecured priority claim." It used to be that if you could prove "hardship" that you could walk away. Now, you cannot. Sorry. This was my realm for a long time and I got quite knowledgeable about it .

Please don't apologize for adding correct information to a discussion.

 

[JJ22L]

There were multiple problems and lenders and borrowers both made mistakes that led to the mess. I knew back in the late 90s and early 20000s that the loans being done in the regular market were very risky and had the potential to lead to a real mess. No one wanted to hear it, though.

Being a governement program providing second lien postion loans behind first position private lenders, at the time, I really didn't want to take a big risk of taxpayer dollars behind questionable underwritten first position loans.

Some of the generally bad ideas for the majority of borrowers: ARMs; 1, 2 or 3 year interest rate buydowns; no interest (for 5 years) loans; little or no down payment. Also, be careful of "free" appraisals paid by your real estate agent or broker. You are paying for them. It's hidden in the difference between the stated interest rate and the actual annual interest rate or APR. Other bad ideas: exceeding the standard debt ratios (front or back end) by using questionable "compensating factors."

Other bad ideas: borrowing against equity with the exception of college costs or big medical costs. Too many people kept refinacing or taking out equity loans as their house values were sky-rocketing, leaving them no cushion at all in the downturn.

Home loans can be exceedingly complicated and lenders are always finding sneaky new ways to hide what they are actually doing in a deal. They were also doing questionable underwriting.

Everybody just assumed that double digit inflation of home values was an immutable law or even a right. Really bad assumption.

Here here! A very well-informed post.

 

[JJ22L]

Please don't apologize for adding correct information to a discussion.

I deleted the post . I realized I sounded like a smart-a**. I just like the topic and tend to get...excited. I think a lot of this entire recession is a direct result of misinformation and a lack of public education. During my stint I noticed a very common trend: VERY rarely do people actually sit down and budget. Education and enlightenment was the key and I took that to heart. More often than not I turned people away from filing bankruptcy and just acted as a financial planner. It was, however sad it is to say, a very fulfilling experience - having the opportunity to help people.

One of my main jokes during initial consultations was: "I never want to see you again." .

 

[kennadog]

They don't necessarily survive. Often times if the home goes back in foreclosure the debt is wiped. Depends on the timeline. Technically the debt goes from secured to unsecured (since the security interest has been "satisfied" through the reposession of the home), and the remaining debt is wiped out as if it were a credit card/non-priority/schedule F claim or what-have-you. (again, depends on the loan and timeline.)

In regard to your other question: Ah! Then you get into semantics ;-). In a chapter 13 bankruptcy you can file adversary preceedings to a bankruptcy case to strip second/third/fourth position deeds of trust if you can prove the "secured debt" is actually 100% unsecured. Even more interesting is that the government was about to enforce a "cram down" in a chapter 7/13. That would have changed the entire landscape.

I am only really knowledgeable about how loans are affected through BK. You are defeinitely the guru in non-bk related proceedings .

Very interesting. Programs I have worked in for the government have a much lower than bankruptcy or foreclosure rate than the national average, so it wasn't something I had to get involved in a lot, thank goodness. We were quite strict in our underwriting. We want our first-time homeowners to succeed. Not only can we lose taxpayer money in a bankruptcy or foreclosure, but we feel we leave the family worse off than before they bought the house. (By the way, I have not worked for FHA, Fannie Mae or Freddie Mac ) And generally, when its happened its been other debt, not the home loan that causes the problem.

I figured student loans couldn't be walked away from. Neither can IRS debt. Although I've been told that the interest and penalties on the IRS debt can be wiped out in a bankruptcy?

 

[kennadog]

I deleted the post . I realized I sounded like a smart-a**. I just like the topic and tend to get...excited. I think a lot of this entire recession is a direct result of misinformation and a lack of public education. During my stint I noticed a very common trend: VERY rarely do people actually sit down and budget. Education and enlightenment was the key and I took that to heart. More often than not I turned people away from filing bankruptcy and just acted as a financial planner. It was, however sad it is to say, a very fulfilling experience - having the opportunity to help people.

One of my main jokes during initial consultations was: "I never want to see you again." .

Funny story. When I went to get pre-qualified to buy my first house after my divorce, they pre-qualified me for a ridiculous amount of money. Some poeple seem to think that if they are approved for x amount of dollars the lender must think they can afford that amount. Well, one of the monthly amounts I had to pay was child care. This was not an insignificant part of my budget. However, it was not considered a "debt" in the underwriting process. Anything month to month that can be terminated, the underwriting process generally assumes you will cancel, in order to pay your mortgage.

Well, obviously I knew that I would not be canceling child care anytime soon, so I already knew in my mind what my budget for a house payment could be (PITI). Needless to say, what I knew I could borrow was considerably less than they pre-approved.

 

[JJ22L]

Very interesting. Programs I have worked in for the government have a much lower than bankruptcy or foreclosure rate than the national average, so it wasn't something I had to get involved in a lot, thank goodness. We were quite strict in our underwriting. We want our first-time homeowners to succeed. Not only can we lose taxpayer money in a bankruptcy or foreclosure, but we feel we leave the family worse off than before they bought the house. (By the way, I have not worked for FHA, Fannie Mae or Freddie Mac ) And generally, when its happened its been other debt, not the home loan that causes the problem.

I figured student loans couldn't be walked away from. Neither can IRS debt. Although I've been told that the interest and penalties on the IRS debt can be wiped out in a bankruptcy?

Depends on how old the IRS debt is. There is a specific time-line in which the entire debt can be classified as schedule F (like a credit card), and discharged. I cannot recall what it is right now. It is a random number such as 3 years and 265 days or something like that. In the long run, it depends on how aggressive the creditor is. An angry enough creditor, with enough money, can always file a motion to determine non-dischargability. I, personally, have handled a case where a client has had their IRS debt discharged.

I posted this above, but later deleted it - student loans are 99.9% of the time a non-dischargable debt. It used to be that you could show "hardship" and get them discharged. I can't 100% verify, but I believe that was eliminated sometime in the early 2000s. I have still seen in pro per motions filed to try to discharge student loans, though. Never really followed them through to see how they ended. To be honest, I think it's up to the mercy of the Judge in your division.

There is a tremendously large "grey area" in the BK realm. Dischargability of IRS debt is one of them. Noone wants to tackle the gov .

 

[JJ22L]

Funny story. When I went to get pre-qualified to buy my first house after my divorce, they pre-qualified me for a ridiculous amount of money. Some poeple seem to think that if they are approved for x amount of dollars the lender must think they can afford that amount. Well, one of the monthly amounts I had to pay was child care. This was not an insignificant part of my budget. However, it was not considered a "debt" in the underwriting process. Anything month to month that can be terminated, the underwriting process generally assumes you will cancel, in order to pay your mortgage.

Well, obviously I knew that I would not be canceling child care anytime soon, so I already knew in my mind what my budget for a house payment could be (PITI). Needless to say, what I knew I could borrow was considerably less than they pre-approved.

Good for you! Seriously! Don't let 'em getcha! I must have had hundreds of conversations with 4+ person-household debtors who put "$200/month" down for food on their expense schedule. I would always look at Schedule J and say: "whoa whoa whoa. I spend $200 on food in a week and a half!"

 

[Section 101]

Actually, you can give it to the bank and be off the hook. Most mortgage loans are non-recourse loans, meaning the lender's only recourse for repayment is the secured property.

Generally, on a short sale, the amount forgiven by the bank is considered a taxable gift to the homeowner, although the feds suspended that for a year or so during the current crises. I don't know how the IRS views the unpaid balance of a foreclosure, though. Probably don't consider that a gift. It's a bad debt, not a gift from the bank.

Plenty of people are walking away from their homes every day, mainly in the hardest hit markets. The houses aren't worth the amount they owe. They'd have to pay the difference out of "other funds." Most people don't have other money to use to pay off thousands (or millions) they still owe and won't get from the sale of the house. As a matter of fact, you should look in your mortgage documents for the non-recourse language. Hopefully it's in there.

The feds suspended the taxable gift, but the state did not. Many people didnt realize this part.

The difference on the foreclosed sale and loan amount is still the responsiblity of the borrower to pay. This is why a short sale is better if you can cover the potential taxes. Many times the bank won't do anything because it will cost more to go after the money than what they will get back. But many of those debts are now being sold to collection agencies. The people that walked away can expect them to come calling in the future. I dont think there is a limit for how long they can wait to come collecting.

Oh, when buying a home always get the 15 or 30 year fixed rate. ARMs are for suckers.

 

[Hoovtrain]

The feds suspended the taxable gift, but the state did not. Many people didnt realize this part.

The difference on the foreclosed sale and loan amount is still the responsiblity of the borrower to pay. This is why a short sale is better if you can cover the potential taxes. Many times the bank won't do anything because it will cost more to go after the money than what they will get back. But many of those debts are now being sold to collection agencies. The people that walked away can expect them to come calling in the future. I dont think there is a limit for how long they can wait to come collecting.

Oh, when buying a home always get the 15 or 30 year fixed rate. ARMs are for suckers.

Only in some states. CA is a non-recourse state. The lender cannot come after you for the unpaid balance of your loan once the house is sold at auction.

 

[Kingster]

Actually, you can give it to the bank and be off the hook. Most mortgage loans are non-recourse loans, meaning the lender's only recourse for repayment is the secured property.

Generally, on a short sale, the amount forgiven by the bank is considered a taxable gift to the homeowner, although the feds suspended that for a year or so during the current crises. I don't know how the IRS views the unpaid balance of a foreclosure, though. Probably don't consider that a gift. It's a bad debt, not a gift from the bank.

Plenty of people are walking away from their homes every day, mainly in the hardest hit markets. The houses aren't worth the amount they owe. They'd have to pay the difference out of "other funds." Most people don't have other money to use to pay off thousands (or millions) they still owe and won't get from the sale of the house. As a matter of fact, you should look in your mortgage documents for the non-recourse language. Hopefully it's in there.

This is correct. Basically, it's a business decision to stay or walk. And if you walk in the US on a 1st mortgage they can't come after personal assets. If, on the other hand, you took out a line of credit on home equity, well, that's another story. Then they come after you personally and BK might be the end result.

 

[pdxKingsFan]

By my understanding what Kev did was perfectly legal. I also think its a complete scumbag thing to do when you can afford to pay your committments and choose not to because of laws meant to protect people in far less fortunate circumstances. But that's the American way these days.