Strategic foreclosures and short-sells and the church's standing

[some]

Temple interviews and church standards ask members if they and honest with their fellow man. Do members remember creditors and banks as their fellow man? More and more foreclosures and short sales are being used by those who have financial means to sell outright but choose not to only to increase their wealth and standing in society. Basically when a house goes down in value, a member will buy a much more expensive home using either their own funds or a money from a second loan on the first, then short-sell or foreclose the first. The same member is then happy to pocket the profits on the second home when the value goes up.

This is a hot topic where house price fluctuations are greatest, and use of foreclosures and short-sales are a regular occurrence.

Often times the people who are guilty of doing this blame the bank or the system as they move to their more expensive homes and continue to remain in good standing and take on more and more prominent callings in the church.

Those who choose to 'play by the rules' are often times looked down upon by other members.

Hundreds of thousands or millions are at stake when such decisions are made. This can affect a members standing in society and their ward. Who wouldn't be tempted?

Should we as members of the church be held to a higher standard?

Edited August 5, 2012 by some

[john doe]

I think this would fall under being honest in your dealings with your fellow man.

[Guest]

I agree with you. It baffles me. I've even seen someone in my ward start a short sale for the express purpose of having leverage to negotiate with the bank to take a fraction of what's owed on their second mortgage, as opposed to getting next to nothing if a short sale went through. They never intended to short sale it, they just wanted to put the bank in a bind to get out of paying thousands and thousands of dollars that they had borrowed on the house. I don't see how members can do things like that and say they're honest in their dealings.

[NeuroTypical]

A foreclosure process is not necessarily an indication that someone is being dishonest. Many times, it is a process through which someone goes, so they can remain honest with their fellow man.

[yjacket]

Temple interviews and church standards ask members if they and honest with their fellow man. Do members remember creditors and banks as their fellow man? More and more foreclosures and short sales are being used by those who have financial means to sell outright but choose not to only to increase their wealth and standing in society. Basically when a house goes down in value, a member will buy a much more expensive home using either their own funds or a money from a second loan on the first, then short-sell or foreclose the first. The same member is then happy to pocket the profits on the second home when the value goes up.

This is a hot topic where house price fluctuations are greatest, and use of foreclosures and short-sales are a regular occurrence.

Often times the people who are guilty of doing this blame the bank or the system as they move to their more expensive homes and continue to remain in good standing and take on more and more prominent callings in the church.

Those who choose to 'play by the rules' are often times looked down upon by other members.

Hundreds of thousands or millions are at stake when such decisions are made. This can affect a members standing in society and their ward. Who wouldn't be tempted?

Should we as members of the church be held to a higher standard?

I find nothing unethical or dishonest in foreclosures or short sales as long as the terms of the contract are being followed. I think too many people believe it immoral or unethical when someone strategically defaults. A mortgage is nothing more than a contract. The simple terms of the contract are in broad strokes as follows:

1) Bank lends (creates money out of nothing, but we won't go into that here) money to an individual.

2) In return for the money, the individual promises to pay x in interest and principle.

3) In the case that the individual does not fulfill #2, bank takes house as collateral.

No where in the contract does it say the individual "must" make payments. The contract is essentially an if/then clause. If you make payments, then you continue to keep the house, if you do not make payments, then the bank takes house.

Ultimately until you finish payments the banks owns the house. I actually applaud anyone who has come to the logical conclusion that they bought a house for too much money and should get rid of it, even if they have the means to do so.

Now I do believe that banks should be able to go after the remaining amount of a mortgage from a foreclosure or short sell. For example 300k loan, foreclosure for 200k, banks should be able to pursue the individual for 100k. And in many states, banks do have this ability (recourse vs. non-recourse states). And ultimately, if the individual who defaulted truly cannot pay the 100k difference they can declare bankruptcy to eliminate the debt. If the person has the financial means to pay the 100k loss then the bank should be able to pursue that individual. And that is where the courts come to sort it out.

I would find unethical someone who defaults with no intention of ever making future payments and then continuing to live in the house until the cops kick them out. That person has violated the terms of the contract and is now violating the property rights of the bank by continuing to stay in a house they no longer have any claim to.

From what I've read and gathered what I've written above was generally the SOP up until the housing bust. Unfortunately with the stupid Fed. Gov. getting involved in the foreclosure process, it has really mucked up the process. For example, in order to be eligible for some of the housing bailout money the individual has to show true need, which basically means you have to default on your mortgage for 3-6 months. Of course after 3-6 months of non-payment banks start the foreclosure process, making it harder for those individuals to receive bailout money, etc. Personally, I think if someone says it is dishonest to strategically default, then it is probably dishonest to take bailout money too.

Businesses strategically default all the time and it is not seen as dishonest.

The housing bubble/bust is endemic of the corrupt dishonest monetary system we live in; when a monetary system is built upon inherit fraud it will be very difficult for actual individual actors to remain without blemish (I think you can still be honest, but it is a lot more difficult to do so).

[yjacket]

I agree with you. It baffles me. I've even seen someone in my ward start a short sale for the express purpose of having leverage to negotiate with the bank to take a fraction of what's owed on their second mortgage, as opposed to getting next to nothing if a short sale went through. They never intended to short sale it, they just wanted to put the bank in a bind to get out of paying thousands and thousands of dollars that they had borrowed on the house. I don't see how members can do things like that and say they're honest in their dealings.

I don't know, unless they explicitly told you that they never plan to sell I wouldn't make such judgement. I know I've been in situations where if x doesn't happen I will sell. X happens so I don't sell. If the bank didn't deal with them, it might have been in their best interest for them to actually sell. Who knows, except them.

[yjacket]

In this housing bubble, very few are completely innocent. The banks should have known lending money at the prices they were was bad and would get them in trouble (in fact some did that and were penalized b/c of it). Many banks knew it was wrong (I've had conversations with individuals who worked at the big banks during the bubble), the individuals who purchased the homes should have known they were buying too much home. 300k loan when you are making 60k is stupid. The federal government encouraged it, the federal reserve encouraged it, and know we are dealing with the aftereffects.

[bytor2112]

Short selling typically occurs when a borrower cannot pay the mortgage. In order for a bank to consider a short sale, the borrower must submit a hardship letter explaining why they can no longer pay the mortgage. Assuming a buyer comes along the bank first has to accept the offer before the short sale occurs. Anyone entering into a short sale should consider a couple of things:

1. If they owe $300k and the bank accepts an offer of $200k, the seller will receive a 1099 for the $100k. So, they will have to pay taxes.

2. The seller will take a significant hit on there credit score.

[bytor2112]

In this housing bubble, very few are completely innocent. The banks should have known lending money at the prices they were was bad and would get them in trouble (in fact some did that and were penalized b/c of it). Many banks knew it was wrong (I've had conversations with individuals who worked at the big banks during the bubble), the individuals who purchased the homes should have known they were buying too much home. 300k loan when you are making 60k is stupid. The federal government encouraged it, the federal reserve encouraged it, and know we are dealing with the aftereffects.

Very true. But the competition to lend when money was cheap and credit easy was enormous. Uncle Sam really is to blame for this.....threats by AG Janet Reno at the behest of the then sitting POTUS was the beginning of a lending free for all that imploded in 2008.

[Guest]

I don't know, unless they explicitly told you that they never plan to sell I wouldn't make such judgement. I know I've been in situations where if x doesn't happen I will sell. X happens so I don't sell. If the bank didn't deal with them, it might have been in their best interest for them to actually sell. Who knows, except them.

They did tell me so, and exactly what their intentions were. They had a realtor fraudulently listing the house as a short sale so they'd have leverage to negotiate with the bank who held their second mortgage.

There's another couple in our ward who own a house in the neighborhood. They rented it to an LDS family. This family was notified that the house was in foreclosure recently because the owners hadn't paid the mortgage for several months. Yet the owners were still collecting rent from them. They found another place to live as soon as they could, and the owners are now trying to find other renters, advertising an "appealing and flexible" month-to-month lease, since of course they are just waiting for the bank to finally take it out of their possession. I guess they figured they might as well make what money they can, while they can. There are a lot of other circumstances, like the owner's wife's new set of "accessories", but that's a whole other discussion. The point being, they are most definitely being dishonest about it, and unfortunately it's lost them friends in the ward since they were taking advantage of their renters (who are LDS) and it got around.

[bytor2112]

They did tell me so, and exactly what their intentions were. They had a realtor fraudulently listing the house as a short sale so they'd have leverage to negotiate with the bank who held their second mortgage.

Where's the leverage? Short selling only exists if a bank accepts the petition by the seller. Two different lenders?

[Guest]

Their leverage was that if the second lender didn't reduce their second mortgage by several thousand dollars, they'd be forced to short sale. If they sold in short sale, the second lender would get very little, but if they would cut the loan back, the borrowers would keep the house and pay on the second mortgage at the new loan amount. It was actually the realtor's idea, and I don't know if it worked, but they still live there. They never intended to sell their house under any terms, they just wanted to reduce the amount of the second mortgage.

[yjacket]

Their leverage was that if the second lender didn't reduce their second mortgage by several thousand dollars, they'd be forced to short sale. If they sold in short sale, the second lender would get very little, but if they would cut the loan back, the borrowers would keep the house and pay on the second mortgage at the new loan amount. It was actually the realtor's idea, and I don't know if it worked, but they still live there. They never intended to sell their house under any terms, they just wanted to reduce the amount of the second mortgage.

That part of it just sounds like negotiation to me. People negotiate, bluff, call bluffs, etc. all the time that doesn't mean it is unethical. If the bank reduced their mortgage, then hey they are good negotiators. Nothing in the contract says you can't renegotiate it. If the bank was willing to renegotiate then that is between them and the bank. You can't "list a home fraudulently" unless it's not yours to sell. A lot of people list their home with no intention of immediately selling it just to test the market.

I don't see where a family renting out a house and not making mortgage payments correlate. Now if they were renting out a house they didn't own or a house that had already been foreclosed on that is a big problem. I own my house outright, so if I rented it I'm not honest b/c I don't make mortgage payments? Making mortgage payments and renting out a house are not correlated. Renting it out while being foreclosed on, I think is okay as long as the people who are being rented to know that it is month to month. If they have a year contract and they could be foreclosed on at any moment that is a problem b/c you are defrauding the renters into thinking the contract is for a year when it may not be. Month-to-month has already laid out that the contract can be terminated at any time by any party.

[Guest]

Our ethical lines are clearly in different places, then.

[yjacket]

Our ethical lines are clearly in different places, then.

Maybe, maybe not; I've given a lot of thought to these sticky situations, they are very difficult as to what is "right" and what is "wrong".

I don't know the full situation of the folks you've described so it's completely possible they are unethical. It's just really easy to judge without having the full and complete story.

Many times I've found that people judge another as unethical or immoral simply b/c it's something they wouldn't do not b/c it is right or wrong. They see someone "take advantage" or "get something for nothing" and there is a secret wish to get the same benefit and if they can't get the benefit it is labeled as unethical. Maybe it is, maybe it isn't, it just depends on the situation.

[Guest]

Wrong. My integrity is worth way more than $______ a month. Jealousy has nothing to do with it.

[bytor2112]

Everything is negotiable in business and he who does not ask, usually does not receive.

[yjacket]

Wrong. My integrity is worth way more than $______ a month. Jealousy has nothing to do with it.

My integrity is priceless; and it means a heck of a lot more than being "honest".

Integrity - Wikipedia, the free encyclopedia

My integrity isn't perfect, but I try to find the truth of things and live my life according to those truths. Just b/c we have a difference of opinion on this matter doesn't mean you have more integrity than I do or more than someone else. If you wouldn't do it, great, but I wouldn't be so harsh to judge someone else as being unethical in this situation.

[some]

The title of this thread is strategic foreclosures. It's regarding people who can honor commitments but choose not to for their gain. This is not about blaming the creditors or deliberately reneging on a contract so one can better position themselves for profitability.

The responses I'm seeing are dissappointing.

Edited August 5, 2012 by some

[yjacket]

The title of this thread is strategic foreclosures. It's regarding people who can honor commitments but choose not to for their gain. This is not about blaming the creditors or deliberately reneging on a contract so one can better position themselves for profitability.

The responses I'm seeing are dissappointing.

Obviously a lot of people do not understand contracts. (And I would add that a mortgage is a contract.) A contract has an exit clause. Someone who uses the exit clause is fulfilling their end of the contract. (Foreclosure is one way to exit the mortgage contract). It is immaterial why someone uses the exit clause.

If someone attempts to exit the contract in a manner that has not been renegotiated by both parties, then that person is at fault. You are right it isn't about blaming creditors, it is about a contract and fulfilling that contract. Exiting the contract is a method of fulfillment.

Those who exit without paying off the mortgage are assessed a penalty (and in many cases many penalties). They have to pay taxes on loan forgiveness, they have a severe hit to their credit, they will probably not be able to buy a house again using a loan for many years, those are the penalties for exiting the contract in that manner. In some instances taking that hit is much better in the long run than suffering by paying a mortgage on a house now worth 1/3rd the mortgage.

In the broader scheme, the major problem we have in this country is debt, too much debt at the local, state, federal, individual, corporate level. There are only 3 ways to get rid of it; 1) hard default, 2) inflate (soft default), 3) pay it off. #2 is what will happen, #3 is being attempted in Greece, #1 is what should happen. On a societal wide basis, #3 cannot possibly work as at some point you cannot squeeze blood from a turnip. The best way is to just cut your losses and move on. In fact, I would be willing to bet dollars to donuts that if more people strategically defaulted we would end up being better of in the long run. People would be able to get rid of bad investments, learn from their mistakes and move on with life. Instead we feel "obligated" to pay b/c we can pay. Once you realize it is just a contract things become a lot simpler.

Edited August 5, 2012 by yjacket

[some]

Many things are legal but are not right no matter how much they are spun.

Phoning up a financial expert or lawyer will always help one find ways around penalties. Does it make it right?

[annewandering]

Many things are legal but are not right no matter how much they are spun.

Phoning up a financial expert or lawyer will always help one find ways around penalties. Does it make it right?

If they are legal then they are not being dishonest unless you want get into all the ways the public is scammed all the time by big business in perfectly legal ways. Put General Electric in jail and then I might have less sympathy for someone trying to find a financial solution in their lives. It is just disingenuous to point out a short seller and ignore the billions of dollars of companies like GE.

[Guest]

This is why people don't like to do business with Mormons.

[yjacket]

Many things are legal but are not right no matter how much they are spun.

Phoning up a financial expert or lawyer will always help one find ways around penalties. Does it make it right?

Very true, just b/c it's legal doesn't make it right and just because it's illegal doesn't make it wrong. What is just law is another topic.

My comments are addressing, the law, honesty, ethical not "what is right". In situations like these "what is right" is extremely hard to determine and is different for each person. To pontificate as if I know better is a little presumptuous. "What is right" is really determined between the two parties and God. Nothing in the scriptures (at least to my knowledge) directly addresses this issue.

In fact, the old testament probably backs me up as on wiping out debts as there was something of a debt Jubilee:

http://en.wikipedia.org/wiki/Jubilee_(biblical)

All I am suggesting is to not look so hard on people who are strategically defaulting and claim they are unethical. Maybe they are, maybe they aren't . . . that is really between them and God.

[yjacket]

This is why people don't like to do business with Mormons.

And this has to do with Mormons how?? There are gobs of people who are strategically defaulting and most of them are probably not Mormons. I live in one of the cities most hit by foreclosures, strategic foreclosures etc. One persons lose is another's gain for example:

Foreclosure sale gives family a place to grow  | ajchomefinder.com

This person bought a decent home for 40k, homes were going for 120k+ a couple of years ago. Say I'm an investor and I buy homes to rent them, If I had bought at home in this neighborhood 120k, I'd wouldn't think twice about letting it go. I made a bad bet, let the puppy go, deal with the consequences and move on with life. It would be insane to keep making payments on a 120k mortgage when prices are at 40k and my rent payments are less than the mortgage payments.

According to the logic presented here, the investor (who can make payments) should keep the house and should keep making payments. I bet there were tons of strategic foreclosures in that neighborhood. . . those foreclosures drove prices much lower. So low that this lady was able to buy for cash. She now has a place to live the rest of her life that was made possible by foreclosures and the liquidation of debt. If the investor kept making payments he would not be able to free up capital to do other things such as provide investment capital for a better use of resources. In fact that is one of the things keeping this country stuck in a deep economic freeze, the inability of people to liquidate debt.

If an investor can liquidate properties through a foreclosure process that he can pay for and it not be unethical then what is the difference with Joe Blow who bought a house. Again, businesses liquidate debt all the time and it isn't considered unethical or immoral . . . it's just part of the cost of doing business. So why if an individual does the same thing is it considered unethical?