CW 233: Strategic Defaults & Loan Modifications with Chad Ruyle Co-Founder of YouWalkAway.com

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Welcome to the Creating wealth show and Merry Christmas to all. This is Jason Hartman, your host, your real estate reporter, talking on top topics of a broad variety and interviewing guests from around the world, of course. So today we have an interesting show again, episode number 233 here, because we're going to talk about the downside of investing. But if you followed my plan and the plan of many others, it's not just my plan. Oddly enough, nowadays we really live in an upside down world, don't we? We live in a world where the seemingly good behavior gets punished and the seemingly bad behavior gets rewarded. And this show will really delve into that and how it has happened and continues to happen in the world of real estate and how you can play on the right side of that fence. It's just like saving money. I mean, think about it. Before 1971, the best thing to do when we were on a gold standard was to save money, was to save for a rainy day, defer gratification, delay gratification. Whereas nowadays, and since 71, in many ways, the argument could be made and made correctly, depending on exactly what you're talking about, that the thing to do today is to spend more and to have gratification today rather than saving. I know that sounds ridiculous, it sounds irresponsible. But when you really drill down on these issues, what you find is that so many times our society is rewarding the wrong behaviors. So the question that each of us need to ponder and need to decide in our own financial lives, in this era of ridiculousness, this era of criminal behavior, at every level of our financial system, where we have a game that is rigged, how are we going to play the game in order to win when we have this type of behavior all around us? We cannot be this innocent little doe out there or we are going to get slaughtered. We have got to wise up We've got to toughen up. We've got to realize and internalize the fact that again, just irresponsible criminal behavior at every level of our financial system. The question is how do we play the game? What do we do about it? And to kind of start this segment off, I want to play you a 10 minute clip before we go to our guest today of a guest who has been on the show before and it's Katharine Austin Fitz. She was on one of my favorite radio shows, coast to coast, and she was interviewed on there by George Norrie. And it was a great show, great segment. And I just don't think I could say this any better myself. Again, I think Kathryn Austin fits is a very interesting person in the financial world with her take on things. Just an extremely unique outlook on it. I also think Dan Ammerman and I also think, well, not to pat my own back, but yours truly has an interesting take on it as well. So I want to play this little clip. It's about 10 minutes long and it's just a clip from the radio show coast to coast that was aired publicly. And then I want to play I'm going to come back on and I want to play you another very short clip that's less than two minutes where you'll hear some of our regulators talking about Fannie Mae and Freddie Mac before most of the problems were discovered. And just how incredibly ridiculous. I mean, it's so ridiculous that you've just got to think it's a cover up, just can't be anything else. I mean, these people, you got to ask yourself, can they really be that naive? I mean, maybe they can, I don't know, maybe it's just naivete, neglect or maybe it is something worse. It's willful, it's and it is really mal intent. So we'll get to that. But I want to make sure that you are joining us on January 7th at our Creating Wealth Boot Camp in Phoenix, Arizona area. Well, actually Tempe, Arizona, that will be at the Hyatt Place Hotel. We got a special group room rate for only $89 per night. And I went and looked at the site with our area coordinator just the other day and we both liked it. And so we decided to try out this new location. You do not need a rental car because it is right near the Phoenix Airport and they have an airport shuttle or you can just take a quick taxi. But I'd take the airport shuttle because it's free and I think you'll really enjoy this event and Then Sunday morning at 10am we're having a tour of Phoenix properties. Now this will be kind of an informal tour. We're not renting a big diesel bus again like we did last spring for our Phoenix tour, but we will have a tour and I think you'll really enjoy seeing some properties. Since we're actually doing the boot camp in one of our markets, we will have two of our local market specialists there. They will both speak on Saturday to talk to you about what you can see on Sunday. And you can really look at properties, meet their management teams and everything like that. So I think you'll really enjoy it. And by the way, I've got to say, because I can tell my voice is cracking, excuse my voice. I've been fighting a cold and the cold was winning, but now I think I'm winning. You never appreciate your health as much until you lose it for a while. But I'm feeling better, but the voice is lagging. So excuse that. But let's go to this clip. So here's the structure of this show. I've got this clip about 10 minutes long. Then I've got another clip that's less than two minutes. And then I want to go to our guest who is an attorney with a group called you Walk Away just talking about options and how leverage was rewarded and is still rewarded. And because all of us need to realize, and you know, this is just my own thinking on this, is that we never really own our real estate because all real estate in the United States and in most places around the world has a perpetual lien on the property, even if you pay off the mortgage. You may have a homeowners association, of course, which has a perpetual lien, but you always have what you know what I'm thinking, right? Property taxes as a perpetual lien on the property. So again, two things I want you to notice about Kathryn Austin Fitz here is when she talks about criminal behavior in our financial system. And then the other thing she says as it gets into this little clip that I'm going to play, she talks about turning America into renters. Well, that's really good news for us as real estate investors, isn't it? Turning America into renters. So I think you'll get a lot out of this. It's an interesting clip. And by the way, not to jump around here too much, but the Creating wealth bootcamp, be sure to register for that@jasonhartman.com and it's got all the hotel information as well as a special link where you can register online for our discounted room rate or the phone number where you can call them. So let's go to this little clip and I will be back right after it. Again, this is about 10 minutes, so I will be back right after that.

As I reported at the top of last hour, more Americans than ever are showing a willingness to simply walk away from their underwater homes. According to a recent survey. Now in underwater home, the house is worth less than the mortgage. So people who are having trouble making their payments simply say, adios, I'm gone. We're going to talk with Katherine Austin Fitz about that this hour in just a moment on coast to coast am. Katherine Austin Fitz, you know her, she's a regular here on coast to coast am, former US Assistant Secretary of Housing and federal housing commissioner. Her website, solari.coms o l A-R-I.com where she advocates permaculture, getting communities to do localized banking and food processing and everything else. Here she is on coast to coast am. Catherine blub, blub, blub. Our houses are underwater, huh?

Yeah, well, mine is.

Everybody says, so what do we do? But we don't. We're going to walk away from the mortgage. What do we do?

Well, you know, I think, George, there are a couple different fact patterns, but one group of people walking away from the mortgage is because they don't have the money to pay. I mean, they really just don't. If your income has dropped to significantly below what your mortgage payment is, I mean, it's simple math. You can't pay it because you don't have it. So some people are walking more literally because they don't have it. Other people are walking away, George, because their house is so underwater. That means their mortgage is worth more than their equity is valued. And they're having to make difficult choices. If they stay and pay their mortgage, they're going to eat through their retirement savings or.

They'Re going to abrogate other obligations to family, to themselves. And what's interesting is there's a third group that sort of crosses over with that and those are people, George, who can afford not to walk and normally would never have walked. They would have said, look, I made a contract, I'm going to keep it. What's happening is they are either watching or dealing with so much criminal behavior on the part of the servicers that they're just saying, I don't owe these guys anything. This is criminal enterprise. I want nothing to do with it.

I'm getting out and I can't sell my house and make money anyway so I'm leaving. Right.

But I think, you know, I think part of it is for some of these people, it's a political statement. In other words, you know, there's, there's nothing they can do with the polls. That's really a political statement. But one of the political statements they can just do is they can just walk on their mortgage. And I'm, you know, I have to tell you, as a former assistant secretary of housing, you know, the day has come when that's an ethical statement. Depending on who your mortgage is.

Are the, are the commercial real estate owners doing the same with their commercial property, the small strip malls and things like that?

I suspect they are. I'm not as up to, you know, I'm not as current on what's happening in the commercial, but the commercial guys have always been pretty, you know, pretty business, you know, mathematically oriented. So they're the ones who walk if it's good business. Now, one of the things we haven't heard a lot of, George, and I'm still sort of waiting for this shoe to drop, which is deficiency judgment. It really depends, you know, it's a state by state issue, but in states where when you walk the shortfall, the bank has the right to go after you for the shortfall, and, you know, we haven't heard much about that, but it wouldn't surprise me if that sort of raises its head. So it's a very complex, it depends on your unique fact pattern whether it's economically sensible to walk or not. So, for example, my mortgage is underwater. I have no plans of walking because it wouldn't make sense for me for, you know, for lots of other different reasons.

Well, most states have a walk away rule where the banks can't get you, you just simply walk away, don't they?

Well, I don't know what number of the states there are where you're protected against the banks coming after deficiency judgments. I just, I don't know what the count is, but certainly that's what we're seeing so far is most, most subscribers that I talk to, my subscribers in the states that they're in, you know, they're not. Their council says, you know, don't worry. Now here's the thing. It's very frustrating. If you are either underwater or close, you can't refinance. There's all sorts of things you can't do the servicing. George, my mortgage has been sold four times and every time it's sold, I swear to you, I think the new servicer is trying to get Me to default. I mean, it's, it's, we have, we have set up a whole series of procedures to make sure they can't default us in the first couple payments. And we end up usually paying, I end up usually paying the mortgage twice and at least the first or second payment just to make sure they don't default me. And you know, they're trying.

Well, you know what's also unfortunate, Kathryn? The person who does make their payments gets penalized. Let me give you an example. They've got a first mortgage for 5%. They've got a second mortgage that they took out a long time ago and ate up a lot of their equity. But maybe they needed the money for 10% and now they want to refinance it. The house is underwater. They make their payments. The bank or the mortgage company says we're not going to do it, you're underwater. We just won't do it. But you continue to make your payments. They would at least negotiate somewhat if you were in default, wouldn't they?

Well, you know, there's some funny fact patterns because people who tried to negotiate have really gotten put to the wringer in some cases. I was just talking with an attorney I know who's handling a very significant number of sort of foreclosures in a variety of different fact patterns. And I swear, George, given the things that are being reported into me, you know, it just seems like they're trying, they're trying to throw as many things into default as they possibly can. Now I keep being told, you know, it's all giant incompetency. You know, the servicers are in over their heads or they don't have the rights. You know, at some point, George, that just doesn't hold water. So you really get a sense of a long term effort to convert America back to rentals. It's, you know, it's very, very strange. It doesn't make economic sense. And the reality is, given what's happened with the bailouts and the Fed, the banks really aren't on the hook for any of this stuff in one sense. They've been refinanced out. So we're in a situation where nobody's acting economically rational because the way the financing is set up, whether it was the initial financing and securitization or the bailout, you know, the incentives are very conflicting. That alignment perverse. And certainly not have a goal of optimizing.

The equity in the home or the equity in the community. Because make no mistake about it, when you have this level of foreclosures you really harm the total real estate equity in a community.

Absolutely. A senior vice president of Reality Track, which monitors foreclosures, says that the mortgage rates, the adjustable rates, are going to be reset upward over the next 12 to 15 months, adding, he says, an average thousand dollars to monthly mortgage payments on homes that are already 30 to 50% less than their original sales price.

Well, here's the question, because we've had the King Report last week called it a 28 year bull market in the bond market. And I think that's a fair description. You know, the bond market has been a safe haven and performed well relative to many other classes for quite some time. And we've seen interest rates come down. I know you and I get on the line and we say, can they come down anymore? And then they do. But we've really reached sort of the end of that sort of historic period in the bond market. And the problem, George, is the bond market is a huge market. And so if money's going to move out of the bond market to other things, it's, it's quite a deep shift. And what it means is a lot of players who've had the benefit of interest rates dropping are now going to be struggling with interest rates rising. And of course, residential real estate and people with adjustable rate mortgages are first in line. And even if you, even if you have all your mortgage paid off and you own your home, it's going to hit, it's going to hit home values. So, so a rising interest rate environment, which is probably what we're coming into, is going to be, you know, is going to be a one, two punch in housing on top of everything else that's happened.

What's happening with credit scores these days, Catherine?

I don't, you know, I haven't looked at what the numerical scores are, but I assume they're falling because you, you literally have one segment of the population that's experiencing falling incomes and rising expenses. And so there's no way their credit scores can hold now. We see a lot of debt being paid off or debt levels dropping. But I think a lot of that, George, is because people are walking away or not paying. So I think defaults are making an important contribution to that. But you know, what I've seen, which is so interesting is people who can afford to keep paying their mortgage but are walking away and saying, you know, I don't care what my credit score is because I really, I've had it with the whole system. It's all, you know, so there are real issues about the credibility of the system. And that's, you know, that's causing people to. I don't care about what my credit score is. I really don't.

It's just.

I'm not going to fall into that trap. So now if you look at how I organize my finances, you know, it's a different kettle of fish. But I think there's real.

You know, there's real deep distrust of the system.

Okay, well, wasn't that interesting, though? Some of the things she said, she and George said were very interesting there. Now I want to play you a little clip. And I'm doing this one live. This is not spliced in, so pardon the variance on audio quality, but it's really short. It's a YouTube video talking about how idiotic leaders, one of them being Maxine Waters from California, my formerly home state, which is like the band of idiots, are running that state. It's unbelievable. I know that most of you would agree with me, even if you live there still. And I. I am so glad to be out, I can't even tell you. But they're just defending Fannie Mae and Freddie Mac. It is unbelievable. Now, this video tries to make it kind of funny by repeating things. So that is not a mistake. That's not a technical glitch.

When you. When you hear them repeat it over.

And over a couple of quick times in rapid succession. Okay, so here is the clip. I'll be back in less than two minutes.

Frankly, we were trying to fix something that wasn't broke. That wasn't broke. That wasn't broke. Mr. Chairman, we do not have a crisis at Freddie Mac. We do not have a crisis at Freddie Mac. We do not have a crisis at Freddie Mac. We do not have a crisis at Freddie Mac. And in particular at Fannie May. Under the outstanding leadership of Mr. Frank Reigns. Of Mr. Frank Reigns.

There's been nothing that was indicated this wrong, you know, with Fannie Mae, Freddie Mae. Nothing that was indicated this wrong, you know, with Fannie Mae.

Freddie Mac has come up on his own. And the question that then presents is.

The competence that your agency had. What would make you. Why should I have confidence? Why should anyone have confidence and you as a regulator at this point, under.

The outstanding leadership of Mr. Frank Raines, everything in the 1992 act has worked just fine. In fact, the GSEs have exceeded their housing goals. The GSEs have exceeded their housing Goals. The GSEs have exceeded Their housing goals. What we need to do today is to focus on the regulator and this must be done in a manner so as not to impede the their affordable housing mission. A mission that has seen innovation flourish from desktop underwriting.

Just a little comment there from me as Maxine Waters is talking about desktop underwriting. Remember, I used to own, I've owned a couple of mortgage businesses, okay, over the years. And desktop underwriting, that was one of the ways that made it so easy to commit mortgage fraud. All of these quote unquote tools and advances were a lot of the reason we had a mortgage crisis, in my humble opinion, because it made it so easy for mortgage brokers who were getting commissions. I mean, all the incentives on the wrong side of the table here. No one was incentivized to put the brakes on these deals and to be prudent and careful. So here's the rest of the clip. And it's almost over to 100% loans. Oh, 100% loans, huh, Maxine? That's an innovation. Oh, gee, brilliant. Yeah. But the point is again, if the idiots are out there doing this, take what they have, use it responsibly and there you go. Now here's another brilliant guy, and I'm saying that of course sarcastically, a guy with no experience in banking. Good old Barney Frank, here he is.

But I have seen nothing in here that suggests that the safety and soundness are an issue. And I think it's serves us badly to raise safety and soundness as a kind of a general shibboleth when it does not seem to me to be an issue. These, these assets are so riskless.

This is Franklin Raines, the. Well, in my opinion, crooked or at least ridiculously overpaid guy that was running Fannie Mae was the chairman and CEO for a time. And you hear all these people here is this, this company, this government sponsored entity that is just doing terrible things, yet all of these people are saying we shouldn't talk about them, we shouldn't cast a shadow on them, it's ridiculous to regulate them more. And listen, I'm no fan of regulation, but I'm no fan of having a government sponsored entity in the first place. Anyway, about 10 more seconds.

Oh, riskless. Oh, riskless. Oh, riskless that their capital for holding them should be under 2%.

So Franklin Raines said it was so riskless, right? Oh, yeah.

Unbelievable.

So anyway, let's get to our interview. Join us on January 7th. Hyatt Place Hotel Phoenix Airport, Tempe. Technically it's in the city of Tempe, T E M P E, but it's right near the Phoenix airport. No need for a rental car and we will look forward to seeing you January 7th. The Boot Camp will be all day Saturday. Who knows, maybe I'll even join everybody for dinner if I'm not too exhausted from that event. And then we will have our tour on Sunday morning so you'll get to see some actual Phoenix properties that you can purchase. So we will look forward to seeing you there. Register at Jason R. Jason hartman.com will be back in less than 60 seconds with today's guest from youm Walk Away and have a Merry Christmas.

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It's my pleasure to welcome Chad Rule to the show today. He is with youwalkaway.com and we are going to talk about the all popular and interesting topic today of strategic defaults and whether short sale makes sense, loan modification makes sense, foreclosure makes sense and kind of what people are doing out there. Obviously all of you listeners know that people are very upset with banks and Wall street right now, and I think rightfully so. And Chad is actually an attorney and he started this site to help homeowners really understand their options. I think I'm describing that correctly, but I'll let him do the rest. Chad, welcome. How are you?

I'm good. Thanks for having me on the show.

My pleasure. Tell us a little bit about your background and how you came to get into this side of the business.

Well, my background is I'm an attorney. And as an attorney I get a lot of questions in all fields of law. And at the around 2007, a lot of people were coming to me asking about their mortgage and the foreclosure process because there really wasn't information out there. There weren't attorneys or services out there to help them. So my business partner and I, John Maddox, we got together to start a site, you walk away, to help these homeowners understand their rights, their options to get through how to get through the foreclosure process in the best way possible. So these people were spending a lot of money on attorneys fees or fly by night company sites that really didn't offer any sort of help. They just took money up front and promised to do things, promised to modify loans, and in the end didn't really perform their service.

Fantastic. So there has been a lot of, just a lot of litigation, a lot of upset people who hired loan mod firms. A lot of these were attorney backed. They said that's sort of the way they said it, attorney backed. And I'm holding up quotes as I say that, Chad. And some weren't at first. And then there was a new law that was passed about charging upfront fees and all this kind of stuff. Is there a difference between what you do and those other loan modification firms?

Yeah. So what uwalkaway does, we don't deal with the bank, we don't do loan modifications. What we primarily do is help the homeowner first understand what their options are with the information we provide them. So what we provide is a uawkway kit that has all that information in there. It's got form letters. We track their foreclosure and give them an update as to what's going on. Part of the service is they get an attorney consultation within the state that they're in, and we are a nationwide company and they also get a consultation with a CPA for tax advice on the tax ramifications. So we essentially help the homeowner understand their options and then in going through foreclosure, understanding their rights. The timing, the Ramifications, but we also have a division that does short sales nationally as well. So we do help people with short sales. In regards to loan modifications, we don't do them. We don't deal directly with the bank. We just give information to the homeowner so that they understand if they should go that route and if they do what to expect and what the process is like.

What is the sentiment of people out there nowadays? I mean, certainly all of our listeners now have heard of the concept of strategic default. Should people walk away, is that the best thing to do? And when they walk away, what's the right way to walk away? I mean, I think most walkaways are people living in their house for free for two or three years and then they're taking out everything, including the kitchen sink and taking it with them.

Yeah, well, I mean, we certainly don't recommend that. There's some ramifications, but yeah, in terms of the options, you know, first the homeowner has to decide do they want to stay in the property or not. You know, is it something that's sentimental or location wise, their families there? And there's a difference and we'll talk more about it. But is it an investment property versus the owner occupied, is it their residence? And so they first have to decide do they want to stay in the property or not. If they want to stay in the property, then that's where the loan modification would come into play. Or if they could refinance. Obviously most people aren't able to because there's not enough equity. So then there'd be, you know, they'd look at a loan modification. The loan modification is very difficult. The banks are just extremely difficult to work with. They're very slow moving. It's kind of a catch 22. You have to have enough income to show you can make the new payments, but you have to have little enough income that they want to work with you in lowering your payment. Because obviously if you show too much income, they'll say, well, just keep paying this mortgage.

And a comment on that, Chad, is that nobody seems to know what the magic number is. It seems to be this secret, highly guarded underwriting criteria that only the people of the Bilderberg Group know. I mean, it's like absurd. Nobody knows what to do or how to qualify for a loan mod. It just seems like a big game.

Yeah, there's really no magic number. Banks don't even know themselves because each loss mitigation department at each bank is different. And it just depends on who you talk to. I've seen all across the board different types of loan modifications. Where in one case they would say, that doesn't make sense, we won't allow that. And then months later, the same thing they said they wouldn't approve, they approve.

With loan allocations, modifications, short sales, it's just very difficult to deal with the bank because there's just no logic there. And so if the homeowner though decides to get rid of the property, then their option would be a short sale or foreclose on it, go through the foreclosure process. So the decision in that is really an effect on your credit. So there are certain ramifications of whether the bank can come after you for the difference or not. On short sales, the object is really to get the bank to sign off to agree that they won't come after you for the difference. And so the short sale would be to help their credit. It's much better than having a foreclosure on your credit. The process is someone would negotiate like our company would negotiate a short sale with the bank. And so if the property is only worth 200,000 and at the height it was worth 400,000, the loan was a hundred percent loan, like a lot of these, and it was 400,000, then you've got that difference of $200,000 that has to be figured out with the bank. And so in that short sale process, the bank hopefully approves that new number, a reduction in principal, the property sold, the bank takes that loss, homeowner is out of the property and it's less in effect on their credit. So those are really the options. And again, depending on whether they want to stay or not and what their end goal is.

Okay, so Chad, talk for a moment about if they want to stay. So say someone wants to stay in the property. And of course we're talking about homeowners now, not investors. But I'd like you to maybe parse that up a little bit too, because there are some nuances that differ with investment properties versus your personal residence. Right?

Yeah. So I mean, whether they stay or not, I mean, the differences would be whether the bank has typically whether bank has recourse. I mean, particularly in California. Arizona has similar laws where, you know, if it's your residence and there's a deficiency amount in my example where the properties were 200,000 now and the loan was for 400,000, that deficiency of 200,000 with a residence, there's anti deficiency rules where the homeowner would not owe the bank that difference.

By law, one distinction first, and that is providing it is a purchase money loan that has the deficiency. Right. Because if that person refinanced or put a second trustee on the house, then it can be recourse. Is that correct? I just wanted to make sure people knew that.

Yeah, correct. But there could be a second that is a purchase money. A lot of these loans, they had a first, they took the second was used towards the purchase. So yeah, if there's a second that was not used towards the purchase, it was a home equity line, they pulled money out and used it for something else, then you're correct, they're not covered under the deficiency statute for that.

So the listeners should understand that a purchase money loan just means loan proceeds that you use to acquire the property. If you refinanced it, even in a state like California that is a non recourse state, that loan then becomes a recourse loan if you've refinanced. Right.

Yeah.

Okay.

Correct.

Wanted to make sure people knew that. Go ahead.

And so that, I mean, that brings up a good point as well. So we're talking about is the difference whether it's an investor or it's their residence. And so there's more protection for a homeowner that lives in it. But at the end of the day, what we're really seeing is, you know, it's a question of whether the bank will come after the owner for the difference. So not talking law, we're talking more of a reality if the deficiency amount, and typically we're seeing this where the first has been wiped out or has wiped out the second, whether that second lien will come after the homeowner. And a lot of times we're seeing the bank not do that. We're seeing them charge it off because the amount that the cost of them going through litigation and the fees are too much to try to recoup that difference.

Right. And Chad, that's one of the things I've talked about in prior shows because. And of course, listeners, you got to be careful with this conversation here. You can't hang your hat on this necessarily. Okay. It's just, it's just an opinion.

I'm just telling you in a lot of the cases we see.

Right, yeah, got it.

But, but that's not true in every, in every instance. And that's what I was going to just follow up and say, you know, it just depends on the bank, it depends on the loan. It depends on the amount that, that you owe the deficiency.

Right, right. But here's my question for you. Though, Chad, on that issue, if there really are 7 million people either in or on their way to foreclosure and say we have that many foreclosures or some really high number, right. How would all of the banks sue all of those people? It's just, is a practical matter, it's just not going to happen. Now the problem is it may be you rather than your next door neighbor. So that's why you got to be careful. But here's my question for you. How do you know that you've got a non recourse deal? So say for example, someone listening is in California and it could be any state, but let's just use them as an example and say the statute here, the law is that it's a recourse because they have refinanced the property or say it's in another state that is a recourse state and they haven't refinanced, so it's recourse right away. So you do a short sale. How do you know that the lender, it's always kind of hanging out there that maybe they have four years possibly to pursue the deficiency or two years or whatever the thing is in that state.

Each state has different statute of limitations on the recourse.

So how do you know they're not going to pursue it even though they have the legal right to? How do you know? Now you could have that in the paperwork where you say you and the bank agree that there's no recourse. Of course that's one way to do it, right?

Yeah. So in a short sale, that's typically what the realtor negotiator will try to do is get the bank to agree in the contract that they won't come after them for the difference. But they don't always do that. And that's kind of a negotiating point with the bank, between the bank and the negotiator. But in terms of whether they will or not, like you said, you can't hang your hat on it that they won't. But you have to look at how aggressive the banks are. And that's tough for an individual consumer or homeowner to know. But there are certain banks that we know of that are more aggressive than others in trying to recoup their deficiency. The biggest determining factor is really what's the difference? If it's 30, $40,000 difference, I'm not saying they won't, but it's unlikely that they'll come after homeowner for that difference. The fees, the costs are involved for them to try to recoup that, it just doesn't pencil out for them to pursue an action against them.

Right, and when you say pursue an action, of course that makes sense because anybody listening has been involved in litigation knows that 30, $40,000 in attorney fees are, that happens pretty quick. So does the lender have to actually formally sue the borrower to recoup that deficiency or can they do it in a statutory manner or is there another way or is it just a full blown civil lawsuit?

Well, each state's different. In some it's part of the foreclosure process and then they would actually file a claim for the deficiency amount and then get a judgment for that deficiency amount and have to pursue that. In some it's a separate action that the lender has to bring. It is a civil action that they would have to bring to recoup the difference. They'd have to go through that civil trial process and then get a judgment and then also have to enforce the judgment. So as many of your listeners probably know, the legal system isn't cheap and it isn't quick. So. So when the bank is looking at that lengthy costly process, they're going to think twice about it if the deficiency amount is less, if it doesn't make sense financially for them to do that.

I just wanted to clear a couple of those points up, but go ahead with what you're saying. I got you off on a few tangents here and I apologize. But I just thought it was important for the listeners to know some of those things. Differences between investment properties and homes, did you kind of COVID that?

Yeah.

So with investment properties versus owner occupied, I mean the main difference really is the deficiency amount or the ability for the bank to come after the homeowner for the deficiency. But also, you know, it affects whether someone could get a short sale or a loan modification. The banks are not very willing to work with investors.

Investment properties because it's a second property or multiple property. They're much more willing to work with an owner occupied to do a loan modification or short sale.

And I think part of the reason for that is just basic pr. The banks have a pretty bad image right now and they want to lessen if possible, the number of people that are kicked out and talking on cameras and so forth are calling in to talk radio shows. But I will tell you that the banks are so flippin confused and just disorganized, it's mind boggling to me that half the time it seems like they don't even know Whether you're occupying the property or not, they literally have no idea. I mean, I have received letters in the mail on properties I own all over the country and bank of America, in an attempt to justify the money they've taken, actually I should say stolen from our government, us, the taxpayers, in pretending that they're willing to do loan modifications. Right. They'll say, well, we're having an event in your area and here the property's in, in Georgia and they're inviting me to the. They just have no clue what is going on. And you can tell when you talk to their call centers and their processing people that they just, they just don't even know. I mean, these portfolios are so big and it's just a mess. I mean, you've certainly heard and read about the MERS system and what a disaster. I mean, it's just mind boggling what's going on.

You know, I've tried to understand it and I think you're certainly right that it really has to do with this whole department that was created 07 or you know, around there 2007, where they had these departments of, for loans and procuring loans and putting, you know, homeowners or people into homes. And then they had this all of a sudden switch from that and get rid of all these people and take on a loss mitigation department. So it's not a whole new department because they've always had a loss mitigation department, but they've had to increase it substantially. I couldn't give you numbers. I don't know how many new employees each bank in the loss of mitigation departments, but anytime a company or a department grows that quick and that large, there's just going to be chaos. You can't do that. So I think part of it is this unorganization, this chaos that's going on at the loss mitigation department at banks. And just to clarify, loss mitigation departments, those are the departments, the people that a homeowner would talk with or negotiate with. If they're trying to get a loan modification, they'd be talking to the loss mitigation department of the bank. If they're trying to do a short sale, it's also at the loss mitigation department. So they're dealing with these people at the banks. A lot of them really don't know what's going on. So I think there is that chaos. But I also think that these banks aren't really willing to move through short sales and modifications quickly because I think Then they'd have to write down these assets. So if they took it all on at once, it would kill their balance sheets to show all these losses at once.

That's a great point. That is a great point, Chad, and I'm glad you brought that up. The other thing I'd like to just ask you about that is it seems that the banks, and this is a purely anecdotal, you know, I have no data on this. It's just a perception. It seems that they're more willing to do short sales than loan modifications. And I don't know if that's the way their assets are valued or the way that the investors they sell off the loans are willing. I don't know why it is exactly. I'll probably come to understand it, but at this time I don't. Do you perceive it that way too, that loan mods are harder to get than short sales?

I do. I think it's what the bank is looking at, the reality they're facing of someone doing a short sale versus a foreclosure. They're further on in the process. So they. It's kind of like the second step almost. They've tried a loan modification. Bank wasn't willing to work with them, so now they're in option two, looking at short sale. I'm not saying that what happens all the time, but a lot of times that's the process. And so when they get to that short sale, the bank's looking at either a short sale or a foreclosure. And every time they go with the foreclosure route, they're going to lose money because they have the cost and fees of going through the foreclosure, taking the property back, having to get the owner out of the property and then the costs that are associated with it and the loss in value if there's a depreciation. So they're going to be losing a lot more money if they go through the foreclosure versus going through a short sale because they reduce their costs and their fees. But going back to this irrationality of the banks, I've seen cases where people try to work out a short sale for say 400,000 and the bank's just not willing to budge. They're not willing to go down to 400,000. Property goes to a trustee sale, so it goes through the foreclosure bank sells it at a trustee sale and they sell it for $340,000. So they're selling it for $60,000 less than what they were unwilling to sell it for through a short sale. In addition to taking that $6,000 loss, they're having to pay a lot more in costs and fees because they went further along in the process. So it just doesn't make sense.

Very good point. So in terms of how someone should walk away, or if they should walk away, maybe circle back around, we started talking about that. What are some of the other things, things they should think of? I mean, for example, Chad, does it ever make sense to just do the foreclosure? Does that sometimes make more sense than the short sale? I mean, it hurts your credit more. And I do want to ask you a little bit. I know this isn't your specific area, but you are involved with it. Credit repair and credit restoration. Because with a foreclosure, the person can stay in the house longer, potentially, right?

Yeah. The determining factors really, their credit. So do they really, are they going to buy a house in the near future? Do they need that credit for something? If they're trying to save their credit, a short sale is a better option. But a lot of these homeowners, they've already ruined their credit. They're not looking to buy anytime soon. And the process of going through a short sale is a lot more involved, a lot more difficult than just letting it foreclose. And as you pointed out, going through the foreclosure process, typically they get to stay in the home a lot longer than a short sale.

One thing I just want to mention there, if I may. I know I said that, and what you're saying is interesting and it's right. But sometimes the short sale is used as a gambit to sort of string lender along and delay the foreclosure. So sometimes you actually stay longer if you're doing the short sale or at least pretending to do the short sale.

Sure. People use it as a tool, like you said, to stay in the property longer. They use. They pretend that they're going to be doing a loan modification or short sale. But, you know, most of the people we see, they're really trying to work something out with the bank, and the banks just aren't cooperating. But yeah, going so going through the foreclosure, you know, I know people that have stayed in their properties for two, three years without paying a rent, without paying property taxes. So they're living essentially rent free. And from a financial perspective.

Because they weren't as concerned about their credit, made much more sense to go through the foreclosure than it did to try to short sell the property.

Let Me Take a brief pause.

We'll be back in just a minute.

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Can people get their credit repaired? Can they fix up their credit after one of these experiences?

Yeah. So on the credit side of it, there's two areas. One is the score and one is the report. And they work together. But the difference is that the score can be recovered fairly quickly. And when I say fairly quickly, a year or two, sometimes sooner. But that score can get back up to what they had before. But on the report, which is the information, kind of a history or timeline of their credit relationships, the foreclosure is going to be on there for, for up to seven years. So a bank might see a good score, but they could look at the report, see a foreclosure on there and then make a decision not to lend because they saw that foreclosure. But outside of that, I mean that score is going to be recovered, as I said, relatively quickly.

So are banks looking at the report closely? Because most people talk in terms of scores, they just say my FICO score is this with Experian, that with Transunion, that with Equifax or my Tri Merge, which means the merger of the three reports together. My middle score is X. And by the way, you may have a commentary on this. As an aside, I think that 650 is the new 720 when it comes to credit scores nowadays.

Yeah, and that's a good point too. Go back to your first point. But on the point of, of the relativity of scores now, I think they've changed both things have changed how they score and also lenders perception of that score because there are so many people that defaulted on their mortgage and missed payments and people that had trouble with credit cards and missing those payments that you have a larger percentage of the population that has lower scores.

So it's, it's a bell curve. It's a bell curve.

It's a bell curve. Exactly. I was just going to say that. So it's the perception of the score, but it's also the score itself that's changing. No one knows how they scored exactly. It's based on a lot of different factors. But in terms of the score and looking at foreclosure, your credit and foreclosure A lot of the people that we deal with, we advise them, if you're not going to pay your mortgage and you're concerned about the effect the foreclosure will have in your credit, take that money you're saving if you can. Some people can't. But if you can, use part of that to pay off your credit card debt. Credit card debts, we've heard, are roughly. Debt balance is roughly 30% of your score, the effect on it. So there's ways to use the foreclosure and the savings there to your advantage to try to build that score back up.

That's similar to what I had predicted. I think correctly now looking back when consumer spending went up like a year ago last spring and the Obama administration was bragging about the recovery. Yeah, sure. I said at the time, this is just simply people who aren't making their mortgage payments going to the shopping mall. It's a matter of people using money they would otherwise be paying a mortgage with to spend.

Yeah. There was a Bloomberg article recently and I just, I don't think it's aired yet, but I just interviewed with Fox News and the piece was on that. What are people doing with the money that they're saving by not paying their mortgage? A lot of the people we see are using it responsibly, but obviously there's people that are just spending it unwisely. But I think there is kind of an effect on the economy because there's money that's being saved by not paying a mortgage and they can go out to eat more, they can spend it on trips. And so when that free ride ends not paying the mortgage, then that money is going to be taken out of the economy.

Yep. Couldn't agree more. And that's what happened during the refi boom when all these lenders were giving these liberally ridiculous loans is that a large part of the country's GDP was basically coming from people refiing their homes and buying stuff, stuff that wasn't real production. It was simply cycling fake equity into the shopping mall, the car dealership and the travel agent.

It's kind of like the foreclosed properties, the REOs where investors were buying those up. That the realtors and that industry was pointing to those numbers to say, look, the housing market is recovering, people are buying again. But those weren't real buyers. Those, you know, those were mainly investor groups or investors. But you know, on that point and as it relates to everything we're talking about there, there's, you know, a difference of the homeowner who can make the payment, but they just decide because they're so far upside down, it's just underwater, it's not worth it. So those are, you know, strategic defaulters where they're just deciding, look, it's not financially my interest to continue paying a mortgage on a property I paid $400,000 for that's worth $200,000. I'm not going to recoup that for many, many years. A difference between them and then the homeowner who just can't afford it, they aren't making enough money, they lost their job, lost income, whatever the reason. But people differentiate the two. But you also have to look at kind of the gray area where someone might be considered a strategic defaulter. And people say, well, they can afford it, they have enough income, but that might mean they're not putting money towards savings or they might have to take money out of their retirement funds. They're not paying for certain needs and things of their family. So at the cost of their family, their future, they would be able to continue making the payment. So there's definitely a gray area, I think, between a strategic defaulter and then just a homeowner who absolutely can't afford that payment.

Well, the original question on that kind of started out as the difference between the score and the report on someone's credit. Now, and you were going to get to this, and I know you're working your way there, but like, are the lenders really looking at the reports closely or is it score based?

You know, I couldn't say for sure. I mean, each bank's different, but most of them, they look at the score. That's what they go off of. It just depends on the size of the loan and the procedure of the bank. But it's mostly looking at the score. But I know that banks do in certain cases look at the report as well to see if there's a foreclosure on the record.

Can you fix that? Can it be removed? Or is that pretty impossible? You see all these ads and all these companies that some see, rather hokey to say the least, that say they can fix your credit. I mean, what is the real success rate in that kind of stuff?

You know, I couldn't give you percentages. You walk away, doesn't do that. We don't file lawsuits or try to get foreclosure off the record. But just in my experience, in hearing of different cases, it's definitely successful. You know, it's not something that happens most of the time. I, I can say that, but I've seen people that, you know, for whatever reason, whatever violations that are there from respatilla violations, they're able to get the bank to take the foreclosure off the record, which significantly helps their score. Sometimes, you know, people will hire attorneys or companies to try to do that, credit restoration companies to try to fix that. They're, there's games that people play with the bank of demanding that they produce the note which essentially is showing them the loan documents, that they actually have them in hand asking and requesting that many times and the bank not complying that they force them then to remove the foreclosure off the record. So it definitely works. But I think a homeowner going into the decision, foreclosure, short sale, loan mod or continuing to pay, they shouldn't bank on them getting a foreclosure off their record.

Very good point. In other words, don't hang your hat on it. Well Chad, what else do you want people to know about this whole area? What haven't we covered in this talk?

Well, the question I get asked most by the media is the moral dilemma or ethical dilemma of someone that walks away and specifically strategically defaults. So again, they owe more than the house is worth. And from a financial perspective doesn't make sense. There's this idea that no matter what you pay your mortgage, that's your obligation, that's your word. But in my view, and if you look at the contract, it's different than a credit card debt which is just a guarantee that you're going to pay that back. There's no collateral in the property. In a mortgage it's a business transaction where there's collateral and the property. The bank in their agreement is lending the money and if you don't pay that money back, they get to take that property. So it's not, you're not breaking your word or your bond or the contract doing anything illegal. You're following the terms of contract to where.

If you don't pay. So it doesn't say if you can't, it just says if you don't pay this mortgage then we'll take the property back. And they hedged their bets with interest rates, they hedge their bets in other ways with certain credit default swaps and other investments. And also banks should have been in a position to know better. They're the ones who created these loans. These loans sold them off many, many times in mortgage backed securities. So obviously we wouldn't feel bad for the banks but, but in this business transaction I think it's completely ethical for a homeowner to decide to give the property back. They obviously have certain ramifications with credit, possible deficiencies that they owe. But they have to look at it as a financial decision. They can't just be bound of these payments because someone says that it's a moral obligation.

You know what, I have to say that I agree with you. My attitude has changed pretty significantly on this because at the beginning of the financial crisis when I was less informed than I am today, I really sort of thought what are all these people whining about? They got lucky. They got to move into a house that they couldn't otherwise have afforded. They got to live there for three, four years and now they're complaining that they're getting kicked out on the street. And the media never asked the question, you know, when they reported those stories, well, did you ever really deserve this house in the first place? Before this you were living in a two bedroom apartment. Now you're living in a four bedroom, really nice McMansion or pseudo McMansion. It's sort of all relative. People just looked at as though, oh, they lost their home, but they never looked at what level the home was. And so I still think that, but on a larger picture with what you said that the bank has agreed that look at this is the business deal. Here's the collateral. It's not an installment debt, it's not a credit card debt. If I don't pay or I can't pay, you get the collateral back. And that is simply a business deal. It's the same way people use corporations and LLCs in the, in the broader business world. Shipping and exploration of the earth would have never been done if someone didn't invent the corporation. There probably would have never been a Columbus or any of those explorers. Right? And so, so that's the business deal. The liability goes only to the property. And there's certainly a large school of thought that believes that the banks engineered this whole crisis in the first place. We did an article in my newsletter, the Financial Freedom Report about Goldman Sachs and how they're the great bubble machine and they always seem to profit ultimately from these bubbles where they go in and they pump up asset values, they loan on them, you know, and this is all the behind the scenes stuff that goes on in the Wall street world. They loan on them, they, they use credit default swabs, they use all these other vehicles, they sell off the loans to Fannie Mae, which means the taxpayers ultimately foot the bill through taxes and inflation and debt and Then they go in and buy the assets up cheap later, and everybody's. Everybody's credit's been destroyed. And then they get to have an excuse to charge them higher rates on loans in the future because their credit is now worse off. And most people just buy into all of that, that grand scheme, without ever fighting back and trying to fix their credit or trying to consider strategic defaults and so forth. So it's a much more complex problem, and you can slice and dice this a zillion different ways. But I'm glad you brought up that, that moral question, because it's a. It's a good one.

I'd like to follow it up by saying I do think there's a responsibility on the homeowner. I mean, certain people abuse the system. They lied in getting and securing the loan by not by falsifying their income. They pulled out seconds and didn't spend the money wisely. So I think there's responsibility homework. But if you look at morality, it's really looking at someone's intentions, not the act itself. That's important to me at least. And so in this situation, we're really just looking at a legal contract.

And what they're doing with it. You know, they're not breaking their word, as I said, they're following the terms of it. And, you know, to give an example, when people, you know, just after explaining that, still don't feel it's quite right, I asked them if they have a cell phone contract, you know, say with one big carrier, and they don't like that carrier's coverage or whatever reason they want to, they want to switch. People wouldn't think twice about moving to another carrier if the penalty was suitable. So they pay a $50 penalty, $100 penalty, get out of the deal.

Get a better deal.

Sure, get out of the deal, move into a new carrier. And they understood the penalties that were there. The carrier set those penalties because they know people are going to move and cancel their contracts before the term. So when I asked them that, I said, well, yeah, I wouldn't have a problem doing that. I'd done that. I canceled my carrier. There are other examples like that.

But you made an intelligent business decision because it was worth it to pay the penalty. And so in the case of strategic default, the penalty people pay is, number one, it can be a big hassle. Number two, their credit is damaged. Number three, can be a hassle to fix the credit, and they ultimately lose the collateral of the property. And like you said, Chad, there will always be people that Abuse every system. There are bad people out there that really take advantage of things. There's no question. We all know that's true and that is going to happen. But in the case of the mortgage world, this whole game, and everybody knew it in the early 2000s and in the mid 2005 area when it was just getting really frothy, that the whole system was set up as a corrupt system where everybody along the line from the mortgage broker who gave you the loan was making commission and didn't really want to, to know if you could afford the house. The whole system was, was set up that way. It was designed that way. And it wasn't like the borrower. You know, a lot of these lenders went out to people that they knew could not afford these properties and pushed loans down their throat. It's really a, it's a pretty facet.

The responsibility and the cause, I think is all the way from the homeowner all the way up to the top politicians and everywhere in between, from the homeowner, the, the mortgage broker, the bank, the investment company that bought the securities, the legislators that created new laws to allow for no doc, no money down these new loans that were pushed and pushed back in the other direction towards the homer. So I think all across the board there's blame, but you really have to look at where do we want to burden or who do we want to burden? And I just get frustrated when people just keep, keep arguing that it's the homeowner's responsibility 100% they have to pay it. You know, I really believe that the burden's on the bank. They're the ones that went into this eyes wide open. They're the ones that got money from ferp. They're the ones that should have hedged their bets better. So that's where I really think that the burden lies.

I agree.

Well, hey, this has been a really interesting discussion. Chad rule. It's you walk away.com and Chad, we're going to do some special offer or something on our page for you and the services your company offers. And that's jasonhartman.com offers. So again, check out jason hartman.com offers. And thank you so much for joining us today. Really appreciate the insights and learning more about intelligence, strategic default, which is what you help people do. So appreciate having you on the show.

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