I wrote about series LLCs (Delaware Series LLCs) in this blog many years ago. Recently I got an email from the folks at TACPAS warning against using them.

What Warren said:

  • Whether a liability could be contained within a single LLC within the series has not been proven in court.
  • States may differ in their interpretation of series LLCs.
  • Tax treatment, particular with different types of entities, is unclear.

Troubled homeowners who have gone through a foreclosure or a short sale may have a lurking problem that could cause them problems years down the road. Even though you think you may have put a bad chapter in your life behind you, the lender can still come after you with a deficiency judgment.

A deficiency judgment is when the lender sues you for the difference between the loan amount and the amount they (the lender) realized when the house was sold. Whether it was through a short sale or sold as a bank owned property may not matter.

Yahoo finance published an article that illustrates the problem with several examples. In one, a borrower even signed a document at a short sale closing that gave the lender permission to come after him.

If you are in a short sale, make sure you get agreement (in writing) that the lender will not pursue a deficiency judgment against you. If you have lost a house through foreclosure, whether the lender can come after you will depend on the state the house was in.

If you are in a recourse state, the lender can pursue a deficiency judgment against you. Per The New Republic blog, the non recourse states are Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, Washington and Wisconsin. However, even iin these states, a lender may have recourse with second liens and refinanced loans. Regardless, consulting an attorney is needed for advice on your specific situation.

Strategic defaults are on the rise. The number of “strategic defaults” doubled from 2007 and 2008 (588,000 in 2008) and now comprise more than a quarter of mortgage defaults. I’ve also seen both 16% and 17% quoted.

So what is a strategic default? A strategic default is when a homeowner (presumably includes investors) walks away from his mortgage payment when he or she is still fully able to pay.

Strategic defaulters get special scorn for their actions. Never mind that it would take fully 60 years, in one example, to recoup their losses, you are a deadbeat for walking away according to Henry Paulson (even though it’s a “good business decision” in other arenas).

I wanted a more precise definition of is considered a strategic default, while I’m sure there are situations where it is perfectly clear that the borrower could afford the mortgage, it’s not always a black and white scenario. What if you could scrape together the money every month but it required a second job to do so? If you decided that after a year of insane workweeks you couldn’t keep it up, would you fall into the “strategically defaulting” camp?

Per studies done by Experian and Oliver Wyman people who strategically default have a different profile than the classic borrower in trouble. Borrowers who are strategic defaulters will typically have a high credit score and suddenly default on the mortgage without warning, but on no other debts. Compare this to the typical pattern of financial distress on multiple debts, where the mortgage payment is the last thing that a borrower will give up paying on. Strategic defaulters are typically concentrated in the negative equity markets and often have large mortgage balances.

The exact criteria that Experian-Wyman used to mine 24 million credit histories to find the 588,000 strategic defaults in 2008, is the following: “We define such borrowers as those who rolled straight from current to 180+ [days past due], while staying current on all their non-real estate debt obligations, 6 months after they first went 60 [days past due] on their mortgage.” With this definition, my “second job” scenario I outlined above, would be considered in scope.

The recommendation is to not offer these borrowers loan modifications. I guess the option of offering to reduce the principal balance still appears to be a foreign concept to the lenders.

What do you do when a property you bought for 5.4 billion is now only worth 1.8 billion? Why you give it back to the lender of course.

Several people who track the commercial real estate market have warned of a coming wave of commercial property defaults that might make the current residential real estate problems look like peanuts. Adding credibility to this claim, Tishman Ventures recently defaulted on Stuyesvant Town & Peter Cooper Village in Manhattan and returned the property to its lenders in a deed-in-lieu arrangement.

With a loan more than double the property value, the action by Tishman makes financial sense. They are not the only ones giving property back to the banks, recently several towers in San Francisco bought by Morgan Stanley at the peak, were returned to the lender. Note the quote in the article: “This isn’t a default or foreclosure situation,” …. “We are going to give them the properties to get out of the loan obligation.”

The Huffington Post, a popular blog, contrasts the Stuyvesant situation with a borrower who is underwater on a mobile home. Entitled “Tishman Speyer Walked Away From Its Stuyvesant Town, Peter Cooper Village Mortgage. Why Can’t You?”, one has to wonder at the double standard here.

Short sales would appear to be the best answer to a bad situation. The borrower can’t carry the mortgage payments, the loan is more than the house is worth. With a short sale, the lender agrees to take less than the loan in exchange for a buyer that keeps the house off their hands.

Seems like a better solution all around. Short sales reportedly are not as damaging to a credit rating than foreclosure, the legal costs of a foreclosure are avoided, and the bank typically gets more money (especially when the buyer is a retail buyer) than they would through foreclosing on the property, carrying the property and paying the holding costs, and then selling it as bank owned.

However as Robert B. Jacobs writes, the best solution isn’t always what happens. In one case the lender refused to release the seller from being liable for the difference between the selling price and the loan amount. So the property went through foreclosure instead. While foreclosure laws in each state are different, apparently in the state this foreclosure occurred (probably California), the lender lost recourse to go after the borrower for the difference. The saying “cutting off your nose to spite your face” seems appropriate here.

Many people who purchased during the housing boom have found that their house is now underwater.  In other words the loan amount is more than what the house is now worth.  Many are sitting tight hoping that prices will eventually come up again.  However it turns out that purchasing during the housing boom may have had an even steeper price, one that could threaten their health.

During the housing boom, there was a shortage of building materials.  US made drywall was in short supply, and to keep up with demand, Chinese made drywall was imported.

The first signs of trouble came when homeowners had to replace their air conditioning coils many more times than seemed normal for a new house.  Then some started noticing their silver turning black.  Wiring and appliance problems were common.  Then finally, some started getting sick with headaches, rashes, sinus problems.

The culprit was the Chinese made drywall, specifically from Knauf Plasterboard Tianjin.  The theory is that fly ash from steel mills was mixed in the plasterboard so that there are higher concentrates of sulfides in the gypsum than normal.  Moisture activates these toxic compounds, releasing hydrogen sulfide, among other fumes.   The gas, which smells like rotten eggs, corrodes metal and can make people sick.

There is a a lot on the net about this problem.   If you think you are a victim, the Chinese Drywall Complaint Center is one resource that could help.

Aren’t you glad 2009 is over?  So many foreclosures, 10% unemployment, so many houses underwater.   2010 has to be better right?    Some realtors and economists are predicting better times for real estate in 2010.  I really want to believe them.  I really do.  But what about the coming mortgage loan resets that will start about mid 2010?

As many know we just went through a period of massive defaults on subprime loans. When housing prices stopped going up and people starting losing jobs, many of those loans became worthless.  However we are still facing another period of possibly the same thing.  Many ARM (adjustable rate mortgages) are due to reset in 2010 with the peak in 2011.

Here’s a picture from a report from the imf (international monetary fund).

Mortgage ARM Loan Resets

Mortgage Rate Resets

So far the banks have not been very accommodating to borrowers.   Troubled borrowers have reported it is difficult to convert the temporary modifications from the government’s Housing programs to permanent programs.  Only 9% of mortgages have been modified. And adjusting the principal value … which is what is really needed here .. forget it, they would rather foreclose.

So unless the banks take proactive action with the this coming wave of Option ARM and Alt-A mortgage resets, housing isn’t out of the words yet.