To default or not to default

Default and foreclosure

Default, often lender induced

Default and strategic default
Default is when the borrower does not pay his mortgage. Sometimes he's sick, sometimes he lost his job. Sometimes the bank is actively driving him into both default and foreclosure. Sometimes a borrower stops paying although he has the money; if the house value has fallen so much it is worth less than the remaining debt, it can be financially advantageous just to leave the house.
In some states (non-recourse states) they have a further regulation: the loan is linked to the house, not to the borrower. This means that should the house price be lower than the loan amount, the borrower can give the house back to the bank and walk away without foreclosure and without any remaining debt; in recourse states the bank can sue for what is left of the debt. No matter the circumstances, defaulting can have further consequences; if the borrower does not fully pay the loan he can suffer in credit worthiness and he will have difficulties getting new loans.
The bank can try to make the defaulting borrower resume paying, maybe by renegotiating the loan. If the bank does not succeed, it can take the house back through foreclosure. The borrower can stay in the house without any payments until the foreclosure is complete; in some cases the bank even lets him stay longer so the house won't deteriorate.

With rising prices, wage backing is not important
With the housing bubble driving prices up, up and away, housing speculators did not care much what price they paid; they felt sure they could always find some sucker who would pay even more.
With prices rising all the time, wage backing did not seem very important; should the borrower get in trouble he could just sell the house. So there was no reason to be finicky; a little lying doesn't hurt anybody.

Banks, not borrower, profiting on HAMP

Help through HAMP
To help people affected by the crisis, the Home Affordable Modification Program (HAMP) was created. A bank entering HAMP will get incentive payments for modifying loans; assuming the bank will make more money and the borrower is eligible, the bank has to offer the borrower a modification and cease all efforts to foreclosure. The bank is requested to actively solicit borrowers before initiating foreclosure.

Harm through HAMP
HAMP did not always work out the way it was supposed to. A HAMP Call Center report lists more than 36,000 complaints. Lost documents, banks not responding to applications, improper requests for modification fees, and similar problems.
Often a borrower was given false hope by the bank and put on trial mod with lower instalments. Then, when the bank did not make the permanent modification, he was charged not only with the difference in instalments but also with penalties and late fees. Extra costs that could drive somebody into foreclosure, although otherwise he had been able to pay his mortgage. Often the only result of applying for a HAMP modification was the bank getting some extra fees and a foreclosure delay of some months.
And the bankers had tricks. Borrowers have been told they had to stop paying off their mortgage to qualify for modification, a lie setting them up for further bank abuse. In spite of borrowers having letters that they are approved for HAMP modification, home have been foreclosed. Borrowers have been wrongfully told their mods would be made permanent. Banks have incorrectly told credit bureaus that borrowers had defaulted.
An alternative trick is using robo-signed documents to file a lawsuit, then deliberately fail to tell the "debtor" that the lawsuit is pending. After that, it is easy to get a default judgement when the debtor fails to show up in court.
When questioned, Secretary of the Treasury Tim Geithner explained that HAMP was not meant to help distressed borrowers, it was meant to "foam the runway" for the banks. There were just too many foreclosures to handle at once, HAMP was meant to protract the process.

Up to 70% of defaulting loans borrower fraud
If the borrower signs a paper overstating his income, it is his responsibility. It does not matter if the broker says overstating is all right or if it's the broker filling in the figure. Even should the broker inflate the income without the knowledge of the borrower, if the borrower signs he is legally responsible. The borrower might be a housing speculator well versed in the intricacies of finance. He might be a first time home buyer and an easy mark to a broker only interested in making a fast buck; although sometimes there was deliberate fraud from the borrower, often the fraud was broker initiated. According to FBI, as much as 70% of early defaults might be borrower fraud. FBI also found that "80 percent of all reported fraud cases involve collaboration or collusion by industry insiders" - real estate brokers, mortgage brokers, lenders. Maybe it's not always so easy to tell the difference between victims and victimizers.

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