Philadelphia to suspend some foreclosure sales

Breaking news from Reuters: "Authorities in Philadelphia will suspend foreclosure sales of homes whose owners have fallen behind on adjustable-rate subprime loan payments -- potential relief for tens of thousands of struggling debtors."

More: "Sheriff John Green said he would halt sales of foreclosed properties in April and would seek a court order extending a moratorium for an unspecified period. His action follows a nonbinding resolution passed unanimously by the Philadelphia City Council on Thursday calling on Green to stop the sales to give borrowers more time to seek a settlement that would prevent them from losing their homes."

The story raises questions: First, is this action legal? If I'm running a large bank and I'm trying to get my hands on houses so I can put them on the market before they fall further in value, I might want the houses now. Second, will other municipalities follow suit? My guess is that the answers are no and yes, in that order.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: Philadelphia Mayor Michael Nutter, by AP.

Comments

[Dan]

If I were a bank, I would stop issuing mortgages in Philadelphia right away before other cities try to copy them. There's no point to issuing a mortgage if you can't foreclose...

[ajk]

This seems like a version of eminent domain where the government takes property from one private party to enrich another. The usual version is when government takes property from a private homeowner to give it to a large developer. When the Supreme Court upheld this practice, there was an outcry against it. Now the government is taking from a bank and giving to a homeowner. It is still taking from one private party to benefit another.

[Inland Empire]

I don't think its legal and I don't think its the right thing to do (nor a bailout). I do think that the banks could renegotiate with many of these people for a new loan that would benefit both parties. Maybe not all cases but many.

[waitingitout]

It's much ago over nothing. No workaround Philadelphia, the Fed or even lenders can conjure up will alter the fact that most of these folks facing foreclosure have ZERO chance of ever paying off their mortgages. Most foreclosures have occurred before the borrowers' resets even took place. To keep these people in their homes, without any hope of building a dime of equity, knowing that it'll be 10 years before they can sell to break even - let's just say the city of Philadelphia isn't doing them any favors. Neither will Clinton, Obama or anyone else hatching a half-baked plan.

The problem will take care of itself - it is taking care of itself - despite politicians' best efforts. All we have to do is sit back and wait.

[unbelievable]

What a crock of BS. They make it seem as if these people will be "out on the streets" huddled around a fire in a trash can trying to stay warm if we do not have governement bailouts. Oh, poor them. These "homeowners" can simply leave the home they never put money into anyway, rent a place like everyone else, regroup and try again later.

Where the hell was this kind of action when the prices were skyrocketing out of control? Where was the price freeze then?

They politicians all need a lesson in economics. We are simply seeing an overdue and inevitable price correction.
Let the free market work, let overly inflated home prices reach their normal equilibrium and let the people who deserve to lose money, lose money.

[Stevestevens]

Thats is what I'm saying guys . If the market continues to decline and people end up walking away or crashing and burning or whatever is supposed to happen, we wont have some dramatic and cathartic moment were all the speculators console each other and the over extended home owners compare foreclusre stories at the back of the rental line. What do you think will be happening if housing collapses to the point where we would see prices from 1996? This isn't a minor correction that will go away by doing nothing. They are scared this time, really scared. ( just like some guy above mentioned)We will have severe economic contraction not only on the local level but unprecedented financial disaster on the national and global level. I think you are right on the whole legality of the contract aspect...the fact is I don't know. How do we get around that? What can we do collectively to solve this? I don't know. I guess my point is that most people's perception is "let it crash so I can buy really low.!! Well, if it gets too low housing will be the last thing on our minds.

[Dave]

>Can you find out (probably not) does this apply to all >homes even in the 650K and up (million dollar homes) >range?

Mapletree, as a former longtime LA homeowner and now a Pennsylvania homeowner, I can tell you that very, very, very few houses in Philly city are priced above $650K. Philly is not like LA, where the burbs are part of the city. Much of Philly is gritty urban innercity, with houses selling in the five-figure range. (Several zipcodes have median house prices below $20,000.) These are the houses typically affected by this action. There are only three zipcodes in Philly where the median price of homes exceeds $200K.

>First, is this action legal?

A foreclosure is part of a judicial proceeding. A sheriff is an officer of the court, not a legislator nor a judge. Thus he does not have the power to do this. Reversing his action will take time, however. A smart lender would go into court on Monday and get a TRO to stop him. That lender, while acting within its legal rights, would likely face some PR fallout.

[SJ]

Hey Stevestevens and Martin,

NOBODY forced them to "buy" the home they are now being foreclosed on. They CHOSE to buy it. They willingly signed a legal and binding contract which said they would pay back the money they borrowed. These people had no business buying a home in the first place. This excess demand put even more pressure on already high home prices to increase making it even more difficult for every other person who does not own a home to buy one at a reasonable, affordable price - a price in line with income levels.

That being said, I do not feel one bit of pity for these people. They can simply rent just like the rest of us. I do not want the money I pay in taxes to go to helping them unless some of their money helps me pay my rent. Fair is fair.

[martin]

Stevens stevens had a point. He just lost his position when he called intelligent bloggers here -- with an opinion different that his -- "jerks." I would never want him to serve as my mediator.

Nevertheless, somehow/someway try to appreciate that Stevens' reference to families in distress is valid. Tens of thousands of families are going through a financial nightmare. No one bargained for that no matter how foolish they were taking on a big loan. Yet they created the cause and there is an effect.

I don't see an easy solution and I too have adopted a conservative opinion here. There should not be government intervention. As Mr. Paulson said, the storm must pass. In time, housing demand will stablize the real estate market simply because housing will be more affordable. Government intervention will only delay the process. It makes sense.

Still, families are in distress. To say they should go to the back of the line as renters, however, is cruel. Yes, they should now rent because they must have a safe home. But people are allowed to make a mistake. They surely had no idea that their actions combined would contribute to the real estate bubble and ensuing chaos. When push comes to shove, I ultimately blame financial institutions that adopted a come-one, come-all loan marketing approach.

I'm a longterm homeowner. I'm a longterm landlord. I'm in a comfortable position to ride this storm out (for now). But it doesn't mean I don't have compassion.

I think Philadelphia's city council made a major mistake. Their legislation is Socialist in nature. And I largely suspect they will now have to weather a major storm because of their decision. Those silly councilmen. They had a heart too.

[Ann]

The story raises questions: First, is this action legal? If I'm running a large bank and I'm trying to get my hands on houses so I can put them on the market before they fall further in value, I might want the houses now. Second, will other municipalities follow suit? My guess is that the answers are no and yes, in that order.

________

Question 1: Highly highly doubtful that a court will allow the sheriff to stop doing foreclosure auctions. In fact, the sheriif may find himself trying to explain to the court why HE should not be held in contempt of court.

PA is a judicial foreclosure state. Lender goes to court, gets the judgement and the court orders the sheriff to hold a foreclosure auction.

Real real bad move to ignore the court and not do as he is told when ordered by the court to auction the property.

The City Council has NOT authority to alter state law on foreclosures nor to tell anyone not to obey the Judge. That City COuncil resolution has all the legal effect of making a wish upon a star.

The court will get very annoyed, order the sheriff to proceed or be found to be at least in civil contempt where he can be tossed in jail until he agrees to do what the court ordered him to do. (In civil contempt where the individual is jailed he is said to'hold the keys to his cell door' because he can get out the minute he agrees to do as he was told.)

So, the whole thing will be a tempest in a teapot.

Lenders will run to the court, court will order the sheriff to appear and threaten him with contempt and jail if he does not hold the auction. Sheriff does auctions to dtay out of jail.

The CIty Council can pass anything they want but it IS and WILL BE totally ineffective in this area as it is a matter of state statute, not local ordinance.

(2) PA city council may pass such ineffective resolutions but they have no effect for the reasons explained above.

In non-judicial foreclosure states as well, again the rights of the parties' to the mortgage are created by STATE LAW - not local governments. Local governments can huff and can puff but they can NOT change state law - and will be so informed by any state court.

Doubt you will see many sheriffs in judicial foreclsoure states who will be willing to be held in contempt by a couurt or get tossed in jail until they obey the court and hold the foreclosure auction.

[blackbox]

NUTS!!!!!!

[mbob]

Our local chucker-of-widows-and-orphans-into-snowbanks foreclosure fella sez.....anybody with more wit than a bivalve can run out the process to about, ah, let's see, um, ohhh, say 5 years. No pagar en los anos del negocio, either.

We are so close to what might be politely called a grand episode of rodent fornication.

[buz]

Agree with WhatMeWorry 100%. The banks have already grown extremely cautious due to this bubble rupture. Future lending in Philly will be nonexitent if this crap flys. Oh, and SteveStevens you are a true dimwit.

[sheila]

if it's so damned urgent for these banks to get their hands on these houses to sell them, then how come they haven't "tried" to sell the houses they already have? look at your own examples of how long they are sitting on vacant properties (which hurts the owner, the asset and the neighborhood), then how insanely they are listing them, then how inflexible they are when they get offers! since we all know they aren't gonna sell them, at least not right away, it's better for everyone to have people living in them so at least there is a small chance the vacant house won't totally blight the neighborhood. in the meantime, they might just realize that a 30 year fixed at 6.5% to someone who wants the house and is already in it is better than trying to flog it at auction, refusing the bids, re-listing, etc.

reminder - if these are ARM resets, maybe people CAN afford them, if the rapacious re-set interest rates are dropped below 13-15%. Consider this - on a $400,000 house, the payment is only $2,400/month at 6% but is over $4,400 at 13%, which is a normal reset rate we are seeing for these foreclosed ARMs. That is a HUGE monthly difference, so stop acting like all these people are so insane and could never afford their houses, when they easily could - if the banks would get a clue.

As for them being stupid to sign up for an ARM, many of them were not that cheap in the first 3 years (in the 5% range), and Greenspan was cheering loudest for them, so maybe they had a right to trust in the "experts?" Right when they were poised to refinance, per the usual process that's been done forever, all the lenders closed up shop and they got stranded. Lots of normal, responsible people have used ARMs for decades, so you have to look at the individual facts and stop generalizing.

[Danny]

This is INFURIATING. An adjustable rate loan is a gamble. You take the lower interest rate up front and hope that you can refinance later on. But it is a risk. RESPONSIBLE homeowners take a fixed rate mortgage, buy a smaller house, or rent. It is the heads of those households who have put their own families at risk.

[amir]

That's just silly and counterproductive.

If mortgages can be legally superseded by the city or the state, then they're a far riskier investment. If they're far riskier the interest should not be 7%, but 17%, Good luck going for a recovery. The sanctity of contracts is a basic part of our legal system.

[Sky]

I think my landlord tricked me into paying too much rent on the house I'm renting. I mean, I didn't think she was serious about me paying all that rent. Luckily, I'm occupying the house so it must belong to me now and I don't see any reason to keep paying the rent (since it is mine now). Hallelujah, there's more than one path to the American Dream!! Thank God we live in a country where possession is 9/10ths of the law!!

[Law Guy]

Ummmm... I hate to be disagreeable here, but I think we're wrong in assuming that the city's actions are clearly illegal. To the contrary, the city's actions may well be legal in light of the current mortgage crisis and the public interest in controlling massive foreclosures. The case on point here is Home Building & Loan Assn. v. Blaisdell, 290 U.S. 398 (1934), in which the Supreme Court upheld a Minnesota statute that temporarily extended the redemption period on defaulted mortgages. I think the burden is on the banks to distinguish Blaisdell.

[Sean]

Stevestevens,

What the hell makes you think I have not been "sacraficing" to the same extent as these "homeowners" and their irresponsibility you so easily dismiss? What makes you think you know me? I have been patiently waiting - for YEARS - for the housing prices to correct itself. I have been saving my money responsibly, paying my bills and living on a tight budget. I did NOT buy a home I could not afford. I did not want to be high debt position and have the strong possibility of not being able to pay back what I borrowed. Instead, I have been renting, saving and waiting.

Who the hell gives you the right to judge us as "jerks". All we want is to have the government butt out and let the free market work the way it is supposed to. This will allow the market to correct itself.

Frankly, if anyone is the jerk it is you for not truely understanding the situation from all angles.

[Kathryn]

Isn't this just going to discourage investors from investing in mortgages? If local governments can just suspend foreclosures, then what bank or lender wouldl want to loan money to those areas? Sure, they might keep a few people in their homes now, at the expense of everyone else who wants to borrow money for years to come. This is a good way to make sure there isn't a recovery.

[NoWayinLA]

sheila: "reminder - if these are ARM resets, maybe people CAN afford them, if the rapacious re-set interest rates are dropped below 13-15%. Consider this - on a $400,000 house, the payment is only $2,400/month at 6% but is over $4,400 at 13%, which is a normal reset rate we are seeing for these foreclosed ARMs. That is a HUGE monthly difference, so stop acting like all these people are so insane and could never afford their houses, when they easily could - if the banks would get a clue."

Most people cannot afford your $2400 a month for housing. To meet the standard 3:1 debt-to-income ratio for a 30-year fixed, the household income would have to exceed $133k. Do most families make that?

You know the bubble is out of control when people use the word "only" in front of a sum like $2400/mo.

[houserenterinLA]

sheila: "reminder - if these are ARM resets, maybe people CAN afford them, if the rapacious re-set interest rates are dropped below 13-15%."

Sheila, your argument is void when you look at the facts. Most people are going into foreclosure right now due to FALLING PRICES, NOT Adjusted rates. NPR did a segment on this. Once these "innocent" homeowners realize their home won't double in value in 1 year, like it did in LA from 2004 to '05, they STOP MAKING PAYMENTS. THEY WERE ALL SPECULATORS, EVEN IF THEY LIVE IN THE HOUSE THE SPECULATED ON!!!!

[Charles]

If this is true, all people there will suffer a substantially jumped mortgage rate or even worse, some lenders may even retreat the business there.

This actually means all people are going to pay for this small irresponsible group.

[alvin]

Stevestevens, don't confuse "jerks" with reality. our economic system is painful sometimes - but that's the reality of a market based economy. short term pain for some is the "cost" for the most efficient distribution of limited resources over the long run.

government can play a vital role in supporting those in short term need - but that support shouldn't come in the form of impeding the market process (by stopping foreclosures). the unintended consequences of those actions will do far more damage over the longer term and make eventual recovery that much more difficult for all.

[Laker]

I think this is illegal. They are basically nullifying a contract in a non recourse loan or not complying to a court order in a recourse loan.
Also, as many stated, if the bank can't take the house back in case the borrower is not paying will simply increase the risk factor to the lender. If indeed something like this turns out to be implemented, interest rates will jump to double digits pretty much like credit cards. Good credit FICO will get 11.99% rate and subprime FICO will pay 29.99% interest rate...I guess you all know what that will make the prices of houses...
What people like "sheila" don't understand is that most foreclosures today are not a result of a rate reset. They are un-affordable even at original rates. If you add the rate resets, then you get total mess. People can't afford fixed rate loans, that is the reason they took ARMS. Even today, many rich people use ARMS because they can buy "more" house with it. I call this over extending.
In any case, When you have all these "loan" owners that bought with 0 (zero) down, they simply rented and thay is why they are loosing the houses. there is no incentive to keep them.
I wonder what will happen when renters stop paying their rent in Phili,...maybe the police officer will also keep the house landlord from pulling the renter out of the house/apartment.

they might just realize that a 30 year fixed at 6.5% to someone who wants the house and is already in it is better than trying to flog it at auction, refusing the bids, re-listing, etc.