Hold On — Wilson Phillips
Last Friday, I wrote a post titled Downpayments Are Back. After taking the weekend to contemplate what this really means for homeowners who are thinking about walking away from their obligations, I have changed my mind on what I believe they should do. If they can manage their payments, they should consider trying to hold on, even if the house value has dropped well below their purchase price. There are still a great many overextended homeowners and speculators who cannot possibly manage their payments, and trying to hold on until the market comes back is a foolish waste of time and resources. The market is not going to come back before they go under. However, for those who can make the payments, there emotional benefit of home ownership may be worth the financial hardship it entails. When downpayment requirements were eliminated during the bubble rally. Many people who are not in the habit of saving were suddenly able to purchase a home — albeit at a greatly inflated price. For people who do not have the habit of saving money, they will never come up with even a 3% downpayment to obtain an FHA loan much less a 20% downpayment like everyone else will need. The house they are in right now may be the only house they ever own in their lifetime. If they bail out, the new (and permanent) downpayment requirements will probably ensure they never own again. Under these circumstances, even if they are upside-down on their mortgage, and even if it might make more sense financially to go back to renting, there is a strong emotional desire to own a home, and this may be their only chance to satisfy this emotion. Many of our decisions in life are not based purely on a basis of economics. Having children is not a great economic decision, but the love of family makes the economic sacrifices worthwhile. If satisfying the emotional desire to own a house is worth the sacrifice in terms of elevated household expenses, perhaps it is the proper decision for those owners on the margin to stay put. It is not the right financial decision, but perhaps it is the right life choice.
I have another piece of advice for the homeowners who are facing an exploding Option ARM that will not save them from foreclosure, but it may provide a way for them to reenter the housing market at some future date. Freddie Mac recently changed their servicer guidelines and eliminated compensation to servicers who foreclose quickly. The effect of this change in incentives will be a longer foreclosure process once people stop making payments. This is where the advice comes in. When owners with an Option ARM face their loan recast, there is little hope of affording the payment, so they should not try. What they should do is immediately start saving the amount of the payment they used to make on their mortgage. If the foreclosure process drags out a year or more, they could easily save the 3% necessary for a downpayment on an FHA loan. They may have to wait a while for their FICO scores to improve to qualify for the FHA loan, but when they do, they will already have saved their downpayment. Will many people do this? Probably not. Many people will simply spend the money they should be saving and be no better off for not having a housing payment for an extended period of time, but for those that do, they have the opportunity to save and prepare for home ownership again.
So what do you think? Should they stay, or should they walk?
Today’s featured property is a short sale. It is owned by a speculator who already got what he could out of the property, and now he is walking away.
Asking Price: $250,000
Income Requirement: $62,500
Downpayment Needed: $50,000
Monthly Equity Burn: $2,083
Purchase Price: $330,000
Purchase Date: 5/27/2005
Address: 139 Briarwood, Irvine, CA 92604
| Beds: | 2 |
| Baths: | 1 |
| Sq. Ft.: | 921 |
| $/Sq. Ft.: | $271 |
| Lot Size: | – |
| Property Type: | Condominium |
| Style: | Other |
| Year Built: | 1985 |
| Stories: | 1 Level |
| Area: | West Irvine |
| County: | Orange |
| MLS#: | R807405 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 1 day |
 New Listing (24 hours)
|
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located in the Briawood complex that is located close to parks,
shopping,and eateries which are all within walking distance. Enjoy long
relaxing walks or enjoy a day by the man made lake
The pictures in this listing are ridiculous. They show one ugly photo of the outside of this apartment condo, and 13 of nearby facilities. Most of the pictures are from Woodbridge, and this unit is not even in Woodbridge. I guess that is why you have to take a long walk around the lake.
For those of you tracking percentage declines, this one is a healthy 25% off. The owner used 100% financing when it was purchased, and then opened an HELOC that allowed him to extract another $34,000. It was if he sold at peak pricing. The total debt on the property is $354,000. If this property sells for its asking price, and if a 6% commission is paid, the total loss will be $119,000. Washington Mutual gave him the HELOC, and they will absorb the loss.
.
I know this pain
Why do lock yourself up in these chains?
No one can change your life except for you
Dont ever let anyone step all over you
Just open your heart and your mind
Is it really fair to feel this way inside?
Chorus:
Some day somebodys gonna make you want to
Turn around and say goodbye
Until then baby are you going to let them
Hold you down and make you cry
Dont you know?
Dont you know things can change
Thingsll go your way
If you hold on for one more day
Can you hold on for one more day
Thingsll go your way
Hold on for one more day
You could sustain
Or are you comfortable with the pain?
Youve got no one to blame for your unhappiness
You got yourself into your own mess
Lettin your worries pass you by
Dont you think its worth your time
To change your mind?
Hold On — Wilson Phillip
Urging them to stay and fight impairs the labor mobility that America often uses to climb out of its many self-induced disasters. I’d also like unworthy ‘owners’ to leave and take their bad habits somewhere else, but that’s the selfish in me talking.
Still can’t believe that we are entering a stage of history in which the government will make whole various irresponsible lenders and buyers, at the expense of the thrifty and punctual.
Did you forget about the 1980’s Savings and Loan bail out?
Invitation sent:
http://yvonnedowland.point2agent.com/
Her banner says “My REALTY”; I misread it as
“MY REALITY” which I thought was much more fitting and comical.
Another financial consideration for those who are upside down on their mortgages but who conceivably can make the monthly payments is this:
Inflation may be posed to really take off — much more than it already has. (And with it, interest rates.) Assuming these folks have, or can negotiate a fixed rate mortgage, they may be in better shape paying a low interest mortgage with a higher balance than their depreciated house is worth than they are renting over the next five years.
IMHO, the ramping up of inflation, while horrible for the economy as a whole, will actually stabilize the housing and financial markets.
Owning/financing (at a fixed rate) a home is a great inflation hedge. One argument against owning is that it’s a bad investment because the value tracks inflation; i.e. You can do better elsewhere. But, if we’re exiting our decades long inflation-controlled era, then you’ll be ecstatic to have an investment tracking inflation.
My two cents:
I agree with the exploding option Arm – scenario as they have no credible alternatives.
I’m not sure on Scenario 1 as I’m not sure why a borrower in this scenario is less likely than a borrower in scenario 2 to be able to buy again…lets assume they have same income and FICO before walk away. On FICO if both borrowers default, they will lose X points – whatever X is – but should be same. And both borrowers will likely be renters for some time after they lose their homes. But then the borrower in scenario 1 can save for a downpayment just like the borrower in scenario 2. Now some of these people won’t be able to save as they may be more tempted to buy a jet ski, but I’m not sure that would be any different for either group.
I think for group 1 if “ Pain of Negative Equity” > “Emotional Value of Ownership” you should leave. As negative equity increases, the more likely/rational it is to default but you wouldn’t necessarily default with $1 of negative equity. However there is positive value of ownership – eg you have good friendships on your kid’s little league team etc. and that is usually a positive. Each homeowners’ situation is different so hard to value that.
That said, my one area of concern on scenario 1 is can a borrower who prima facia is able to make his payments really just walk away scot-free. I’m assuming his bank records/tax returns/pay stubs could be discovered in a foreclosure. I know in California it is difficult and impractical to get a deficiency judgment, but that is not the case in every state. (Here is a link with some data on this topic http://www.all-foreclosure.com/procedures.htm)
I’m not a lawyer but I would think any borrower should definitely take legal counsel before taking any action to ensure there are not further unintended consequences.
BTW Calculated Risk has a very detailed post on the revised changes to foreclosure guidelines for those interested.
http://calculatedrisk.blogspot.com/2008/08/freddie-mac-foreclosure-timelines.html
“But then the borrower in scenario 1 can save for a downpayment just like the borrower in scenario 2.”
My main point is that this group will not save for a downpayment. Saving is a habit, and for those that do not save who were able to get in with no money down, this is their only chance at home ownership. Perhaps if they change their character and become savers, this isn’t advice they should follow, but for those who don’t save and will not change their ways, this is their one chance.
I agree that anyone in either group will find it hard to save for the reasons you note, but to put it another way, I think the borrowers in the option arm group are even less likely to start saving after walking away, as someone who took on an exploding mortgage has less financial understanding as someone in the first group who at least had enough understanding to take out a loan they had a realistic chance of servicing through their income.
People are adaptable, most will save if they have to. I doubt all those boomers older than me will give up on home ownership, they’re getting to the age when they want to sock stuff away-they’ve got to stash it before the rest of us can grab it…
I dunno.
I bought a house in 1990 with 20% down, and by 1995 the property was worth 70% what I bought it for. I was adding a bedroom and bathroom and just kept on improving the house. I traded up in 2000, and I do not think it mattered exactly when I bought and sold since I was in one way or another. Unless you can sell fairly close to the top and buy back in fairly close to the bottom or are buying for the first time fairly close to the bottom, what does it matter? You are either buying and selling low or buying and selling high.
The best candidates for what might sound like market timing are people who would move anyhow. For example, the kids are gone and you now have a 4br house which is way too big. You can afford the payments. You could sell about the time the kids leave and buy a smaller house or condo. Or, you could sell and rent something for a few years, if you think home prices will go down.
Timing is also important if moving from a bubble market to nonbubble, or vice versa. Moving between Dallas and LA would be a fine example. Move to LA at the bottom or when prices have only been rising a year or two. Move from LA when prices have been rising for 5+ years, or are just flattening out.
I was in the same position as awgee. I rode it out and did fine, although the loss of equity was a little depressing. I did cancel some improvements I was planning on making like a built in barbecue.
The difference this time is I knew what my payments were before hand and didn’t bite off more than I could afford. People today never planned on how they could afford the loan resets, let alone the absolute magnitude of the equity loss is several times what awgee and I experienced in the early 90’s.
alan, you may have “rode it out and did fine”, but your decision cost you a great deal of net worth that you are apparently overlooking. I have in-laws in the Bay Area who bought at the peak, and comps are now selling for 20-25% less than what they paid. They have two solid incomes, and will likely “wait it out and do fine”, but their future net worth will be greatly damaged, forcing them to work much longer than they would have otherwise (before retiring), or, forcing them to accept a much more conservative lifestyle between now and their death. Make sure and count the return your money could have been making in good investments, instead of “waiting it out” in your home.
Yes. We considered buying a house near the peak and would have lost about $250,000 by now, in less than two years. Instead, our downpayment keeps growing and prices keep dropping.
I posted once before on down payment math. If you had $100,000 for a 10% downpayment on a $1 million house in 2006 and didn’t buy, watch what happens. With a price to rent ratio of 300, owning that house would cost $34,000 more per year aftertax than renting it.
By July 2008, that house is $720,000 and dropping fast. It costs $20,000 more a year to buy than rent it. That $100,000 downpayment has grown to $112,000 with interest, and to $135,000 with new savings of $1000 per month. It’s now a 19% downpayment.
Wait until late 2009 and the same house costs $500,000. The aftertax costs of ownership are now equal to the cost of renting. That $100,000 downpayment has grown to $150,000 with interest and new savings. It’s now 30% down.
But wait, there’s more! If you had been saving the difference between aftertax cost of ownership and rent for the entire time 2006-2009, you would have saved up about $125,000 of new money. When added to the original $100k of savings and interest, you have about $250,000 down. 50% down, just by waiting about 3 years.
That analysis has the makings of a great post.
I’m memorizing the basic outlines of your analysis to tell others. Thanks. Great comment.
Just to add a caveat to that post… this assumes that a situation where the house price falls 50% in two years. That sounds like a pretty safe bet in Irvine, but it’s still a bet, to be sure.
Of course, “losing” that bet still gives you $250K in your pocket, so I guess that’s one of the happiest definitions of a loser you could find.
OR, you could continue to save and rent until retirement. After you retire, move somewhere more affordable and have a very nice nestegg.
MalibuRenter,
Very good analysis!
Realistically, I think you NAILED IT,
or at least came damn close to it.
At least Alan (and Awgee) have some ethics. The lack of a ‘do the right thing and pay your obligations if you can’ mentality is frightening. I bought a place in 1994 and the value decreased more than 25% before coming back up…there were many years I thought we’d just live there forever due to lack of equity. But I never considered walking away, as long as I could make payments. It’s called personal responsibility. Sad that so few think that means anything anymore. Oh, my net worth turned out just fine. And I’m sure your in-laws will survive – and not be unhappy – if they take a few less trips or consume fewer goods in the next 20 years.
The price at purchase (and the home’s projected price 1, 5, 10 years out), is just one component of the decision to buy a home. If you control yourself, spending less than 2.5x your household income using a fixed rate mortgage, you really just have to ride it out. You’ll have plenty of money outside of your housing costs to invest and enjoy life.
IR, I think it is great that you explore more of the emotional aspects of home ownership. In the end, people will do what they will do mostly emotionally.
Just walk. Go to the mall. Go see Batman. Take a load off.
I, my children, and grand children will mop up.
thoughtful and worth reading… emotional factors certainly work for me keeping my house despite a possible loss in equity, in that i don’t want to ever deal with any Armenian, Russian, Korean, or South American landlord again… just knowing I won’t hear their butchering my language or having them come by to snoop at 7 in the morning is worth at least a few extra hundred dollars a month… to me anyway
also, am i missing something? i do not usually see mortgage interest exemption figured into your calculations … people’s decisions to ‘walk away’ must be tempered by this as well. I received an $11K refund check this year largely due to those exemptions.
i had forgotten about wilson phillips, and wish i could forget again… gaaaak
All 4 landlords snooped on you at 7am? Gotta wonder if it’s the landlord or the tenent that is the problem.
uh..no. my current landlady “comes by to check on things” (from the outside, but she peeks in), every two weeks. It’s pretty common with private LLs. One of the reasons I will be buying next year. I can’t deal with this anymore.
“…I received an $11K refund check this year largely due to those exemptions…”
You really need to change your W-4 withholding, unless you like giving the Feds an interest-free loan?
I received an $11K refund check this year largely due to those exemptions.
***************
How much did you pay in property taxes and HOA?
Um, approx $3000 in taxes on two houses.
Re the withholding, I don’t enjoy financing Uncle Fuckhead’s miscreations in Eye-wrack etc. However, after being audited one year…for no particular reason…it seemed better to sleep at nite than worry about the door being kicked in. Accidentally.
Regarding the 7am remark, ha ha. Obviously you live in safe, white Irvine… my last day in Los Angeles I was at Ralph’s waiting in line, waiting, waiting… the Armenian gypsy in line before me was buying a single zucchini squash.
The cashier said, that will be $.90, and the gypsy screamed, THAT WILL BE TOO MUCH. I WILL NOT PAY A PENNY OVER SEVENTY-FIVE CENTS.
Borat–it’s not a joke. (although the word i am to submit is “white45”–maybe that is)
That’s great advise, IR. Just screw Freddie out of as much as you can, so the taxpayers can pick up the tab. I guess your becoming an enabler for the folks who got themselves into this mess…
Agree with you Steph. Not sure why IR is recommending people to squat as long as possible. I am fine with advising someone to overextend themselves and hang on to the house fo the emotional benefit but telling them to break the law and steal is just wrong.
Right. I expect better from this blog…
I suspect IR just threw out the comments in today’s post to push some buttons. It would appear that he was successful in that endeavor…
Trust me. As a police officer, I can honestly tell you it is BETTER to have someone living (even squatting) in the home, than for it to be vacant.
No doubt about it.
The fact that they squat in the house has no bearing on how long it will take to go REO.
There’s no law being broken, and no one is “squatting”. It’s up to the banks to decide when to call in the marshals and toss someone on the street. The “tenant”, or “former owner”, or whatever the heck you want to call them, doesn’t get to make that decision and never has.
It is in the bank’s best interest to toss someone out as quickly as possible, but if they don’t, that’s their call. I think they’re insane for not doing so, but there’s been a lot of behavior by lending institutions over the last decade that doesn’t meet the sanity test.
I am not aware of any statutes that make loan defaulting a criminal act.
Morality in lending went bankrupt long ago. Nobody has clean hands.
Sorry Steph, you are WAY off the mark. One’s obligation is primarily to one’s family and self. The lender will do whatever is in his best interest — let you stay or toss you. The lender will look out first and foremost for their best interest.
The homedebtor should do the same. Pay rent when one can live for free? Why? Put that extra money into your childrens’ college account. Put it into your 401(k). Pay down your credit cards. Take care of YOURSELF and your FAMILY. The lender can take care of their shareholders.
One’s obligation is to abide by the law and one’s ethics. If it is lawful to stay without paying, you may do so. It certainly isn’t UNETHICAL to put your family’s future before the shareholders of some foolish lender.
Never use the argument that the ends justify the means. It’s always wrong and is the basis of the worst crimes in history. Rob a bank to fund your child’s schooling. That’s taking care of your family first. Kill someone to get their organs because your child needs a transplant.
“That’s great advise, IR. Just screw Freddie out of as much as you can, so the taxpayers can pick up the tab. I guess your becoming an enabler for the folks who got themselves into this mess…”
I hate to say it, but if you DONT, there will be MANY OTHERS who will. Its called REALITY.
You might as well get yours while the getting is good.
Im sure we are ALL going to pay for this bullshit one way or the other, so you might as well GAME the SYSTEM while you STILL can.
Maybe tomorrows post could instruct folks on how to strip out the copper plumbing before walking away…
I noticed a house for sale just north of me. They were having a yard sale last weekend, which had some unusual items. I could see a builtin dishwasher and interior doors for sale as I drove by.
Could be leftovers from a major remodel, or part of stripping the house before moving.
I fear that inflating our way out of this mess is part of “Bailout Ben” Bernanke’s plan: Hyper inflation helps debtors as it makes future debt payments less in real terms with deflated dollars. Inflation may help stabilize housing prices somewhat, but would cause significant further losses in the financial markets as P/E ratios tend to be much lower and interest rates higher during inflationary periods. NCR
As someone with a huge pile of unsecured debt (PhD’s ain’t cheap), I always object to this logic, because it usually makes an assumption that is questionable.
Inflation helps debtors if you assume that their wages rise with inflation. In June, that wasn’t the case at all. For those of us who work for the state, for example, there’s AMPLE reason to suspect that inflation will simply make our daily expenses like gas and groceries go up much more than our wages do.
The “well, quit and go work elsewhere” argument also doesn’t fly. If you do something specialized, the notion that you can live wherever you want is simply not true.
WAGE inflation helps debtors, in that they have more of a limited good (money), so any particular sum of money (as debt is fixed) is worth less to them. But consumer inflation does not automatically generate wage inflation for everyone, or with the same rapidity.
How To Strip Out Copper Plumbing:
Supplies needed: truck (preferably one that looks like a contractor’s vehicle), flashlight, tarp, friends who can keep their mouths shut, large duffel bag, hammer, several hacksaws.
Safety issues:
1. Make sure the owners aren’t home.
2. Turn the main circuit breaker to “off” to avoid shock.
3. If it’s a gas water heater, turn the thermostat off and turn the gas supply off to the burner.
4. It’s not required, but is considerate to the owner of the property – turn off the water! You’ll stay dry and it will avoid flood damage to the property.
Method:
Drain the hot water heater. Be sure to stand back, that water’s hot! Once drained, grab your hammer and follow the pipes, smashing out drywall as you go along. Cut pipe when needed to extract from framing/fixtures. Once done, cut up pipe into easily handled lengths, place in duffel bag or tarp, and leave quietly.
Good job.
What about the copper wiring?
And how about a few tips for cheating on our tax returns while your at it…
This is the whole problem with asking any kind of blue collar question on an elitist blog. None of the participants have hands on experience and instead regurgitate “white papers” on the matter. You don’t need to build a bureaucracy to get this job done. You just need a sledge hammer, bolt cutters, a pick-up and a little methamphetamine. A hack saw is a waste of time, the bolt cutters get the job done faster. And before a bunch of nancy boys give me a lecture on methamphetamine, I have to say that anything that is good for our Air Force pilots is good for all Americans.
Beautiful!!!!!!
the lovely rural people around here were way ahead of the stealing copper game. They also steal firewood. The hunting cabins in Pennsylvania often have gas pipes run throughout for lighting. One of the local thieves built a fire to sweat off the fittings, but they were compression fittings and obviously didn’t come off.
There really needs to be controls on people selling duffle bags full of copper. I think most states are implementing waiting periods for such sales.
“They may have to wait a while for their FICO scores to improve to qualify for the FHA loan, but when they do, they will already have saved their downpayment.”
Aren’t FHA loans just for first time home buyers?
No, FHA loans are for everybody. The only limit is the amount that you can get a mortgage for & these limits are set by your county median price for a home. The FHA limit is 110% of your county median.
Also, FWIW, there are no FHA standards for a FICO score. In fact, you can have no score whatsoever, establish your credit through 5 positive tradelines like utilities, & still qualify for FHA.
also wanted to add, a particular lender may have their own standards for a FICO score on any loan, including FHA.
if you are looking for a mortgage & encounter this, it is best to go with a good broker & you can check your GFE on http://creditboards.com/forums/index.php?act=SF&s=96030d9da4bf90658a9e6d66a8eb8d9c&f=9
They will let you knnow if your rate/fees are too high.
The time to walk away was six months ago or very, very soon. Don’t you think that lawmakers have wised up to the money that’s walking out the door?I would be, in the very near future, that property laws will change in many states (California, Florida, Arizona, Nevada) to make every home loan a RECOURSE loan, and the banks will figure out some way to get the jingle mailers on the hook. So, if you’re going to walk, better walk now.
Also, I wouldn’t be too confident that the IRS won’t try to get its 2 cents, a kind of anti-capital gains tax — those accountants will think of some way to get people to pay — maybe call walking away from a $200,000 negative loan balance a kind of income in some way. Sounds preposterous, right? Well, they will sell it to the rest of the taxpayers as a way to protect their own property values and bring these “degenerates” to justice. In fact, I wouldn’t put it past them to change the credit reporting laws to have foreclosures remain for as long as 15 years. What I’m saying is that if you walk away from your home, which may be a good thing for you right now, don’t expect that the current laws will protect you. These laws are going to be changed, and some may be retroactive. There’s still 5 months to go before the end of 2008, and tax laws can be changed.
I say, yes, hang on to your property as long as you can because it’s going to be a lot more difficult to get a home. And I also say “there but for the grace of God…” This could have happened to any of us.
Um, “ex post facto.” You should really do a Google search on that term.
That said, the IRS is ALREADY going after folks who took HELOCs and plowed that money into productive home upgrades such as matching his-and-hers Escalades in the driveway. As to not paying back a loan, um, they’re taxing that, too.
Scenario 1- I believe foresclosures of homes with non-recourse loans are taxed at the capital gains rate. Your gain is the amount of the loan pending at foreclosure minus the basis, which is the purchase price (plus upgrades). If you had a neg-am loan, I could see how you wouldn’t have any income. Also, you get the standard exemption on home sales, unless it’s not your primary residence for 2 of the last 5 years.
Scenario 2- In a recourse loan, the unpaid amount on the loan is INCOME, not capital gains. Ever tried paying the tax on $500,000 in income on $80,000 a year salary? Good luck. Because of this tax consequence, I expect all recourse loan defaults will be preceeded by filing for bankruptcy, which is the only way I’m aware of getting out of the debt.
Since you are familiar with tax law, you may be familiar with the Mortgage Forgiveness Debt Relief Act of 2007.
I am no tax expert, but it appears to me now would be the time to walk away (not after they repeal this).
“…In fact, I wouldn’t put it past them to change the credit reporting laws to have foreclosures remain for as long as 15 years…”
I actually think the opposite could happen. I think we could see Congress mandating that credit agencies minimize the consequence of a foreclosure so that these people can get back into the market ASAP and support inflated prices.
I agree with this. Current bankrupt debtors are the most desirable customers, they will line up to borrow. Deadbeats like me who pay off CC every month and refuse to enslave myself to the debt machine will continue to be punished.
If you truly cannot afford the payment – squatting is the wisest decision. Squatting with extreme savings and the fact that lower credit scores will be the norm could get these homeowners back into a home faster.
And that really is the goal isnt it? Let’s make sure that folks who made really dumb decisions get back into a home as quickly as possible…
the people that made really dumb decisions that are living in that decision really weren’t the problem. The problem was the speculators that drove up the whole market that made all the houses on the market over-priced. In the worst case scenario, the economy will be wrecked, and we will all be in deep , deep trouble. The way our economy is currently structured, we probably need the dumb people to buy another house fairly soon.
Silly me! Of course, the IRS already has a provision to tax people on losses — it’s called loan forgiveness and the IRS does consider it to be a form of income. If you owe $5,000 to MasterCard and they charge off that $5,000, then you decide you want to buy a home and fix your FICO scores, so you settle for $2,500. MasterCard reports that to the IRS and then they send a form to you at the end of the tax year and you had better report it to the IRS as income (it’s line 21 on the 1040)or you are going to be guilty of tax evasion. Do you really think it’s that big of a stretch for the IRS to go from “debt cancellation” of a settled credit card debt to the hundreds of thousands of negative debt that people are walking away from? No, the IRS accountants will find someway SOON to get their claim in on this money, and after the IRS, expect California and other income tax states to go after this source of money as well. Interesting that the only items that you can’t get relief from through bankruptcy is (a) child support, (b) student loans, and (c) tax liens.
If you’re thinking of walking away, you better consider what your future tax liability may be.
Ah, but Washington figured this out and passed The Mortgage Forgiveness Debt Relief Act of 2007 which allows debt forgiveness and does not create a tax liability…appears to be for primary residence loans. This act has a 3 year life, expires in 2010.
http://www.whitehouse.gov/news/releases/2007/12/20071220-6.html
Kind of. This is for “purchase money debt” used to acquire the principal residence. It’s a “no go” if it’s for a second home or investment. Also “no go” for the HELOC this clown (oh, sorry, savvy real estate investor) took out. Still, it’s better to keep the HELOC money and pay the tax then to pay back the HELOC money.
The IRS HAD a provision on loan forgiveness. That was changed by hr 3648, the Mortgage Forgiveness and Debt Relief Act of 2007, “DISCHARGES OF INDEBTEDNESS ON PRINCIPAL RESIDENCE
EXCLUDED FROM GROSS INCOME” http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h3648enr.txt.pdf .
The people who might still get caught for debt forgiveness at the Federal level are flippers and speculators who didn’t live in the house, and people who refinanced for more than the initial loan balance.
What to do, what to do……
I know this much, whatever path the little guy takes to try and improve his life, someone in a suit will be there to rip him off.
In every situation, the rich get richer and the poor get poorer.
Banks will get bailed out, homeowners will get the shaft, count on it.
Yep.
Departing Countrywide exec said to ne vacationing in Africa with corporate jet
latimes.com/business/la-fi-countrywide2-2008aug02,0,4279484.story
The dark side is getting stronger…you are getting closer and closer to writing like an RE agent:
* However, for those who can make the payments, there emotional benefit of home ownership may be worth the financial hardship it entails.
* When downpayment requirements were eliminated during the bubble rally.
* It was if he sold at peak pricing.
I was wondering if someone would notice that and comment on it.
Yes, I was thinking the same thing. “Who is this man and where did our IR go?”
Looks like the apartment complex went to condos in 2002; by my memory, that’s about two years into the run-up in prices, although prices didn’t start hitting WTF levels until late 02/early 03.
It’s overpriced even at it’s original sale price of 185k – I’d be hard-pressed to justify dumping more than 100k into such a place.
The one plus? You’re still in the Irvine Unified school district, although I suspect the market for a two-bedroom crackerbox, complete with dry-rotted wood trim, doesn’t include a lot of families with kids.
what does it rent for ? $1300-1500/month, that would put rental equivalent value in the low $200’s, $100k would mean rent would have to be below $750/month.
I understand your point, but I have no reason to believe that rents will hold.
Right now, we are only seeing the beginning of the bursting of the bubble. The bubble has enabled a lot of folks to live beyond their means for a good many years now. HELOC money is only the tip of the iceberg – when IR profiles a property that an institution is going to lose 200k on, that loss isn’t an abstract concept; that’s 200k that just got chopped out of the economy. Another name for this is deflation, and we’re just now seeing this start.
I lived through a miniature version of this in the Bay Area in 2000, right when the tech bubble burst. The Bay Area housing market is one of the few on the planet that should be, by all rights, immune to deflationary pressures. But it wasn’t. Rents dropped, albeit not very much, but they did. Insane situations, such as the ad I saw in late 1999 for a closet for rent for $500/month (I’m not kidding) went away.
We all know that this is going to be a far nastier and longer-lasting scenario than the bursting of the tech bubble. So if I were in the market for a place as an investment, I would definitely knock about 25% off the expected rental revenue for any given property.
And this has nothing to do with my argument, but goddamnit, this place is ugly. I simply wouldn’t buy it at a reasonable value, for no other reason than I can’t stand the look of the place.
Bay Area rents dropped a ton from early 2000 to late 2001 – per my faulty and subjective memory, 1br average rents went from 2200 to 1500 or so on SF and the penninsula, 1700 to 1100 in San Jose.
However, they have recovered since, and that drop was basically a return to were they were when the bubble really gathered steam, like 1996.
$1300 (a 2/1/carport, afterall) MINUS $350/month HOA fee. so $1000X160GMR = ~$160k
southoctracker today is profiling a laguna niguel condo, only a 1/1/carport, that follows IR’s (this) condo, except that it converted earlier and sold in 2000 for $125k.
I think that is a fair estimate
Just to be accurate – this is located in Woodbridge but I still love the way there are no photos of the unit!
You are correct, I stand corrected. For some reason, I thought this was in Windwood behind Culver Plaza. It is still a long distance from the lake and amenities pictured.
Stay and pay to the extent possible.
No one who can afford to pay should be able to just walk away. The only excuse for walking away is that you are financially buried and really can’t pay.
Anyone capable of paying should get a judgement for the diff.
This a moral issue, and our moral failure is bankrupting us financially. Every default adds to the load. Do you just walk from your car loan, because the car is worth half what you paid for it?
Time to restore Moral Hazard and make mortgages full recourse, along with other forms of debt. My credit cards are full recourse, and I can’t walk away without facing default judgments and garnishments against my paycheck. Bankruptcy, with the usual scrutiny of my situtation, would be my only out.
Agree completely. And this site shouldnt be advising borrowers to just reneg on their contract…
If you reread what I wrote, I advised a whole group of owners not to walk away from their obligations. The other group is going to walk away in time because they cannot possibly meet their contractual obligations. My advice to the latter group is to prepare for a time when they may be able to reenter into a contractual agreement they are capable of making good on.
You seem pretty angry about the post this morning. I don’t want to pay for this mess through my taxes either, but the situation is what it is, and people need to carefully weigh their options before making a decision. Much of the advice here has been purely financial, but emotional concerns play a part as well. It is not realistic to think people will hunker down and put 60% or more of their gross income toward housing indefinitely just because others consider it the moral thing to do. I made no judgments on the morality of these decisions, I will leave that to others, and we have had many discussions on that in other posts. The fact is people are walking away from these obligations, and they will continue to do so. The point of my post is that some of these people may do so for financial reasons, and they may end up being permanently excluded from home ownership when they walk. Emotionally, this may not serve them in the end.
I count on this site to be a refuge from all the b.s. The people here are in on the joke in that they realize the folly/stupidity of the lenders and borrowers that caused this mess.
The last thing I want to see here is advice to distressed borrowers effectively suggesting they take advantage of Freddie Mac penalizing servers that foreclose too quickly. Suggesting squatting in their home as long as possible to save up a down payment to go through it all again is not what I want to read about here.
And lets face it, this site is the last place a distressed seller will turn to for help, although it should be required reading for any executive in residential lending, as it so completely documents the absolute stupidity of lenders during this time (as well as the fraudulent behavior of borrowers).
I hope that you are never in such a desperate situation. Many of these people WERE taken advantage of by salespeople and the like. Not all people posses the neccesary skill to make such financial decisions; especially in the face of such overwhelming hysteria to the contrary.
Imagine being a working class family and thinking you were buying your dream home and putting half your take home pay into it only to discover that it was snake oil.
Why feel sorry for the lender who made the loan?
They were the REAL morons in this fiasco, but again, they will get bailed out and the little guy with get the shaft.
I say stick it to them as long as you can, their the ones that made the stupid loan.
Imagine being a working class family, and deciding not to buy the home & rent, live cheap and save in your 401K. Then having your 401K tank severely, your FDIC bank service charge skyrocket, mortgage rates soar, and be unable to buy your home after that. All because some slick Wall St. guys figured out how to loan your 401K money to idiots who went & overpaid for the house you wanted and spent it all.
How’s that more fair?
Oh Dude, this is as good as the comment (a quarter-page above) about taking out the copper pipes.
Stick it to ’em… because two wrongs makes a right!
That is my exact situation so you are preaching to the choir.
The only thing that bothers me about todays post is that when you talk about screwing Freddie, I see it as the taxpayers getting screwed. Before this is all over, Freddie and Fannie will be nationalized. Other than that – the lenders should get what they deserve.
I’m sick of bailouts for investment banks,banks,
borrowers, et al…
You pushed my button too, IR.
It doesn’t bother me you recognize one group will walk away. I’m sure most of your readers have accepted that reality. But to suggest they remain in the property without paying a dime until they are finally ushered out by the Sheriff?
I’m with Steph_LA. Where do you draw the line? Why not maximize that nest egg for the next house by ripping out the copper plumbing and holding a garage sale to cash in the appliances and interior door?
More seriously, it is the sense of right and wrong that civilization is founded on. I was horrified to see the behavior of Americans in New Orleans immediately following Hurricane Katrina. Chaos is not pretty, and should not be encouraged.
I am torn about whether this is reneging.
For purchase money loans in CA, the lenders knew that the only collateral is the house. For someone who got a purchase money loan for a house they couldn’t afford, it sure looks like longstanding State of CA public policy is to say “Mr Bank, if you give out big loans to people who can’t pay them back, that borrower can hand you the keys. Good luck on recovering the full value of your loan at the foreclosure sale or REO, because that’s the only way you’ll ever recover it.”
For those purchase money loans, it certainly sounds like exercising and option instead of reneging. I like the public policy implications: Make stupid loans and suffer the consequences.
For people who have recourse loans and helocs, it’s another story.
The problem is that economic decisions and moral behavior, at least in our captalistic society, don’t have very much to do with each other.
In almost all of these cases IR cites, staying and paying would be the correct moral decision. However, staying and paying would be the wrong decision from the viewpoint of maximizing one’s investment/minimizing one’s losses.
As a society, we obviously value maximizing return/minimizing losses over correct moral decisions; hell, we hold corporate boards legally liable if they fail to take actions to maximize returns!
Laws that reward such behavior obviously are going to have to change. What perhaps is not so obvious is that the mindset that allows people to even consider such a course of action needs to change as well. Sadly, I don’t even see much recognition that the attitude that drives these decsions is in any way a problem; we seem focused, to the point of mania, on the actions of those who engage in acts of gross financial negligence rather than on the attitudes, environment and mindset that drives them.
I really see no moral hazard. If BOTH parties knew the loan would be non-recourse, one would assume that the lender charged an interest rate (ie, was compensated) for that additional risk. They received the contracted compensation, so if the property reverts back to them then so be it.
If they misjudged the risk and the appropriate compensation for assuming that risk, then they made an error in business judgement and bear the burden of that mistake. There is no moral hazard by abiding by the contract terms and applicable law when all parties are informed of such terms and law. So to postulate that the lender is an innocent, uninformed victim is quite a stretch.
What do you think about the part of IR’s scenario where the lender is encouraged to continue living in the house, without paying a dime until she is forcibly evicted?
I live about a block from this property.
The only person that would touch this unit is a first time home buyer or an elderly retiree (1st floor only).
With 3% down and an HOA payment of $330 and a 1% maintenance reserve (you’re going to need it for this place), my mortgage calc tool shows that the total cash outflow with PMI is $2,442 per month.
Results
$250,000.00 Purchase Price
$7,500.00 3% Downpayment
$242,500.00 Mortgage
$309,295.38 Interest Paid over the Life of Mortgage
Monthly Cost Breakdown
$1,532.76 Monthly Mortgage Payment @ 6.5%
$208.33 Property Taxes @ 1%
$52.08 Homeowners Insurance @ 0.25%
$0.00 Special Taxes and Levies @ 0%
$330.00 Homeowners Associate Dues or Fees
$208.33 Maintenance and Replacement Reserves @ 1%
111.58 PMI (one half of 1% or .005)
$2,442 Total Monthly Cash Outflow
Now, just one block away in a nice location you can get a remodeled 2 bed 1 bath apartment for $1700. You get complete access to all of Woodbridge’s amenities such as the lake, tennis courts, pools, etc, and you also have a team of maintenance workers who will fix anything in your apartment within one day.
So is this property overvalued at $271/sq ft? Is it worth $743/mo to rent an apartment from the bank instead of from a property management company?
The cash flow equivalent value of this home with 0% down, PMI, HOA etc taken into consideration is $155,000.
That is a great analysis. And to think someone paid $330,000 for this place.
If you were an investor looking to become a slum lord, then you would also want at least a 10% return on your investment which means you wouldn’t touch it until it drops below $140k
I agree with you on the time-bomb Option ARMs. If the owners can delay the foreclosure as long as possible through any cost-effective manner and put away what they were spending on the mortgage anyway, maybe they can come out of everything somewhat financially healthy.
The only thing I’d worry about is if lenders start pursuing deficiency judgments on these loans and borrowers have thousands of dollars holed up in a bank account. But that would only affect some owners in some states, of course.
I don’t think the banks will usually pursue the deficiencies. They have plenty of work to do and don’t like the bad press.
However, I’ll bet a bunch of the banks sell off the rights to collect the deficiencies. Why? A. They get the money now, and they need cash. B. They don’t have to hire people with different skills to pursue that money. C. They don’t get (much of) the bad publicity for pursuing the shortfalls.
There is another group where I’m not sure what will happen. Will the FDIC pursue deficiencies? I know politicians will be tempted to curb or eliminate this practice, but the FDIC will have financial pressures, and the ability to collect is an asset of the banks they take over. What if Indymac has hundreds of millions of dollars of these types of deficiencies? The last debt collector a person wants to try to avoid is the Federal Government.
I posted a similar observation recently. My phone at work was inundated for over a year when one of the scumsucking second level debt collectors somehow got that number as belonging to a debtor. And as far as I know, it was a small debt, these people don’t care, if they nail someone, it’s with fees and interest. Interesting thing is, when I bothered to answer the calls, the debt collector was an American.
So it seems that at least the Helocs would be worth something to these vermin, they buy any debt, even debt that has been discharged in a bankruptcy.
I haven’t gotten a bill collector in some time, but they seem to have somehow given the number to telemarketers, I got a call today about reverse mortgage. I get a lot of calls about extended auto warranties and direct tv.
Malibu Renter — Maybe that’s the next big paper security! Banks can slice-and-dice their foreclosure deficiencies and sell it off in pieces to collection agencies, who will then proceed to collect on the deficiencies. You know they do it for charged-off credit cards, why not for (charged-off) foreclosures?
And that mortgage debt forgiveness act won’t stand — it was OK when the horror stories of predatory lending were first coming out in 2006 and 2007, but within one year when state and local governments are going bankrupt because property tax revenues have declined so abruptly, you’re going to see a change come over the current “silent majority” of responsible home owners who pay their mortgages and live within their means. You are going to see a backlash against irresponsible homeowners, and these laws are going to change. If we know one thing, we know that this is a very volatile situation. If I were thinking of walking away from a home in California, I would be very, very careful because you never know what is going to happen in six months. Walking away may seem like the prudent thing to do now, but in six months it may end up to be a catastrophic decision. I just can’t see the average American homeowner continuing to support irresponsible home ownership for much longer, and I know city/county/state and US govt. can’t afford NOT to get those revenues up.
Again. “Ex post facto.” Google the phrase, then reconsider your comments.
(Not a fan of the fraudsters, just a little unhappy that people don’t ever bother to learn ONE OF THE FUNDAMENTAL REASONS THIS COUNTRY EXISTS.)
Even given ex post facto protection, the IRS may be able to lay claim to any income in a calendar year. Congress certainly has felt no qualms about changing tax law extremely late in a year.
However, let’s say that “no ex post facto laws” is binding in this case. Let’s say that Congress gets its act together and passes a bill (becoming law, probably through a veto override, on Sept 2) that says that forgiven mortgage debt is taxable as ordinary income.
When, exactly, is this “income” from forgiven mortgage debt realized? The government can argue, quite persuasively to me, that the debt isn’t forgiven until the lender releases the borrower from the debt through a recorded document (or a foreclosure for non-recourse loans).
I’d bet that Congress can change tax law a lot faster than a lender can forgive a debt…
“Even given ex post facto protection, the IRS may be able to lay claim to any income in a calendar year.”
Clarification: ‘may’ reflects a lack of knowledge on my part. I did not mean to imply that the IRS can make such a claim, only that I can envision a possible constitutional theory where they might be able to make a claim.
“Congress certainly has felt no qualms about changing tax law extremely late in a year.”
Clarification: none of the examples I can think of actually increased the tax burden of typical taxpayers, but they may have adversely affected taxpayers in pathological circumstances.
One example of a late change: the annual increases in AMT exclusion limits.
“(Not a fan of the fraudsters, just a little unhappy that people don’t ever bother to learn ONE OF THE FUNDAMENTAL REASONS THIS COUNTRY EXISTS.)
”
Are you kidding me ? Most sheep under 30 could CARE LESS about the “FUNDAMENTAL REASONS THIS COUNTRY EXISTS”.
It’s all about ME, ME, ME, ME. Thanks to the DUMING DOWN of America. It has been a GREAT success, IMO.
I applaud IR for presenting all sides of this issue. We have to be careful to not make this site one-dimensiional.
Hordes walked awau in Houston in the 80s and scores more will walk away now. This HAS to be factored into ones thinking and planning.
As an example, bankruptcy was once only for the wealthy. Once working class Mary saw working class Jill get out from under her albtross of debt, she wanted in and the “shame” vanished. Heck who reads the local papaer anyway. I saw the BK virus move thru the support staff in my office. Those who filed BK were buying new cars, while those “plugging along” were still in klunkers. In the end, the first to file BK was seen as wise and was giving “how-to” pointers to wanna-be filers at the watercooler.
I would be embarrashed and ashamed to fiel BK or to walk away. But for my family’s future . . . I would seriously contmeplate it.
We have all been thru this before. This whole paradigm is all about human nature, greed, ego, desire. From the perganitesteel and flipping that got this mess started to now and will play out BASED on human nature. For a large percentage of homeowners, who didn’t both the read the fine print on the biggest financial decision of their life, they will walk with not only no shame, but probably with a false belief of rightiousness.
It will all start once, the word gets out that their brother in law or girlfriend saved $40K by squatting for 18 months and is proud of it.
Human nature never changes
How is making a payment to the bank/mortgage company, on a home you “own” no percentage of, that is greater than the amount of money you would have to pay to rent a similar home, in any way “emotionally satisfying”? I don’t get it.
Maybe people feel more like part of the community when they get to pay property taxes directly?
Emotional people did not listen when they were told to not buy, hence I conclude they wont listen when you tell them to not walk away either. Afterall, they are emotional people. If they had this much sense, they wouldn’t have gotten into this mess.
I see good deals out in OC, however when you think about no interest only financing availability, those deals really appear pricy! The values lost thusfar allows you the same monthly payment with 20% down, the mortage that people paid for the same house with $0 down low interest only payments. In essence, the pricing needs to fall further where we will have monthly payments 20% lower than the $0 down, 2% teaser rate monthly payments of the past.
After reading this whole thread I wonder if the banks won’t respond to massive write-offs on non-recourse loans.
Nothing says they have to lend to Californians. Once they see the next wave of foreclosures, they may finally conclude the non-recourse law in California is hurting the bottom line and stop making home loans here altogether.
http://www.iht.com/articles/2008/08/03/business/mortgage.php
A second, far larger wave of U.S. mortgage defaults is building
By Vikas Bajaj, New York Times, IHT
Monday, August 4, 2008
NEW YORK: The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is building with alarming speed.
After two years of upward spiraling defaults, the problems with mortgages made to people with weak, or subprime, credit are showing the first, tentative signs of leveling off.
But with the U.S. economy struggling, homeowners with better credit are now falling behind on their payments in growing numbers. The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A, or alt-A, mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.
While it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in subprime loans suggests that the problems in the broader market may not peak for another year or two, analysts said.
Defaults are likely to accelerate because many homeowners’ monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks are tightening their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are alt-A loans, many of which were made to people with good credit scores without proof of their income or assets.
Much will depend on the course of the economy, particularly unemployment. A weaker job market would push more homeowners toward the financial brink. The U.S. Labor Department reported Friday that the unemployment rate climbed to a four-year high in July. Other downbeat reports last week documented another drop in home prices, slower economic growth than expected and a huge loss at General Motors.
“Subprime was the tip of the iceberg,” said Thomas Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”
During a conference call with analysts last month, James Dimon, the chairman and chief executive of JPMorgan Chase, said he expected losses on prime loans at his bank to triple and described the outlook for them as “terrible.”
Delinquencies on mortgages tend to peak three to five years after loans are made, said Mark Fleming, the chief economist at First American CoreLogic, a research firm. Not surprisingly, subprime loans from 2005 appear closer to the end than those made in 2007, for which default rates continue to rise steeply.
“We will hit those points in a few years and that will help in many ways,” Fleming said, referring to the loans made later in the housing boom. “We just have to survive through this part of the cycle.”
Data on securities backed by subprime mortgages show that 8.41 percent of loans from 2005 were delinquent by 90 days or more or in foreclosure in June, up from 8.35 percent in May, according to CreditSights, a research firm with offices in New York and London. By contrast, 16.6 percent of 2007 loans were troubled in June, up from 15.8 percent.
Some of that reflects basic math. Over the years, some loans will be paid off as homeowners sell or refinance, and some will be foreclosed and sold. That reduces the number of loans from those earlier years that could possibly default. Also, since the credit market seized up last year, lenders have become much more conservative and have stopped making most subprime loans and cut back on many other popular mortgages.
The resetting of rates on adjustable mortgages, which was a big fear of many analysts in 2006 and 2007, has become less problematic because the short-term interest rates that many of those loans are tied to have fallen significantly as the Federal Reserve has lowered U.S. rates. The recent U.S. tax rebates and efforts to modify more loans have also helped somewhat, analysts say.
What will sting borrowers more than rising interest rates, analysts say, is having to pay interest and principal every month after spending several years paying only interest or sometimes even less than that. Such loan terms were popular during the boom with alt-A and prime borrowers and made sense while home prices were rising and interest rates were low.
But now, payments could jump 50 percent or more for some borrowers, and they may not be able to sell their properties for as much as they owe.
Prime and alt-A borrowers typically had a five- or seven-year grace period before having to start making payments toward their principal. By contrast, subprime loans had a two- to three-year introductory period. That difference partly explains the lag in delinquencies between the two types of loans, said David Watts, an analyst with CreditSights.
Er, this property has some nice pics of the lake, but where’s the interior photos?
IrvineRenter, you mention the minimum 3% downpayment for FHA loans a couple of times, but that got increased to 3.5% by H.R. 3221, yes?