Today’s post on Non-Judicial Foreclosure is the second in a three part series on foreclosure. We will also look at a property in one Northwood neighborhood stubbornly refusing to fall in price.
Irvine Home Address … 176 GARDEN GATE Ln Irvine, CA 92620
Resale Home Price …… $669,000
{book1}
Space: the final frontier. 
These are the voyages of the starship Enterprise.
Its five-year mission:
to explore strange new worlds,
to seek out new life and new civilizations;
to boldly go where no man has gone before.
Star Trek Intro — Gene Roddenberry
Today we embark on a five-minute exploration of Judicial and Non-Judicial foreclosure and the ramifications for different borrowers, and we will also go step-by-step through the non-judicial process.
Foreclosure 101: Vesting Title
Foreclosure 101: Non-Judicial Foreclosure
Foreclosure 101: Mechanics of a Trustee Sale
To start, I recommend Foreclosure Radar’s excellent series on foreclosure: Types of Foreclosure, Non-Judicial Foreclosure Process and California Foreclosure Laws.
Judicial or Non-Judicial Foreclosure
Foreclosure proceedings in most states are either Judicial or Non-Judicial at lender’s discretion. Unlike mortgages, Trust Deeds give the lender the Power of Sale at public auction if the borrower fails
to repay the debt. With a Trust Deed, a lender can exercise this right without a court
order using the faster and less-expensive non-judicial foreclosure.
The lender may sue
the borrower for repayment of property debt in a judicial foreclosure and obtain a Deficiency Judgment which they can record as a blanket lien against all borrower property in a given jurisdiction. Lenders often will pursue judicial foreclosure and Delinquency Judgment if the amount is large and the borrower has other liquid assets the lender can take or illiquid assets the lender can encumber (look out Coastal California). Lenders greatly weaken — but do not extinguish — their claim to borrower assets in the non-judicial process. Without a judgment, lenders are merely unsecured creditors similar to credit card companies hoping to squeeze life from the insolvent.
Once a lender has decided to obtain a judicial foreclosure — a relative rarity in California so far — it enters a court process ultimately leading to a Trustee Sale and Deficiency Judgment. The non-judicial process is of most interest to us because it is a process we can follow, it is the most common, and it is a process hundreds of thousands of California borrowers are enduring.
The step-by-step Non-Judicial Foreclosure process
The Non-Judicial Foreclosure process, established by the Legislature and encapsulated in the Trust Deed, begins when a lender records a Notice of Default. There are three events, (1) Notice of Default, (2) Notice of Trustee Sale, and (3) Trustee Sale, which cannot occur quicker than the prescribed timeframes; the speediest is one-hundred fifteen (115) days with one-hundred twenty (120) being typical — assuming no delays.
The law makes no time requirement on lenders after default before lender has option to record a Notice of Default. By custom lenders give borrowers ninety days, but they can give as many or as few as they like; lately, lenders like delay. The lender is never required to issue a Notice of Default, but unless the property is worth less than the loan balance — a common occurrence of late — the lender will issue a Notice of Default as quickly as possible to move the process along and regain their stranded capital.
After the Notice of Default is recorded, the borrower is granted a ninety-day redemption period to bring the loan current before the lender has option of Trustee Sale. Historically, this period was the only period in which the borrower was allowed to bring the loan current; the Notice of Trustee sale being a point of no return. This law was changed, and now the borrower has unrestricted right to reinstate the loan up until five days prior to a Trustee Sale.
Once a Notice of Trustee Sale is recorded, the Trustee must send notification via certified mail to all known borrower addresses of the scheduled sale, and the Trustee must publish Notice of Sale in a newspaper or other prescribed media (1) three times (2) one week apart. If the Trustee publishes the day after the Notice of Trustee Sale is recorded, and published again on the next two weeks, the entire process can be completed in about three weeks.
The Trustee Sale occurs at a public site determined by the Trustee, often at the County Courthouse, but sometimes in front of the Trustee’s office. Since these auctions are often held at the County Courthouse, many people incorrectly believe the Courts are involved in the process in some way; courts are not involved in the process here in California unless the lender specifically chooses to pursue a Judicial Foreclosure.
Black hole of payment default
In 2010, payment default is akin to crossing the event horizon of a black hole never to return. The singularity sucks in and spaghettifies every troubled borrower with the relentless tug of equity-squashing financial gravity. The black hole feeds continuously on the unemployed and overextended and cleanses the universe of toxic mortgages in its purifying crucible.
The first public problem
disclosure, our detection of loan particles passing the event horizon, is the TransUnion report on 60-day delinquencies, and this data is supplemented by the First American CoreLogic report of 90-day delinquencies (Irvine 90-day delinquencies.pdf). In the
aftermath of The Great Housing Bubble, lenders by choice to maintain
their capital ratios or by force through Government moratoria chose not
to issue Notices of Default: they chose to amend, extend and pretend. Impact of
these delays, besides the multi-month extension to the process, is
accumulation of vast Shadow Inventory.
(Load the image above into a new browser tab or print the diagram to follow the discussion.)
Visible inventory
Once a Notice of Default is issued, properties move from Shadow Inventory to Visible Inventory where they are tracked by Foreclosure Radar and other companies. At this point in the process, borrowers are usually at
least 3 payments behind, but they are given another 90 day period to
reinstate the loan through (1) bringing payments current, (2) selling the property
for a net greater than the loan balance (no shorts), or (3) negotiating a
loan modification. Since most borrowers are also underwater and since short
sales are very difficult and take months to get approved, few have option of a market sale, and loan
modification or foreclosure become the only available paths.
Loan modification recycling
Loan Modification programs have consistently proven to fail. The first of these programs floundered back in 2007, and now in 2010, they continue to writhe and flail. The entire fiasco resembles a rancid meat
grinder where toxic loans are ground and reground with the fetid
meat-debt stuffed in a paper
sarcophagus printed at the Federal Reserve (The FED program to buy GSE debt is printing money).
The loan modification recycling will continue for the foreseeable future as lenders prefer to defer; lenders, and US taxpayers insuring GSE debt, are praying for appreciation to save them. Lenders must wait a decade or more to be successful, and practicality suggests more properties will grind through the foreclosure process.
When loan modifications are completed, the lender issues a Notice of Rescission announcing the borrower has reinstated the loan. This resets all statutory timeframes, and if the borrower were to default again — something they do with great regularity — then the process starts all over.
Restarting the process removes a property from both Shadow Inventory and Visible Inventory, and although these properties are no longer measured in our statistics, most will ultimately go through the foreclosure process. Consider properties in the Loan Modification Recycling process as Shadow Shadow Inventory (or double-secret probation).
Lenders hope to recycle the toxic mess until values come back.
Trustee sale postponements
Besides the delays creating Shadow Inventory, Trustee Sales are postponed for a variety of other reasons — but mostly because the lender doesn’t want to either take a loss or buy the property. These postponements add weeks or months to the process, and there is no knowing if an auction will occur as scheduled. The frequent postponements make purchasing at Trustee Sales difficult for the few all-cash novices making the attempt.
Foreclosure Suffering Flow Chart
Another way to conceptualize the foreclosure process is to look at borrower circumstances and outcomes. Above we defined the timelines of events that occurs once borrowers enter the whirling vortex of mortgage debt, but we have not discussed the ramifications of this process on the borrower both short- and long- term.
I last covered this topic in The Financial Implications of Short-Sales and Foreclosures. That post referred to an attorney’s post on the subject: The California Foreclosure Rules or “So What Happens If I Let My California House Go Back To The Bank?”.
(Load the image above into a new browser tab or print the diagram to follow the discussion.)
Bad Credit is best result
All borrowers who default on their loans endure credit problems because credit scores are impacted by delinquencies; no defaulting borrower avoids this fate. Beyond that, the range of possibilities ranges from (1) complete freedom from further financial obligation to (2) complete liability for every penny of lost lender funds and legal judgments to obtain same. Obviously, most prefer the former to the latter, and unfortunately, many believe they can and have escaped the bills, but the system is not finished with them quite yet.
Many who become delinquent lose their homes and become renting-former-owners; they snobbishly will never identify with being a “renter.” Renting-former-owners believe they will own real estate again in a year, eighteen-months tops.
Not going to happen.
The GSEs and FHA have guidelines preventing them from loaning to anyone who discharged mortgage debt over a five-year lookback period, and few private lenders extend such loans. Many have suggested the large number of renting-former-owners are a pent-up-demand that lenders will gush over. Perhaps so, but the borrower pool has proven default, so why would a lender want that business? — except perhaps to obtain huge fees, charge usurious interest, and go back to subprime lending-as-usual. Do we want that again? Really?
Borrower options
The borrower has four major options when in delinquency: (1) make up missed payments, (2) sell in resale market, (3) enter into a loan modification agreement with the lender, or (4) do nothing and wait for the Trustee Sale.
The best outcome for everyone is for the borrower to make up the missing payments, and sometimes they borrow from Peter to pay Paul and cure the mortgage delinquency through other borrowing, but this outcome is rare because borrowers are in financial distress.
If the delinquent borrower attempts a sale, they are giving up their house, so this isn’t a pleasant outcome, but if they have equity, they can sell the property, pay off the loan, and obtain their cash equity to move on with life. If they do not have equity, they must wait for approval from the bank for a short payment on the sale of collateral (short sale) or acceptance of a deed-in-lieu legal abandonment. This has serious negative credit repercussions, and few borrowers bother to read the onerous terms of the short sale agreement where lenders often make the borrower personally guarantee the shortfall.
A common outcome lately has been a delay; loan modifications are the rolling loans gathering no loss, an attempt by both parties to avoid dealing with a problem that isn’t rolling away.
Lenders Captain the Titanic
No matter what option a borrower chooses, lenders push forward with the process leading to Trustee Sale. The Titanic is heading inexorably toward the iceberg with lenders at the helm, and it is up to borrowers to divert its course. If borrowers do nothing, a Trustee Sale is assured.
If a property goes to Trustee Sale and borrower loses legal title, they must vacate the property and the ramifications of their previous decisions become apparent; good or bad, they reap what they sow. If the borrower bought at the peak and borrowed too much, but they never refinanced or took any mortgage equity withdrawal money, they have a Purchase Money Mortgage, and they have no further financial responsibility to the lender or to the IRS. They endure the credit hit, but they are rewarded for their small modicum of restraint and prudence with debt forgiveness; this is the best possible outcome.
Recourse sucks for borrowers
If the borrower adds to or refinances a purchase money mortgage — even if the refinanced balance is the same size or smaller — they give up their recourse protections, and lenders gain several options borrowers find unappealing: (1) seek deficiency judgement, (2) become unsecured creditor, (3) charge off debt and issue borrower a 1099 creating a tax liability. There are no good outcomes for borrowers who lost their recourse protections.
In the best case scenario — remember these people already lost their homes and their credit is trashed — the borrower is reported to the IRS and ends up with a major tax liability because forgiveness of debt is considered income (that HELOC money was income after all). This point is critical: borrowers who have not received a 1099 have not had their debt discharged. 
Many think that because lenders are not badgering them that somehow the lender forgot they are owed money. Lenders haven’t forgotten, they just haven’t put the systems in place to chase down payment on mountains of unsecured debt. Many bright attorneys are working to create this debt collection doomsday machine to slice people to rubble. Look for this to be a developing story over the next several years.
The worst possible outcome is reserved for those borrowers with assets. If lenders believe they can obtain more money than it will cost them to pursue the borrower, they will opt for a Judicial Foreclosure to obtain a Deficiency Judgment. I recently attended a meeting of the Turnaround Management Association, a group of turnaround specialists. Many of the assembled attorneys, investors and consultants derive their livelihood from pursuing borrowers who personally guaranteed defaulted debt. This group is going to be very busy.
California Legal Code Pertaining to Foreclosure
The links below lead directly to the State of California code where you can wade through the legalese for yourself.
Start of foreclosure process. Initial notice recorded after borrower fails to meet the terms of their loan.
CC 2924c.(a)(1)
Sets auction date. Can be recorded 3 months after Notice of Default
CC 2924 c. (b)(1)
Initial auction date can be just 14 days after Notice of Trustees Sale is recorded.
CC 2924 f. (b)(1)
Auctions can postpone for up to one year.
CC 2924 g. (c)(1)
Transfers
property to winning bidder. By default this will be the lender if no
bid higher than the lender’s opening bid is received.
CC 2924 h. (c)
The links provided by ForeclosureRadar.com are supplement to today’s post.
Ideal Home Brokers Trustee Sale Service
If you are interested in learning how you can become active in the Trustee Sale market, review Ideal Home Brokers Trustee Sale Service or contact us at sales@idealhomebrokers.com.
Irvine Home Address … 176 GARDEN GATE Ln Irvine, CA 92620
Resale Home Price … $669,000
Income Requirement ……. $141,375
Downpayment Needed … $133,800
20% Down Conventional
Home Purchase Price … $550,000
Home Purchase Date …. 6/9/2003
Net Gain (Loss) ………. $78,860
Percent Change ………. 21.6%
Annual Appreciation … 2.9%
Mortgage Interest Rate ………. 5.18%
Monthly Mortgage Payment … $2,932
Monthly Cash Outlays ………… $3,830
Monthly Cost of Ownership … $2,840
Property Details for 176 GARDEN GATE Ln Irvine, CA 92620
Beds 3
Baths 3 baths
Home Size 1,600 sq ft
($418 / sq ft)
Lot Size 3,264 sq ft
Year Built 1998
Days on Market 4
Listing Updated 1/13/2010
MLS Number S601543
Property Type Single Family, Residential
Community Northwood
Tract Glle
Equity Seller has to move!Charming Plan D/3bdr Highly Ugraded Northwood Single Detached Home.3 Full Bdrms plus office,Main floor Bd&Bath.Beautiful Gourmet Kitchen with Maple Cabinets,,Formal Dining RM open to GREAT ROOM,Cathedral Ceilings,Firplace,Recess Lighting, Designer Paint,New Carpet,Plantation Shutters through out. Built In Media and Office.French Doors Open to Entertainers Backyard.Pre-wired for Security System,Full Size 2 Car Garage w/Built-in Cabinets..Walk to Blue Ribbon Award Winning Cayonview Elem & Northwood High School.
I like this neighborhood, and apparently so do many cash-heavy buyers. Prices on many homes here have held over $350/SF, and this owner thinks he can get over $400/SF. He might be right as someone will probably borrow $417,000 and put $252,000 down. Cash is king.
While borrowers may give up legal protections if their loans are recourse, they are still protected from deficiency judgments if lenders pursue non-judicial foreclosures.
Great post, but I’m surprised you didn’t mention the “one-action” rule in CA where lenders can either go non-judicial or judicial, but not both. Lenders give up the right to deficiency judgments in exchange for the ease/cost of the non-judicial process whether the loans are recourse or not.
This sounds like a long and complex process for the lender, with many deadlines to keep track of, how many notices to send out, etc. Multiply that by a number of homes, and that sounds like a lot of work for a lender. The worst part is that this effort doesn’t result in increased revenue; rather it’s all spent on trying to minimize their losses.
Yeah, I think much of the “shadow inventory”, however you define the term, is simply paperwork sitting on a huge pile on some guy’s desk that the poor guy hasn’t gotten to yet.
n/m it’s implied in your second paragraph, it’s early =(
Yes, I did mention the either/or nature of the decision for lenders. I was forced to take out some tangential information. For instance, when I first wrote the post, I had a detailed explanation of what happens during the three weeks between Notice of Default and Trustee Sale, but the post was long enough, and the three-week estimate is close enough so I removed it. The attorney’s post I link to goes into more detail about the legal aspects including the “one action” rule.
In the event the foreclosure process is finalized and the home is purchased at a trustee sale but the old “owners” still reside in the home, what is the course of action taken to remove them from the property and what is that process?
Watch the opening scene of “Capitalism : A Love Story”
What’s economic and stock market’s trend in next three years?
IMHO, the script has been written and encrypted a year ago, co-author by Obama, Bernanke, Geithner and Wall Street.
The key to decrypt the cipher is: 2012 election.
IMHO, I had best stock performance in pass three years in terms of efforts, because I read the overall picture in much high view.
Now, IMHO, Obama gave $trillion to Wall Street in the name of new job creation, and Street announced historical bonus a week ago. Essentially, Obama already declared that there is no ONE can give more money to Street.
The next step for Obama is to find a reason to print more money, a lot of more money before 2012, so he can get re-elected.
Because with 6th grade math we know to sustain current debt, we need a lot of more new money to inject into the system.
And for this, Wall Street will find a reason for Obama to print a lot of more money.
So my prediction is the stock market will start the real slide in around 4 months later, DOW should hit 8500-8000 again. Along with high jobless rates and mortgage default, Obama can find a reason to print money.
IMHO, the DOW target was set to 12500 a year ago, the interest rates is 3.5%, jobless rate 7% (real rate is much higher) and CPI is 3% (real rate is 6%).
So just relax yourself and follow the script.
(Make a donation to homeless people if you make money from my suggestions.)
If more money is printed, it does not necessarily mean the stock market will drop in nominal value. It can stay at current nominal value but drop a nice percentage in real value as the dollar’s purchasing power becomes less due to dilution. How is this for a scenario?
Dow 10000 in 2004 is not the same as DOW 10000 in 2010, or is it?
DOW 10,000 in 2010 is worth more than DOW 10,000 in 2004 if you are buying houses. Think about all of that printed money no appreciation in the stock market, and 6 years later you get more house. Inflation?
What if one already own a house? I was refering to inflation and dilution. The inflation index excludes real estate as I recall. excluding real estate is how we were at only 2% to 3% inflation while home prices were going bubbling up by 20% to 30% per year.
A sheriff from the county is called to the home with a locksmith, and the home-debtors are typically given a couple of hours to get out. I’ve seen this happen several times. It’s sad. Most of the time when the sheriff arrives, the home has already been abandon.
Also, the home-debtors are generally offered money from the lender, via a realtor, to leave the undamaged home voluntarily by a certain date.
the new owner at the trustee’s sale would have to go through an eviction process.
Rookie realtors like you shouldn’t be giving tax advice….especially when it’s wrong. Simple insolvency gets you out of tax liability for forgiven debt and the Heloc money would be excluded under capital gains tax rules. You’re going to need to get your jollies over people’s hardships from another source.
Hey Yummy,
Since you seem to know everything regarding real estate law…why don’t you take the time and effort to educate us. And I’m not talking about your one sentence…”Simple, blah, blah.”
Everything few months we get people like you who come out the woodwork and criticize everything and everyone here.
Not everyone. Hate begets more hate. The writer sounds vampiresque. Just sayin.
An astute teacher such as yourself should also know about the extension through 2012 of debt forgiveness relief laws.
Speaking of which, when does the special law that forgives taxes on forgiven housing debt expire?
Oh yes, 2012.
http://www.irs.gov/individuals/article/0,,id=179414,00.html
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.
You are wrong. Insolvency may lead to reassessment of tax liability due to forgiven debt, but is not a given, and must be declared by the IRS after investigation. HELOC funds may be excluded from cap gains tax, as other borrowed funds may also, but only under certain circumstances, usually if they were used to improve the property, but HELOC funds are not exempt for cap gains tax by the nature of their being HELOC funds. That is just plain stupid. IR was not complete, but he was way more accurate than you.
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation is a given.
While on the subject, it may be useful for some to know that they can record a request of notification of default on a property.
If you are a renter, and not so sure about the condition of the owner, you may consider this to be sure you find out sooner, rather then later, that the owner is behind on payments.
Outside the subject, again …
It’s very obvious that what’s good for main street, is now (SO) bad for Wall Street and the banks. Just the hint of new regulation, makes the markets decline.
BTW~
As I type…
Dow -202
S&P500; -20
NAS -27
From the link above~
By Jim Kuhnhenn, Associated Press Writer , On Thursday January 21, 2010, 11:42 am
WASHINGTON (AP) — President Barack Obama is calling for tougher regulations on banks that would limit the size and complexity of large financial institutions.
The proposal would limit banks’ ability to engage in high-risk trades. Restrictions would be placed on proprietary trading by commercial banks to separate those institutions from investment banks.
Obama said Thursday that without these regulations, the financial system will continue to operate under the same rules that led to its near collapse.
The announcement comes as Obama renews his calls for financial regulatory reform, which is being negotiated on Capitol Hill.
THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below.
I agree with Volker’s views and am glad that he has Obama’s ear. Commercial banks should not be able to run a casino division to juice profits when times are good and then demand a bailout when the trades go against them. The asymmetry drives overly risky short term bonus seeking behavior.
I am not saying that there should not be casino type companies that make a living through proprietary investments and trading, I’m just saying that they should be run independently and forced to raise their own investor capital. They should not have access to cheap customer deposits and federal bailout money. Let proprietary traders survive or fail on their performance.
I can’t help but believe the entire run-up in asset prices since March was an agreement between the big banks and the Fed/Treasury/Administration. Though it’s provided a short-term pop for the economy, it’s also come at a great cost to the politicians in power, who are now seen as the overseers of corruption on Wall Street.
It took the loss of a liberal democrat in Massachusetts to get Obama talking about sticking some teeth into these GD banks.
I think we could see some good things finally happen in Washington. Let’s hope they lock the banking lobbyist out.
Sad isn’t it… it takes the loss of senate seat in MA (like a slap in the face to Dem) that finally gets Obama’s attention. One year after he took office he finally went to Volcker for advice. Let’s see if all this populist saber rattling is just for a show or really has some meat to it.
Thanks IR. That was an incredible explanation of a complicated and mysterious procedure.
This place has a good-looking, solid facade. Just wondering – if a solicitor confronting a house with no front door suffers a stroke, is the homeowner liable?
Hi IR and everyone,
A bit off topic but I could not find any other way to ask this question. I am an avid reader of IHB although I do not post much. Over the last couple of years I have carefully read most of the analysis articles on this blog in general and those on accelerated amortization, mortgage debt retirement and money rentership in particular.
It all made perfect sense to me and am ready to put at least 20% when I buy a house. But recently a friend directed me to a web site of a hotshot financial advisor (who claims to be “ranked #1 financial advisor by Baron’s”) whose recommendation seems to go counter to what I
have been learning from this blog, which kind of threw me into confusion. I would have ignored it if it came from a real estate interest or a journalist, but it is coming from a financial advisor which is unsettling as it appears that this is the kind of advice people get from their paid financial advisors. Also, notice the list of references in the article. It will be very useful for those of us who are financially unenlightened if you, IR, or someone else can comment on it.
http://www.ricedelman.com/cs/education/article?articleId=232
10 Great Reasons to Carry a Big, Long Mortgage
Thank you IR for the great blog which I am sure has opened the eyes of thousands like me !
Ric Edelman is pretty well known and i read some of his books.
however, i just read his article you referred to and feel skeptical.
first, i think this article was written before the housing crash in which most of his assumptions are house price will go up forever (just like most everyone else thought during the bubble years)
second, this is the question for IR and anyone:
Assuming you have no other better investment (like right now) to invest the cash, should you pay cash for the house (of course, assuming you have the cash).
maybe i’m missing something in my logic, but i just don’t see any benefit of spending $1 to get 30 cents back on tax (assuming 30% tax bracket). that 70 cents still come out of your pocket???
appreciate anyone’s thought!
The fault I see in that logic is that paying all cash is essentially a 30 year bet, whereas the lack of investment opportunities may just be a 1-5 year problem.
There are many correct things in that article, but they need to be viewed in context not as absolutes.
He’s making and not stating some underlying assumptions:
1) Inflation will be high, possibly even higher than your mortgage interest rate.
2) Investments will return a higher rate than you’d pay out in interest.
On the 15 versus 30 year mortgages. The problem with a 15 year mortgage only comes about if the 15 year payment is one that’s onerous.
Prepaying a mortgage is exactly like investing in something with a rate of return equal to the interest rate. Except for the liquidity problem he rightly points out. But that’s all really about diversification. Don’t put all of your money into your house. Don’t pay extra into your house if you can’t actually afford to while having more money left over for investing. An emergency fund is more important than prepaying your mortgage.
But really it all comes down to inflation expectations. That $98/month wouldn’t go far in groceries these days so avoiding it during retirement doesn’t do you that much good. Far better to have investments that stand a chance of keeping up with inflation. Since it’s nearly impossible to predict the next 30 years of inflation, you need to hedge your bets in both ways. Pay down your mortgage and invest elsewhere.
There is way too much to this question to answer in a few paragraphs.
But, financial advisors do not make money by making money for their clients. They make money by selling their services and bringing assets under their commissioned direction. Read “Confessions of a Wall Street Insider.”
More simply the question being asked is whether to use leverage when buying a home?
Leverage is useful on an appreciating asset. Leverage will kill you on a depreciating asset. Can you think of any recent examples?
It’s like when my mom’s retirement investment advisor keeps telling her to take money out of the HELOC to fund anything rather than up her monthly income out of her retirement.
There’s some truth to what he says, but only if she sells the house soon such that the HELOC will be paid out of tax-free capital gains (or existing equity) rather than retirement funds which haven’t been taxed yet.
It’s totally clear to both her and me that his goal is to keep as much of her money on hand as possible, rather than her/my goal to have her enjoy life and die with as little money left as possible. (just enough for insurance against longer life and higher medical expenses). He basically feels that her principal needs to keep up with inflation forever…. Which there’s no need for that I can see. Dad didn’t save all that money to pass on to us, he saved it so they could enjoy life without worry.
“Isn’t it funny when you walk into a investment firm, and you see all of the financial advisors watching CNBC — that gives me the same feeling of confidence I would have if I walked into the Mayo-clinic or Sloan Kettering and all the medical were watching General Hospital…”
-Senior portfolio manager, UBS
I think some of it is knowing yourself and your family. If you are the type to spend all the excess income – then you may be better paying off the house, because otherwise you (or your spouse) is going to blow away the moola anyhow. Then if there is a truly rainy day and nothing saved (and by truly, I don’t mean car died want to buy a new car, I mean huge medical problem/unemployment), the savings in the house can get extracted (ex sell it).
But if you are disciplined about savings, the answer may be yes or may be now, depending on economy, inflation, taxes etc etc.
should be “may be yes or may be no”
Thank you John, cara, awgee and Anonymous for your answers. Seems there is no rule-of-thumb to go about this and a mixed approach seems to make sense. Probably the current investment environment may have to do with the big down payments we are seeing in Irvine. But I wonder if this is short-sighted if those people are putting most of their savings down. It appears having the liquidity could offer them a better flexibility to make up for any loss even if their house depreciates in value in the long run. So, does Eric’s recommendation still make sense even if the house depreciates in value ? Of course this is assuming that the alternate investment performs well in the long run, which could be likely given the flexibility to adapt the portfolio. Just speculating from common sense that is devoid of any training in finance…
“AZDavidPhx: When he stops paying, he will lose his privilege to live in the house …”
… but he will receive privilge to live in rented house.
Paying low rent may be much better then paying underwater mortgage + PMI + taxes + hazard insurance + hoa fees + mello roos + repairs, isn’t it?
Home ownership has some benefits, but most of them are exaggerated or outright fiction.
People want to be homeowners so that they can have a reason to go to Home Depot. If you rent it would be crazy of you to paint your rental at your own expense, but if you own you can justify being at Home Depot on the weekends. I guess you need new Hobbies after you have been married a number of year and that is where being a homeowner and Home Depot fill the void
Hehehe…
Bravo to you! Getting straight to the center of the human psyche.
Your statement may at first sound ridiculous, and few people will admit that it’s true. But from what I observed:
for a lot of people (not all people), getting married, buying a house, having kids, are because people get bored with their lives, need changes, keep themselves busy…
Ironically, your life WILL unequivocally become more complex with each stage, and more headaches, and the result is misery, not happiness. And then people ask themselves why their lives are so miserable. 🙁
“financial advisors do not make money by making money for their clients. They make money by selling their services and bringing assets under their commissioned direction. Read “Confessions of a Wall Street Insider.””
This is correct. My brother was a financial advisor for just over a year. His personal moral and ethical standards got in the way and prevented him from advancing his career any further. He charged his clients a fixed annual fee for his services, and most of the actual investment allocation was done by an automated system. My brother ran for the doors when he was instructed to heavily push reverse mortgages and annuities on some elderly clients, when he knew deep down it wasn’t in their best interest. It was no coincidence that the companies offering the annuities and reverse mortgages were handing out all sorts of incentives and perks to the managers and advisors.
Meanwhile his best friend continued to play the game (and still is there today), with several promotions in a very short period of time to his current position as a regional manager where he earns a very generous salary (if ‘earn’ is the appropriate word).
Wake up!!!
Regular “financial adviser” is nothing else but simply another name for low life salesperson, who sells financial products. Even kids know that.
Real financial advicer must be paid directly by client and never by somebody else. Good one is not much cheaper than good attorney.
At least did something for the middle-class with the Mortgage Tax Relief Act. I got caught up in the fraud bubble, and now my 20% is loooong gone down the river funding extravagance for some wealthy individuals. I’ve been reading these blogs for years now when I figured out I got hoodwinked. I should have known that anything other than a 30 year fixed rate within my means to afford, was a recipe for disaster, but I didn’t know that fraud was at the creation of this “mortgage wealth”.
I actually received a loan mod, no principal forgiveness, and low interest rate. There will be principal forgiveness one way or the other, either by the banks, or by foreclosure, doesn’t really matter to me, I am ready to give up the home. Hopefully the price of homes will drop to become more affordable for those of us who have been gainfully employed for more than 20 years. I’m getting tired of the hamster wheel, and soon I will stop, and then everyone here can call me names 🙂
@ Swiller
Not going to call you names, but wish you well. If you should end up in foreclosure, rebuild your credit and once you can buy again – should you so choose – hopefully the economy & housing market will have worked through this mess & housing will have come back down to earth.