Public attitude toward commercial borrowers who strategically default is much different than it is toward commercial borrowers. Today, we explore this difference.
Irvine Home Address … 29 BURLINGAME Irvine, CA 92602
Resale Home Price …… $579,000
{book1}
Do you live, do you die, do you bleed
For the fantasy
In your mind, through your eyes, do you see
It's the fantasy
30 Seconds to Mars — The Fantasy
Home debtor fantasies
The endless parade of Bailouts and False Hopes serve to give hope to the hopeless and keep them paying their mortgages rather than strategically default. Those who are underwater and making payments in excess of rent have two real alternatives and two fantasy alternatives. The real alternatives are (1) continuing to pay until they implode or (2) strategic default. Neither option is very satisfying as both generally lead to bankruptcy later on.
The fantasy alternatives are (1) the re-inflation of the housing bubble giving debtors equity again and (2) government mandated principal reduction to give debtors equity again. Neither one is going to happen. The overhead supply of distressed housing units will eventually need to be sold, and in the process, the best case is for prices to hold steady with super-low interest rates. Principal reduction is the ultimate debtor fantasy, and it will not happen because it would require massive theft by the government with a direct transfer of money from the State to individual debtors with the commensurate moral hazard. That's the kind of thing that sends rioters into the streets besides costing trillions of dollars.
Since the real options are bad, most will cling to the fantasy, and in the process, they will continue paying their mortgages until they implode or get pissed off enough to default.
Strategic Default
Some have expressed a concern that I have gone soft on HELOC abusers and those who strategically default. I have made it clear that I believe Foreclosure Is a Superior Form of Principal Reduction because it has consequences for the borrower. I have no desire to see those who over-borrowed be given a free pass. My endorsement of strategic default is a recognition of the lesser of two evils. Strategic default is the better of two bad alternatives; when faced between a life of servitude and a walking away from a huge debt, walking away is the better choice. Both alternatives have negative consequences — as they should.
It irritates me the lengths lenders are willing to go to manipulate people to keep paying for the lender's mistake. Lenders Are More Culpable than Borrowers, and their consequences should be more severe. The fact that lenders would sentence families to a lifetime of servitude to pad their bottom line is wrong, and I will continue to speak out against it.
Why aren't commercial defaulters labeled as evil?
Borrowers who strategically default on commercial real estate aren't immoral thieves or hysterical fools as their residential counterparts are made out to be. When commercial borrowers strategically default, they are "extinguishing debt" to produce "positive results." The contrast between the attitude between commercial borrowers and residential borrowers is remarkable.
MPG Office Trust Eliminates Debt Obligation on 17885 Von Karman in Irvine, California
LOS ANGELES, May 26, 2010 (BUSINESS WIRE) — MPG Office Trust, Inc., a Southern California-focused real estate investment trust, today announced that the company has extinguished the $26.4 million construction loan obligation secured by 17885 Von Karman in Irvine, California. The Company contributed approximately $2.0 million in reduction of the loan, turned the property over to the lender pursuant to a deed-in-lieu transaction, and was relieved of the $26.4 million obligation and a $6.7 million repayment guaranty. The loan was scheduled to mature on June 30, 2010.
They strategically defaulted. They took a look at the numbers and determined it was not in their best interest to keep paying, so they didn't. When residential borrowers make the same calculation, they are decried as immoral or stupid and they are blamed for the collapse of the US banking system; however, when commercial borrowers do it, they are lionized as great financial thinkers who are looking out for the best interests of their companies.
MPG Office Trust President and Chief Executive Officer Nelson C. Rising commented, "Our efforts that started two years ago to reduce debt, eliminate repayment and debt service guarantees and extend debt maturities continue to produce positive results. In addition to the transaction announced today, earlier this month, we made a principal payment of $9.7 million on the 207 Goode construction loan and in exchange, the lender agreed to substantially reduce our repayment guaranty on this loan. We are currently marketing the property for sale. As a result of meeting the prescribed debt service coverage ratio for five consecutive quarters, the Company eliminated a debt service guaranty on a $109.0 million mortgage secured by Brea Corporate Place and Brea Financial Commons in Orange County, California. The Company also extended the maturity of this loan to May 1, 2011."
These guys are cramming down lenders on every deal. Lenders are going to lose a fortune on the actions of commercial borrowers just like these guys, yet when they do it, the strategic default is considered positive.
Maguire Properties swings to profit
May 11, 2010: By Roger Vincent, Los Angeles Times
The Los Angeles real estate investment trust reports first-quarter net income of $18.6 million, largely on the forgiveness of a $49.1-million debt.
Long-suffering office landlord Maguire Properties Inc. on Monday reported a first-quarter profit linked largely to the forgiveness of a $49.1-million debt it was unable to pay.
The Los Angeles real estate investment trust, which owns some of the region's best-known skyscrapers including the US Bank Tower in downtown Los Angeles, finished the quarter with $18.6 million in net income attributable to common shareholders, a dramatic contrast from the $53.9-million loss reported a year earlier.
Finances in both quarters were influenced by significant one-time events, however.
This year, Maguire was forgiven $49.1 million in debt on Griffin Towers, a Santa Ana office complex it sold in March as part of a long campaign to reduce its liabilities. It also recorded a $16.6-million deferred gain on the 2006 sale of a parking garage in downtown Los Angeles. The first quarter in 2009 was affected by a $23.5-million write-down of the value of an Irvine office building and other charges.
Maguire reported a profit of 38 cents a share in the quarter, compared with a loss of $1.13 in the same quarter of 2009. Revenue was down 2% to $111.5 million.
"Revenues are flattening and their leasing seems to be going at a stable pace," said analyst Craig Silvers, president of Bricks & Mortar Capital. "They seem to have stabilized their operations."
Just like any debtor, when they quit paying their debts, their cashflow situation improves. Not exactly a news flash.
She couldn't afford it
- The previous owner purchased this property on 6/13/2005 for $665,000. She used a $498,750 first mortgage and a $166,250 down payment.
- When she purchased, she got a HELOC for $99,750, but it doesn't appear she used it.
- On 12/29/2005 she obtained a $200,000 HELOC which I don't think she used.
- On 12/13/2007 Bank of America refinanced her first mortgage for $417,000 and gave her a second mortgage for $168,000.
- Total property debt is $585,000.
- Total mortgage equity withdrawal is $86,250 which doesn't recover her down payment.
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Total squatting was only about 9 months. B of A did not waste much time in foreclosure.
Foreclosure Record
Recording Date: 12/23/2009
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 09/22/2009
Document Type: Notice of Default
Trustee Flip
This house was purchased for $463,000 at auction on 2/16/2010. Most trustee sales go off about 15%-20% under comps. This seller is hoping to get an extra 5%. It is not a bad pricing strategy as it gives them some room to negotiate back down to comps. This is typical of what happens when the lenders finally let one go through the system. Our current backlog is enormous.
Irvine Home Address … 29 BURLINGAME Irvine, CA 92602 
Resale Home Price … $579,000
Home Purchase Price … $463,000
Home Purchase Date …. 2/16/2010
Net Gain (Loss) ………. $81,260
Percent Change ………. 25.1%
Annual Appreciation … 69.0%
Cost of Ownership
————————————————-
$579,000 ………. Asking Price
$115,800 ………. 20% Down Conventional
4.87% …………… Mortgage Interest Rate
$463,200 ………. 30-Year Mortgage
$118,120 ………. Income Requirement
$2,450 ………. Monthly Mortgage Payment
$502 ………. Property Tax
$125 ………. Special Taxes and Levies (Mello Roos)
$48 ………. Homeowners Insurance
$348 ………. Homeowners Association Fees
============================================
$3,473 ………. Monthly Cash Outlays
-$417 ………. Tax Savings (% of Interest and Property Tax)
-$570 ………. Equity Hidden in Payment
$217 ………. Lost Income to Down Payment (net of taxes)
$72 ………. Maintenance and Replacement Reserves
============================================
$2,775 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,790 ………. Furnishing and Move In @1%
$5,790 ………. Closing Costs @1%
$4,632 ………… Interest Points @1% of Loan
$115,800 ………. Down Payment
============================================
$132,012 ………. Total Cash Costs
$42,500 ………… Emergency Cash Reserves
============================================
$174,512 ………. Total Savings Needed
Property Details for 29 BURLINGAME Irvine, CA 92602
——————————————————————————
Beds: 3
Baths: 2 full 1 part baths
Home size: 1,782 sq ft
($325 / sq ft)
Lot Size: n/a
Year Built: 2000
Days on Market: 63
Listing Updated: 40276
MLS Number: S610651
Property Type: Condominium, Residential
Community: Northpark
Tract: Brib
——————————————————————————
This property is in backup or contingent offer status.
ABSOLUTELY STUNNING!!! This highly sought after floor plan is located in the exclusive gated community of Northpark. This charming home is very bright and open, featuring upgrades such as granite countertops, custom tile flooring, high-end appliances, fresh paint, brand new Berber carpet, and much more. This home is completely turnkey and ready for you. There is an attached 2 car garage with plenty of guest parking. There are resort style amenities with a nice clubhouse, pool, spa, greenbelts, and other great design features in the community. This is HIGH END living at a very affordable price. It is in a great school district, and close to plenty of shopping with easy freeway access. This is a MUST SEE!
CRE defaulters should be seen a lot worse than people who are defaulting on their primary residence, the same way that people defaulting on rental homes or specuvestments defaulting should also be seen worse. There’s a major furniture showroom here (hundreds of sqft that is used for an international convention) whose owners are strategically defaulting. They are doing this to improve their debt renegotiating position, or to just shed the liability. It’s a non-recourse loan.
Foreclosure and getting evicted had somewhat of a stigma. The NYTimes article showed that at least in west FL, the stigma is pretty much gone. There are a lot of people who would be better off trading the mortgage payment for a rent payment – whether through the investor purchase/rentback method you talk about or from moving. I don’t like the idea of people living rent-free, and would rather see banks take some incentives to get properties into payers hands – cash for keys? The big push with gov’t intervention has been foreclosure mitigation though, and that shows a degree of ‘not getting the problem’.
Do you think banks would foreclose faster on a home w/equity for the potential of making money on the deal, relative to a deep underwater loan that they might be marking to myth?
During the Great Depression, banks were faced with this same dilemma, and they often chose to foreclose on the debtor with equity and let the underwater borrower squat. The unfairness of this practice was decried by many, but it made sense for the banks. First, it released their much needed capital, and second it delayed recognition of a loss they couldn’t afford to take because they didn’t have the capital. The prudent borrowers were foreclosed on first to obtain the capital reserves to later foreclose on the imprudent.
Would the GSE’s have any type of refi program for people with enough equity, but with a temporary loss of income? With all the effort going into foreclosure mitigation, it’d be nice to have it channeled to those that can actually be helped.
The current loan modifications programs have this feature. In fact, that is their real purpose. Unfortunately, this disaster was caused by excessive debt most homedebtors cannot afford. If the problem was only unemployment, loan modification programs might be successful, and for those who are temporarily unable to make payments, these programs will help. Unfortunately, temporary inability to pay is such a small percentage of the problem that loan modification programs will not positively impact the market.
And look at what they are doing with FHA. How many of these new house debtors with 3.5% downpayments are going to find themselves both unemployed and underwater over the next several years? There are no indications that the job market is improving any time soon. What kind of a fool takes out a 30 year loan in this volatile environment? Worst part of it is that the government is co-signing all of these turds with a bunch of hot air.
IR, you make a good case for the ethical neutrality of strategic defaulting. I agree to the extent that there actually ARE consequences to defaulting. A buyer who puts zero down and then strategically defaults is presumably covered by Internal Revenue Code Section 108(h) – the basis of the property is reduced by the relief of debt, so in essence the house is handed back to the bank for no gain. I do not like that code section, but the law is the law, I suppose.
However, a HELOC abusing slob should not qualify for Section 108(h), at least to the extent they take money out of the property (Section 163(h)(B)). Since most of the people profiled at IRB seem to be in this second category, we should have thousands of people who will eventually get 1099s from their friendly note holder.
I have no issue with someone who defaults and is prepared to take the consequntial tax hit. If the bank loans you money that you don’t pay back, you have taxable income. The question is, is this really happening? Are the banks really issuing the 1099s?
Eventually, the banks will write off this debt and issue 1099s. When they give up collection efforts or go to sell the loan to someone else, they will issue the 1099. If lenders don’t do this, they cannot recognize the loss on their own books and take a tax deduction for the loss. This is the hidden time bomb from all the market-to-fantasy accounting.
To be honest, I get giddy thinking about HELOC abusers getting these 1099s in the coming years….
This is true unless the government creates policy to forgive this debt and directly compensate the banks for the loss.
What is more likely?
I think it very unlikely that the debts will be forgiven and the losses directly absorbed by taxpayers for a variety of reasons. I am sure the idea would be popular among underwater homeowners and imprudent borrowers, but they do not represent the majority of the country, and even if they did, the backlash among the rest of the country would scare any pandering politicians from actually doing it.
Debt forgiveness policy has been standard American practice and will become even more prevalent.
Student Loans will be next. The bankers will be bailed out after students default in mass. Who knew someone getting a bachelors degree in women studies or relgious studies couldn’t pay off that 100K loan. That debt will be forgiven as well, paid for by the tax payer.
Who could have known?
But it was a degree from NYU! You are guaranteed a “good job” as long as you “pay whatever it takes” to “get the degree”!
MOoooooOoooOOOo!
David, I’m sure these defaulting students also run up insane credit card bills while at school that they will also default on. It’s not enough that they get to study whatever useless degree they want on the tax pagers dime, they also need to maintain a certain life style.
The banks don’t give a Sh!t if they ever pay it back, the tax payer will step up and absorb the loss. The poor students will be forgiven, how could they know their useless degree wouldn’t yield a high paying job?
So that’s where we are now? Everybody run up debt and then just default and the tax payers will pick up the tab? I wonder what would happen if I were to go to my neighborhood Best Buy and max my credit card and then stand there and announce that I will not pay a single dime for these purchases and that everyone there will end up paying for me. All the while I get to enjoy the luxuries the tax payers have given me. Sorry but the outrage at the very idea is boiling over.
I agree with Obama and those who believe that the USA needs a well-educated population and workforce to compete and have any hope to excel in a global society and economy, but they need to be much clearer and more deliberate about what constitutes “education”. Probably a couple of hundred degrees in women’s or religious studies are fine in a country with the population and diversity of the US. But when you add up all such students in those and so many similar degree programs, you are left with a whole lot of very mimimally useful education. For that matter, there are a lot of high schools keeping up their football and swimming programs as well, while presenting the only choices as cutting teachers from the classrooms or raising taxes.
I think the people will just accept it. We are collectivist/statist and every voter/politician feels the need to have good intentions.
You can give everyone an education and load them up with either a student loan or increased tax burden OR BOTH, but if the jobs don’t exist, what is the point?
Planet Reality – HUH? You base this student loan forgiveness scenario on what exactly?
There was an article on Yahoo news earlier today talking about a NY Grad that was $100,000 in debt and was hopeless about *ever* paying it back. There was talk in the article about it being a point of interest in the coming years. Great….yet another bailout.
“To be honest, I get giddy thinking about HELOC abusers getting these 1099s in the coming years…”
It’s like the feeling of Natalie Portman’s warm breath on my neck.
You can get giddy all you want. Just Chapter 7 the entire debt ship.
Oh wait…we need people to be publicly stripped, beaten, possibly raped and/or waterboarded in Guantanomo, and then incarcerated for Bubba Republican to use as slave labor.
The banksters? Well we ought to bow down and kiss their feet. I mean after all, without USURY, the world would be a horrid despicable place. How could anything even be accomplished without the mighty simply looking down at us as we labor?
Yes It the Republican’s who are at fault. The Democrats have been crapping roses during the last 40 years.
Yes, publicly stripped, beaten, raped and some waterboarding too just for fun; that is what everybody who disagrees with Swiller is obviously in favor of promoting.
I would also add to Swiller’s observations that the defaulters be hung, drawn and quartered, or crucified on makeshift crosses or taken out on some old pirate ships to the middle of the ocean and be told to walk the plank.
Many can go through Chapter 7 and wipe out the entire debt, and many should. The consequences balance the scales, and life starts over. That is great.
The part that makes me giddy is all those who feel like they get to avoid the consequences of their actions being accountable. It isn’t about meting out punishment. People need to learn and not do it again. The ones who walk away without consequence will almost certainly do it again if given the chance.
Well put, and I AGREE. Just hold both the people who control the finances (i.e. banksters) held to the same policy as you and I.
I think the idea that business and personal values are different is one that is on par with the reality of TV shows in the 1950’s.
If people go insolvant, so should banksters. If people are forced to pay back onerous loans, then so shall the financial institutions. The part that pisses me off is that people here agree it makes good business sense to dump and run, while at the same time, hold PEOPLE accountable to a higher standard than business. That’s wrong as well. Stop being hypocritical. The LAW needs to be changed in order to protect the part of society that exhibits self-control.
And yes David, I disagree with you on about 90% of what you type. You would be singing a different tune if $100,000 grand of your hard earned cash disappeared. I understand the anger at the peopel who gamed the system, but not everyone gamed the system, many were just victims of the grand scheme of fraud.
The scheme was bi-partisan, I just picked out Bubba Republican because they are so hardcore on prison sentences for even minor offenses like trying to get a prostitute (can get one on OC Housewives for a few million bucks, why not get one for a hundred from the massage parlor? I fail to see the difference in currency exchange for access to female anatomy) or partaking in certain drugs that only affect the user, or getting married while gay…or…or….or…
What do you mean I would be singing a different tune if 100K of my own disappeared? These house debtors are agreeing to pay X amount for a house. There is nothing that entitles the borrower to recoup one dime of his money in the contract. The borrower promises to pay X – there are no ifs ands or buts. The borrower shall pay X amount so long as the fair market value of the property remains greater than Y. That would be ridiculous.
When I look at houses I look at the price in terms of what I am willing to pay back regardless of what gains or losses will be had. Any other type of thinking is founded in speculation.
If you purchase a house without the intent to repay every penny that you borrow then you are engaging in speculation that you will not have to use your own money to repay the debt. People who do this and get burned are not my concern.
I say do the honorable thing and make good on your debts.
“I say do the honorable thing and make good on your debts.”
Agreed….but many can’t, because the banksters weren’t regulated and were allowed to run wild, and then turn around and get money back from the taxpayer.
The people leaving the homes are getting to live there free, but it wouldn’t make any difference anyhow, as many of the homes around here sit empty for months. Sad, I would rather that owner have saved his/her pennies to move on.
Maybe you’re right David…maybe I’m just too bleeding heart when the poor bastards losing their homes deserved too because it was inflated…I just have a hard time swallowing that bailout for the banksters while my co-workers, neighbors, and yes, even fellow church attenders, are losing their homes.
What is the % rate of people losing their homes? Do you look around with disgust at the 10% of the people around you? AZ NV FL CA all in the top 5 for defaults. These are people around us and in our families…are they all pond scum to you?
Yes, I am sure that if you look up “usury” in the dictionary you will find a description of a 0% down, 1% teaser-rate, interest only mortgage adjusting in three years to a whopping 5% interest rate. Yeah, old Shylock had nothing on these guys.
Swiller seems to think that expecting people to pay back cash they borrowed is some kind of theft.
Freetrader: “I have no issue with someone who defaults and is prepared to take the consequntial tax hit.”
OK. Please, give me $10M loan. I promise to pay $3.5M taxes after default.
🙂
Ok Bullock Investor…here’s 10 million, I want it back in addition to the 3.5 million, if you can’t pay, we will incarcerate your wife and kids until you can pay.
I’m sure plenty here would agree to this sort of law and order….right?
Yes troll, Yes.
Just give me $10M in cash. You will see what is next, my dear idiot.
That’s right — because the lender was the idiot who loaned the money in the first place. When people do stupid – even dishonorable – things like borrow money and then don’t pay it back, they should at least suffer the ‘contractual’ amount of suffering — in this case, a bigger tax bill and a ruined credit rating. If someone defaults after considering those consequences, then I’ve not really got any problem with that decision.
What’s amusing to me is that some people seem to think that the borrower shouldn’t even suffer that minimal level of pain — as if the bank was involved in some sort of conspiracy and should be punished even further for stupidly making a bad loan.
IMHO, there’s a big difference between commercial and many residential borrowers.
Commerical borrowers tend to have money in the deal so when they walk out from a property they lose their money.
Many of the underwater residential borrowers had no money in the deal at all, having borrowed 100% of the home. When they walk they take no immediate financial loss.
I figure anyone who walks out from a loan in which they have money (significant downpayment) are incurring immediate pain and so we take a different look at them than we do towards those who went in with a naked option (no money down).
The latter group is the one that should be taxed, tarred and feathered… and the banks that issued those stupid loans should take the losses.
Also, the commercial properties are not a total loss as they can be re-allocated for a productive useful purpose. Unlike a house which produces nothing and is more of a consumptive expenditure.
Anyone who gives strategic house defaulters a free pass must also agree that pre-paying 30 years of cell phone service with a credit card and then stopping payment on year 2 when a cheaper plan somewhere else is introduced is perfectly acceptable behavior and the defaulter should not have to pay the remaining balance of his bill.
Let residential and commercial debtors be treated equally. Sell off all the assets for what the market wil bear. Issue a deficiency judgement and let the defaulter pay back the rest. It’s perfectly reasonable a fair.
CRE is not necessarily ‘not a total loss’. Lots of CRE will not be used because it represents excess capacity that will take years to absorb. Also, homes can still be rented, which is nearly the same as a lot of CRE. CRE could be a hotel, which is not much different than a vacation home.
The solution to the over capacity problem is to lower rents. When rents find their bottom, the vacancy dilemma will be solved.
The problem is that the landlords don’t want to adjust to the new way of things as they want the rents of the bubble era to return.
Ok David, so you are all Gung-Ho for people to have their property re-possessed when they can’t pay the outstanding bill. Well….get ready to move then, because many chinese want their money for all the property they have invested in the U.S.
Dammit, I want the millions and millions of chinese to take back their american properties. Maybe even David himself would be forced to move out from his low cost apartment.
I suppose I would just be renting from a Chinese landlord in that scenario.
Swiller, why are you referring to the property using the words “their property” when the property has a lein atached to it? It’s not their property until they burn the mortgage. This is not anarchy – there is no free lunch. Why strategically default rather than pay what you owe? Why suddenly does the buyer not appreciate the premium he paid to get it when he did?
Should I buy an IPad with a credit card and then stop paying in 2 years when they sell for much less? I could blame the bankster for loaning me the money and call it a business decision to walk away.
You are acting like these people are entitled to write a blank check on a house, default, and then continue to live in the house. How can you seriously justify this? It is madness on your part.
He is being a troll, that is how he justifies it.
Swiller, you’ve got it completely backwards. The Chinese have been giving us money when they buy our properties. Not the other way around.
Strategic default is not necessarily handing the keys back. It can be non-payment to improve the negotiating position in a debt restructuring. Debt restructuring – replacing an old loan with a new smaller one – does not cause any immediate financial loss.
Lots of underwater residential borrowers put money into the deals. In SoFla prices are easily down 50%, so you could have put 20% down on a $1M home, and still be $300k underwater. Choosing to let the home go is still strategic default.
CRE borrowers could have heloc’d to increase their debt level above the original purchase price, making them the equivalent of your naked optioners.
Are there any others here who have some coding skills? I’m currently developing a Firefox extension called “Alternate Reality” that replaces every comment by Planet Reality with the text,
“Blah blah blah blah. Blah blah blah. Blah blah blah blah blah blah blah. Blah blah blah blah…”
It’s not that I disagree with him/her, but that’s what I’m starting to read when it comes to his/her back-and-forth chatter. It should be a fun project!
I’m a fair guy, so I’ll be sure to make it configurable so that it can be done for any user, and replace it with any word (not just “blah”).
You could go to USC school of engineering and pay for it with student loans to learn how to write plug-ins and silence PR. Then according to PR your loans will be paid by the tax payer.
Has kinda of a circular ying-yang quality to it.
I have sometimes wondered if PR is really an ELIZA bot.
Far out, my family had the Eliza program on our mac in the late 80s and early 90s when my sisters and I were growing up and we loved messing with it. My favorite was this exchange:
Are you saying no just to be negative?
No
You are being a bit negative.
…also the thing would postively freak out about names. “I do not care to talk about names.” Jees, Eliza, lighten up dude (or lady)!
A true strategic defaulter is in no danger of bankrupcy. There are many defaulters that aren’t strategic-those with a job loss or had their payments reset or recast at a higher level or the like. But to be an actual strategic defaulter, one has to be able to easily afford the payment, but chooses instead to walk away merely because the value of the house has dropped and they no longer have any equity. If they continued to pay, they wouldn’t “implode”, but they choose to stop completely volantarily, without being forced.
You are right. I should write a more nuanced description. The true strategic defaulter could wait out the downturn and not implode.
In my estimation, most people who strategically default are not truly strategically defaulting but simply accelerating the inevitable. Many, many borrowers simply cannot afford the terms of their loan agreements, and although they may be able to make the payments for a time, eventually they will need to sell their homes to get out from under the massive debt. I believe posters like Perspective who truly can afford their house payments are more the exception than the rule. Most strategic defaulters are simply choosing to accelerate a process already in motion.
I completely agree with this. I walked away and it wasn’t because I couldn’t afford the payments at the time, but because it was very unlikely that I could pay them when the teaser rate was done and the payments were reset. Additionally, I wanted to take the credit hit as soon as possible so that if we wanted to buy again in the future we would be further removed from the foreclosure. Since I was foreclosed early last year and I felt that bottom of the market would be somwhere in 2012-2014, it made sense on two levels.
Interestingly, several of our neighbors at the time felt that they would be better off settling the second mortgage on their homes for 7-10% of the balance and then riding out the downturn. They are all seriously considering walking away now after paying the $10k on the second and paying an extra $500-$1500 a month on their mortgage (as opposed to renting) over the past 18 months for a house they will likely never own or have equity in. If they decide to walk now, they will be ~$25k worse off than if they had walked when we did and they will be 2-3 years behind us in terms of credit recovery.
Aw, c’mon now Partyboy, you are opening yourself up to the rank and file here who want scumbags like yourself whipped and bathed in salt water.
Anyone who is on THIS side of getting de-frauded has a much different attitude than the renters. But from the wailing cries and gnashing of teeth that comes from these “wise” and “patient” individuals, I’m beginning to suspect that they are not such good people at heart and are only wanting to profit themselves. Gee, imagine that.
I would actually just like to buy a house that is not in the ghetto for 2x to 3x my income. This was very doable up until about 1998.
It has nothing to do with being a good or bad person.
Is it fair to me that I rented and lived below my means while PartyBoy was living beyond his means, borrowing what he did not intend to pay back? I don’t think that is very fair.
Is it fair to me that my savings account is paying less than 1% interest so the banks can pay off the bill that PartyBoy left?
Is it fair to me that my taxes are redistributed to house debtors who make interest payments each year?
What would you like for me to say, Swiller? Yes – please tax me some more, raise prices across the board because people like PartyBoy got in over their heads?
Yes, I see how it is. I am mean spirited.
AZDavidPhx, life is not fair, laws are not always fair, taxes are grossly unfair, but what can you do about it? You can bitch and moan or you can learn the rules of the game and make the best decisions you can. I can certainly understand where you are coming from but your anger is misdirected. Your taxes are not higher because people are defaulting. They are higher because the govt is making the public pay for the banks’ mistakes. It’s not fair for everyone to pay that burden, especially those who have not walked from their homes. But again, your anger is misdirected. And if your end game is to buy a house at 2-3x your income, strategic defaulters are helping to make that a reality. If everyone who took on a huge mortgage from 2003-2006 was making extraordinary sacrifices to pay the mortgage and nobody was walking away, home prices would be at least as high as 2006 if not much higher. If anything, you should consider thanking those who walk away for making your dream of affordable home ownership closer to a reality.
I should be thanking them? How is it doing me some kind of favor? Many stop paying and continue to squat while I pay my rent on time every month. Jingle mail does not irritate me as much, but the strategic default followed by a year of squatting rent free does piss me off.
Prices are going to fall regardless of strategic defaulters if the banks will stop playing games and complete all of the foreclosures. The strategic defaulters are irrelevant.
Party boy — you made the a reasonalbe decision after making a nearly disastrous one when you purchased in the first place. Good for you. But I wouldn’t brag about it.
You have some excellent points there David. I feel the pain of the lack of return on deferred savings as well.
No, I don’t think you should suffer the consequences of anyone else’s behavior, but that wasn’t the fault of the average Joe Homeowner, that was your elected officials.
I wasn’t trying to brag about it but your point is well taken. I was just trying to illustrate the damage done to those who are unwilling to face up to current and future realities. The longer they remain in denial, the worse off they will be. That’s what I was trying to get across.
Luxury Sales Bounce Back
Bidding wars for a $2 million house? In some markets, sales of high-end homes return to levels not seen since the boom
http://online.wsj.com/article/SB10001424052748704717004575268573660359734.html?mod=WSJ_Real+Estate_LEADTopNews
Totally off topic IR, but here is link since you have the knighting picture and are a sci-fi fan:
Capt. Picard gets a promotion — to knight
http://today.msnbc.msn.com/id/37466438/ns/today-entertainment/
That is really cool. I am really happy for him. Thanks for sharing.
What do you prefer?
ABSOLUTELY STUNNING!!
or
DROP DEAD GORGEOUS!!
Do I prefer to be stunned by house or killed? Kind of a tough question. Might have to hold off on answering that question until after having made a few mortgage payments.
The stunned buyers will pay anything, further driving up Irvine prices. Actual deaths caused by the home’s appearance will create a mystique, draw intrigued bidders and further increase the Irvine premium over other areas in this declining market, thereby creating a titanium shield which insulates Irvine from all possible causes of price declines.
The government will continue to prop up the banks, out of public sympathy for stunned and zombie buyers, allowing the banks to keep all Irvine defaults off their books forever. Blessed by the government and the gods, Irvine real estate will undergo a quantum state transition, and be fetishized by cash-flush buyers throughout the cosmos. Confined by the titanium shield, a pulsating, rhythmic hum of sexuality shall be heard through Irvine, and shall persist for the next 10,000 years until, raised to a higher plane of consciousness, the whole of Irvine will achieve pricegasm, and all its mass will be converted to pure enlightenment. The ensuing flash will cast a beacon of hope and spirituality throughout the universe. Each lucky Irvine resident will then smoke a cigarette and proceed to purchase a group of galaxies with his fabulous wealth.
To know one place is the start.
Banksters preferences:
1. Borrowers pay back in full by amortization or selling the place. Helped by #3.
2. FC on a property that has lots of equility will be forecloused quickly. Punish the innocent (#2) and reward the guility (#3).
3. Extend and pretend on a properly way under the sea. Free rent for years.
As for extending, the banksters will delay if you’re a member of the club. Actions by members and their family are spun in the most positive terms by WS, govt and main stream media, while non-members are describled in the worst terms.
Club members usually have corporations to avoid personal liability. While non-club members must be personally liabilable for loss. Non-club members who incorporate must put up assurrances and assets.
Federal student loans are “unforgiveable” unless for non-profit/govt. service or a few other situations. The banks are made whole, the taxpayers take it in the shorts. Not everybody will get years of free rent and not everybody gets 0.25% interest.
When real estate is sold, it is reappraised; thus property taxes increase.
Since homeowners sell and re-sell, state coffers from personal property taxes increases as a percentage of the total state collection.
Then, is this the only time that a commercial property is re-assessed, when the loan is defaulted?
Have the percentages of the state budget collected from business property tax changed much since Prop 13?
When real estate is sold, it is reappraised; thus property taxes increase.
Not neccesarily. If the value of the house dropped since last sale, property taxes would decrease, although such decreases are supposed to occur even without a sale. What you say is true for a property that hasn’t been sold for many, many years, however, since there’s a 2% limit in prop 13 for yearly increases in tax.
Same for commercial properties. However, it is frequently the case that the property is owned by a seperate entity that exists only to own the property, and then when the property is sold, it isn’t actually sold-the entity that owns it is. This way, a commercial property can keep it’s prop 13 value from 1981 or whatever even if it’s sold.
I’ve been waiting for price to go down since 2008
but unfortunately in irvine the prices are WTF.
By now with all the things going around from bail out of banks to living free in house convinced me that prices will not go down as much as we thought six months ago or before that. So I guess I am happy renter for now since my work in irvine I don’t want to drive in traffic and live far in corona or riverside.
I am sure that there are lot of people like me waiting for the price to go another 15% down but with lower interest rate it will not go down and if it goes up then price will fall but monthly payment will be the around same as today.
So how we can make income to debt ratio possible?
or how one can afford the home with their current average income of irvine to buy a home?
It can only happen if the monthly payment is lower
via prices going down more than interest rate goes up.
What you all think who are waiting ?
Thanks.
I suspect rising interest rates are in our future. The current real estate market is on life support. My guess is interest rates stay low for another year or two. I have said from the beginning that I will not even consider buying until after 2012 as that is when OptionARMs should be done crashing.
In the meantime, just kick back and watch the government try to print it’s way out of the mess. If we get a bond crisis along the way then even better.
The current market is the equivalent of “the fools come rushing in – this must be the bottom” on the business cycle.
It’s really a calculation involving long-term plans, family concerns, age, and so on.
I improved my income-to-housing expenditure ratio considerably by moving to Colorado. I’m 44, so I don’t have another few years to wait in a pricey place for things to drop, among other considerations.
If I were younger, with secure long-term prospects in a company in or near Irvine, I would stick it out and wait for the price drop. If you intend to raise children in Irvine, it’s worth staying, IMO.
But, if you’re not tied down by family concerns, or you don’t feel your current employer will necessarily be there for you in ten years, consider leaving the state. I don’t regret it, so far, but it’s always a leap into the unknown.
I still have not adapted to life in a real estate market without criminally-insane pricing. There is excess here, but often it’s California transplants tearing down $280,000 homes, building huge stucco behemoths, and then trying to sell them for $600,000.
BoA-mods
How many suckers are going to take them up on this new little shell game I mean earned principal reduction.
Monthly payment voodoo being pitched as a principal reduction. I love it. BoA loves you – bend over and say “Moo”.
IrineRenter,
Your blog has been cited on:
http://www.businessinsider.com/massive-refinancing-during-bubble-years-a-ticking-bomb-2010-6
Some one posted the % of RE by business and residential per and post pro-13. Surprisingly and unexpectedly by the voters, the % paid by residential has gone way up, while % for commerical RE has gone way down. The implications are that the new owners are carrying excessive taxes, while the old residential and commerical are getting subsidized rides on the new comers and younger generations.
Don’t you wish you were a boomer?
“The implications are that the new owners are carrying excessive taxes, while the old residential and commerical are getting subsidized rides on the new comers and younger generations.”
That was precisely the idea behind Prop. 13. The law has functioned as designed; there were no arguments between its supporters and opponents on this point.
Sometimes legislation functions precisely as predicted.
The main goal of Prop. 13 was stop the increases CA spending and stop forcing fixed income old folks out of their house by increased property taxes.
IMHO and as a support of Prop. 13, it has been a dismal failure to stop the rampant CA spending.
Fixed-income old folks who could sell their houses for fat stacks o’ cash if they were too indigent to pay the property tax, and live the rest of their lives in a luxury rental. Plus, they could transfer the asset to their children without losing the tax base, with the result that there are now people living in $800,000 houses paying 1969 property tax rates on them.
The effect was to limit buying and selling, keeping many houses off the market for decades and contributing to further price appreciation by constraining supply.
It was a return to the old ways, indeed: the ways of landed aristocracy and feudalism.
High taxes are bad, but Prop. 13 was the ultimate reactionary solution: an ill-conceived tantrum.
“The implications are that the new owners are carrying excessive taxes, while the old residential and commerical are getting subsidized rides on the new comers and younger generations. ”
Well… I’ve been in the same house for eons, and even though we rebuilt, we’re enjoying Prop 13.
So, for those who pick on proposition 13, think about this:
To us the gains and losses are all paper. So why should we have to be on the hook for the irrational exuberance of others?
Put it this way: Why should equity rich, conservative homeowners who do not partake in the real estate bubble be taxed by the idiotic behavior of the banksters and speculative buyers?
Prop 13 is the shield that protects responsible homeowners from the rapacious behavior of Wall Street and the State of California. If it weren’t for it we would have had to sell the house and then rent.
Prop 13 ended up aiding and abbeding the rapacious behavior of Wall Street and the State of California and punishing the younger generation — eating your young. My analysis is that the Prop 13 was twisted by the politicans and business’ until it punished the innonocent and rewarded the guilty. Business just sold the corp to effectively transfer ownership without getting reassessed. The older folks benefited from the increased govt. services without paying for them. It made passive voting block of govt supporter who benefited by didn’t need to pay for the extra services.
Oh, I forgot…
We vote against all hare brained propositions that require more bonds.