Lenders have been concentrating shadow inventory in communities like Irvine with larger loan balances and numerous second mortgages. They foreclose only on rare occassions, and they do so in a capricious manner to combat strategic default and avoid large losses.
Irvine Home Address … 57 SNOWDROP TREE Irvine, CA 92606
Resale Home Price …… $845,000
Keeping my eyes open
I cannot afford to sleep
Giving away promises
I know that I can't keep
I would stand inside my hell
And hold the hand of death
You don't know how far I'd go
To ease this precious ache
You don't know how much I'd give
Or how much I can take
Melissa Etheridge — Come To My Window
As a renter it's hard not to feel a twinge of jealousy for delinquent mortgage squatters. While many of us pay outrageously high rents to live in Irvine, squatters get to occupy their houses for nothing. With a typical single family home renting for $2,500 here, delinquent mortgage squatters are saving $30,000 per year compared to their renting counterparts. Plus, the government is doing everything possible to give them more free money so they can continue to occupy houses they have no business being in.
It must be difficult for many of them to sleep at night. They have made promises they can't keep, and unless their lender forgives their debts, most are going to be forcibly removed from what they consider to be their family homes. How much would they give to relieve that ache? How much more can they take?
To make matters worse for stressed out borrowers, lenders use terrorist tactics to keep more struggling borrowers from defaulting. Each month lenders randomly single out a few squatters to push through the foreclosure process. If they didn't do this, borrowers would know they had several years of free lodging waiting for them if they default. If borrowers knew they could save $50,000 to $100,000 in housing costs through several years of squatting, most struggling borrowers would default. Lenders know this, so they must randomly execute a few to keep the herd fearful and guessing.
This practice is not as random as it would seem. The selection process is first divided up into buckets. One bucket contains small loans with no second mortgages. This bucket is the one getting the most activity as lenders and the GSEs are competing to empty this bucket as quickly as possible.
The second bucket contains large loans on the balance sheets of large lenders and in private securitizations. Lenders randomly select a moderate number from this bucket each month. Since the big lenders (which are also the big servicers) do not have second mortgages on these homes, they are somewhat more eager to process them, although since the loan losses are still quite large, they aren't in any particular hurry.
The third bucket contains large loans with second mortgages on them. These are the most irresponsible borrowers, and the most likely to be distressed. Lenders only select a very small number of these each month to process because they will lose much more money. If the lender is losing on the first mortgage, the second mortgage is a complete loss.
In fact, bucket number three can be subcategorized by whether or not the lender-servicer holds both the first and the second or if the second is with another lender. If the lender-servicer holds the first and the second, this is the group least likely to be foreclosed on. If the lender-servicer only has the first mortgage, they will ruthlessly blow out the second mortgage of their competitors. This partitioning of the third bucket is so brazen that many servicers are risking lawsuits from the asset-backed securities pools waiting for the foreclosure to take place.
In short, lenders are giving the most irresponsible borrowers the greatest squatting benefits because these are the borrowers on which lenders stand to lose the most.
Foreclosure Roulette Revisited
By Sean O'Toole | Jul 7, 2011
Nearly a year ago I opined that banks were engaged in a game of Foreclosure Roulette — a game by which they randomly foreclosed on a few homeowners, while delaying most foreclosures for longer and longer periods of time. The primary aim of the bank’s random foreclosures being that they can’t let word get out that you can stop making mortgage payments and live in your home for free for years on end, as is increasingly the case. Otherwise, millions of underwater, but paying, homeowners might also stop making payments, spelling disaster for the banks.
At first glance current foreclosure sales do seem completely random. Vacant homes sit for months or even years waiting to be foreclosed on, while a family working hard to short sale their home has the rug pulled out from under them. But looking for patterns by focusing on the borrower or even the property assumes lenders care about people, and neighborhoods. That’s not the role of financial institutions. These are corporations, and their focus is on profit and loss. By focusing on where the losses really are, clearer patterns begin to emerge and we now see that this game of chance isn’t completely random. Like in Vegas, the odds are stacked in favor of the house — not your house, the banks.
This behavior may be completely logical, but it is still reprehensible. They are resorting to terrorist tactics, and they are rewarding the most irresponsible. No matter how they go about resolving these bad loans, moral hazard will inevitably result.
First lets look at time to foreclose based on the size of the potential loss. We did this by analyzing 153,956 foreclosure sales on first mortgages from January 2008 through July 2011 for which we had all the necessary data. This includes properties that were sold back to the bank and became REO, as well as properties purchased by investors on the courthouse steps at foreclosure auction. We divided all the loans into two groups: those with balances over $417,000 (the conforming loan limit) and those below. Specifically we were wondering if banks took longer to foreclose on larger loans, where there tend to be larger losses, than on smaller loans. The answer is clear: yes, the size of the potential loss absolutely matters. Not only that, but time to foreclose doesn’t diverge until the government intervened in the foreclosure market in early 2009, with, for example, changes to the Federal Accounting Standards Board rules on mark-to-market.
Amend-extend-pretend began in earnest in mid 2008, and the results became apparent in early 2009 as Mr. O'Toole's data shows. This also corresponds to the buildup of shadow inventory.
In July 2011, the average loan balance on foreclosures with a loan balance greater than $417,000 (the red line) was $616,000, and the average current market value was $404,000, resulting in an average loss of more than $250,000 per loan after sales costs.
Compare that to loans with a balance less than or equal to $417,000 (the blue line). On those loans the average loss was closer to $115,000 on an average loan balance of $274,000 and with an average current market value of $176,000.
The truth is that the larger the loan balance you have, the more upside down you are in the home, and the bigger the loss for the lender, the better your chances are of not being foreclosed on for a very long time.
This nuance is important for anyone considering strategic default. If someone is considering defaulting on a $100,000 loan, I wouldn't count on much squatting time. Perhaps they will get a year or two, but the GSEs are processing their bad loans at a relatively rapid pace. However, if someone is considering defaulting on a $1,000,000 loan — and we have a lot of those in Orange County — chances are those borrowers will get to squat in their McMansions for the foreseeable future.
In other words, for all of you renting and waiting for prices to drop, lenders are allowing the deadbeat borrowers to stay in the house you want to buy without making any payments. You are stuck renting while they are getting to live in what should be your house for nothing.
Next lets look at the time to foreclose based on the number of outstanding loans. Some have suggested that many servicers have a conflict of interest in that they service first mortgages on properties on which they directly hold the second mortgage in their own portfolio. In fact, Representative Bradley Miller D-NC, introduced a bill, H.R. 4953, to specifically eliminate this conflict of interest; saying at the time “Their stance does seem largely driven by accounting concerns — they are trying to maintain the fiction that the mortgages are worth the value they are carrying them at on their books.” It turns out that there is a dramatic difference in the amount of time it takes servicers to foreclose on first mortgages when there is also a second mortgage on the property, as shown below.
The blue line indicates the average time to foreclose for properties that only had one loan; and the red line indicates the average time to foreclose for properties that had two loans. While there is a notification requirement when foreclosing on a property with a junior lien (a second mortgage for example), this is easily accomplished within the standard foreclosure timeframe, and first mortgage holders have no other duties to protect second mortgage holders, so there is really no other reasonable explanation that we can think of for this significant difference in timing outside of the conflict of interest issue that some have suggested. Note that like time to foreclose by loan balance above, the lines don’t start to diverge until early 2009, when mark-to-market rules were loosened.
The evidence is clear. Lender-servicers are not foreclosing on loans where they would be wiping out their second mortgage. This is also an important nuance for those considering strategic default. If someone has a first mortgage and a second from the same lender, they are much more likely to be allowed to squat indefinitely than if their second is through a different lender.
The basic idea behind mark-to-market accounting rules is that if an asset that you have on your books drops in value, you should recognize that loss on your books and write down the value of the asset on your books. When Treasury Secretary Paulson announced TARP in September 2008, he made it clear that he didn’t think banks should have to write down these assets to or be forced to sell them at what he believed were distressed prices.
This merely underscores the complete lack of understanding of the problem in our government. Prices were not distressed in 2008, and they are only distressed now in a few markets. Prices were in fact quite elevated and needed to come down. Allowing banks to pretend merely delayed the inevitable. It did not fend off a write down that did not need to occur.
After that announcement, considerable pressure was put on the supposedly independent Federal Accounting Standards Board (which writes the accounting rules these companies must follow) to ease the rules that require companies to mark assets to current market values. It occurred to me at the time that it was a ridiculous notion as properties weren’t selling at distressed prices, they had instead returned to normal prices after being artificially inflated in a major credit bubble. Regardless, I think there is little doubt that the changes to these rules were necessary in order for the banks to pass the stress tests that were undertaken shortly after this accounting change was pushed through.
So while we still think foreclosure roulette is the bank’s game of choice, we now also believe that the number of chambers in their gun, and your likelihood of being quickly foreclosed on, is directly tied to the size of the potential loss that the bank might face. Perversely, this means those who took the biggest loans, on the nicest houses, with the largest lines of credit to buy lots of shiny new toys will also get the most free rent when they strategically default.
And we will also probably allow many of those people to get loans again without much waiting because lenders need warm bodies to buy their REO.
It's a great system we have, isn't it?
A squatter's paradise
The bank currently owns this empty property, but the former owners tried to sell it for almost four years prior to their foreclosure. Do you think they were making any payment during that time?
Property History for 57 SNOWDROP TREE
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Date
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Event
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Price
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Source
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|---|---|---|---|---|---|
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Jul 05, 2011
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Listed (Active)
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$845,000
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SoCalMLS #S665221
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Jun 29, 2011
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Sold (Public Records) REO
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$668,126
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Public Records
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||
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Jan 02, 2009
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– Delisted
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—
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Inactive SoCalMLS #3
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||
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Sep 26, 2008
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– Relisted
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—
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Inactive SoCalMLS #3
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||
|
Sep 25, 2008
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– Delisted
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—
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Inactive SoCalMLS #3
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||
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Aug 27, 2008
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– Relisted
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—
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Inactive SoCalMLS #3
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||
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Aug 26, 2008
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– Delisted
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—
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Inactive SoCalMLS #3
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||
|
Jun 13, 2008
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– Price Changed
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*
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Inactive SoCalMLS #3
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||
|
May 14, 2008
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– Listed
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*
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Inactive SoCalMLS #3
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||
|
May 05, 2008
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– Delisted
|
—
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Inactive SoCalMLS #2
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||
|
Jan 05, 2008
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– Listed
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*
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Inactive SoCalMLS #2
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||
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Nov 16, 2007
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– Delisted
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—
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Inactive SoCalMLS #1
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||
|
Oct 10, 2007
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– Price Changed
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*
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Inactive SoCalMLS #1
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||
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Aug 30, 2007
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– Price Changed
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*
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Inactive SoCalMLS #1
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||
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Aug 12, 2007
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– Listed
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*
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Inactive SoCalMLS #1
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||
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Sep 20, 2006
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Sold (Public Records)
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$1,024,500
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Public Records
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||
My records show the first notice of sale in April of 2009. If a lender is prompt in their filing — and in the deflation of the housing bubble, they haven't been — the borrower stopped making payments at least 6 months earlier. That puts his last payment back in November of 2008 at the latest. 
Foreclosure Record
Recording Date: 08/25/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 04/21/2009
Document Type: Notice of Default
The foreclosure auction took place on June 29, 2011, nearly three years after he quit paying. When this property was purchased for $1,024,500, the borrower used a $716,850 first mortgage and put $307,650 down. In this instance the lender gave the borrower ample time to sell the house to recover some of his down payment. It didn't happen, so now the lender has the property and is trying to sell it for an amount that will make them a profit. They need to make it when they can.
If the lender gets this price, the former owner would feel like a fool leaving any equity in the property. Of course with a $4,000+ per month cost of ownership, this owner recovered $120,000 in savings during his 30 months of squatting. I guess that makes it a win-win.
——————————————————————————————————————————————-
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599
sales@idealhomebrokers.com
Irvine House Address … 57 SNOWDROP TREE Irvine, CA 92606
Resale House Price …… $845,000
Beds: 4
Baths: 2
Sq. Ft.: 2803
$301/SF
Property Type: Residential, Single Family
Style: Two Level, Traditional
View: Reservoir
Year Built: 2006
Community: Columbus Grove
County: Orange
MLS#: S665221
Source: SoCalMLS
On Redfin: 17 days
——————————————————————————
Welcome to Lantana at Columbus Grove in Irvine!!! Enjoy the several amenities including association barbeque, club house, recreational facility, parks, association pool, greenbelts and more. Walk, drive or bike over to the District at Tustin Legacy which is Orange County's newest shopping, dining and entertainment destination. After a long day, return to your own sanctuary; park inside your 3 car attached tandem garage, relax in your spacious 4 bedroom, 3 bath home. Start up the fireplace, enjoy a cup of coffee or soak in your master bedroom tub. The gourmet kitchen includes stainless steel appliances, granite counters, breakfast bar and a walk-in-pantry; this kitchen will keep all chefs wanting to try new recipes! Valuted ceilings, recessed lights, mirrored closets, upstairs laundry, and plenty of linen space. Carpet, hardwood floors and a big back yard makes this house truly a BEAUTIFUL HOME, ALL THAT IS MISSING IS YOU!!!
——————————————————————————————————————————————-
Proprietary IHB commentary and analysis
Valuted? I have concluded that three exclamation points are the surest sign of a realtor's writing. Nobody else feels the need to express that much excitement in their sales spiel.
Resale Home Price …… $845,000
House Purchase Price … $668,126
House Purchase Date …. 6/29/2011
Net Gain (Loss) ………. $126,174
Percent Change ………. 18.9%
Annual Appreciation … 317.7%
Cost of Home Ownership
————————————————-
$845,000 ………. Asking Price
$169,000 ………. 20% Down Conventional
4.48% …………… Mortgage Interest Rate
$676,000 ………. 30-Year Mortgage
$146,450 ………. Income Requirement
$3,417 ………. Monthly Mortgage Payment
$732 ………. Property Tax (@1.04%)
$517 ………. Special Taxes and Levies (Mello Roos)
$176 ………. Homeowners Insurance (@ 0.25%)
$0 ………. Private Mortgage Insurance
$175 ………. Homeowners Association Fees
============================================
$5,017 ………. Monthly Cash Outlays
-$814 ………. Tax Savings (% of Interest and Property Tax)
-$893 ………. Equity Hidden in Payment (Amortization)
$280 ………. Lost Income to Down Payment (net of taxes)
$126 ………. Maintenance and Replacement Reserves
============================================
$3,715 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$8,450 ………. Furnishing and Move In @1%
$8,450 ………. Closing Costs @1%
$6,760 ………… Interest Points @1% of Loan
$169,000 ………. Down Payment
============================================
$192,660 ………. Total Cash Costs
$56,900 ………… Emergency Cash Reserves
============================================
$249,560 ………. Total Savings Needed
——————————————————————————————————————————————————-
I think the purchase price & date are off.
I also think that borrowers with equity are the first to get foreclosed because the banks book the smallest capital loss (and might even get a gain). It’s unfair and ironic that those in the best position – still have some equity are the first to get evicted.
I fixed the purchase price numbers. Thank you.
In the Great Depression lenders faced similar circumstances, and most often they did foreclose on those borrowers who had equity or were slightly underwater while allowing the deeply underwater to stay put. It looks like they are doing it again this time around.
What an outrageous price. So few people can buy a home like this with 20% down (that they earned and saved – not “won” in a previous housing lottery) and a conventional mortgage.
Plus you get pay for all the landscaping since apparently the malingerers didn’t use their monthly mortgage savings to pay the water bill… 🙁
With such tiny patches of yard (how apt!), landscaping won’t be much drain on whatever budget you have left after paying $850k for this.
You’d be surprised. A neighbor of ours with a postage stamp front yard (15″ by 10″) spent $25K on nice brickwork with lamp-posts, a walkway, and planters.
True enough, though I was focusing on their lunar landscape-esque backyard… 🙂
How much default time do you guess you get on a $2,366,000 1st mortgage and a $1,000,000 2nd mortgage? One year? Two years? Almost 3 years and still no foreclosure or short sale?
http://www.cotohousingblog.com/?p=17446
Attorneys are less expensive than making payments. The delinquent mortgage squatter in that property will likely game the system for as long as possible. Who wouldn’t want to live in a multimillion dollar mansion for nothing?
Not Squatting
I do not know it this is fact, but I have heard that the attorneys are charging half of whatever they save you in unpaid for payments.
Thanks for the most insightful analysis of this perplexing problem. It is, however, a formula for all the “investors” who have bought SFD properties to pocket the rent money they receive by putting additional loans against the property if they can get them. But the real message is that this foreclosure mess and price realignment necessary for a healthy market are going to be with us for a very long time. And that means folks will not have confidence in the market for a long time.
1. borrow $100k. default. foreclose immediately
2. borrow $417k. default. foreclose later
3. borrow $1M+. default. foreclose years later
4. lend money to millions. default. government gives you a trillion dollar bailout.
it’s true. the bigger your debt, the better it is. if you can be in debt trillions of dollars, the government will actually pay you.
our system is fucked.
This is called corruption. It started with a few hundreds of dollars. Now it has blossomed to trillions. In any capitalistic society, rampant corruption would always be the eventual outcome. It will self-destruct eventually. History shows no exceptions so far. It is just a matter of time.
Borrow $500K, the lender owns you. Borrow $500M, you own the lender. (Adjust amounts as appropriate)
That is a 40% front-end DTI including HOA. Let’s take it down to 30% (still above the 28% bandied about for qualifying mortgages). We’re at $200k/yr. Move to 10% down, and 5 years of 10% savings gets you the DP. A 401k loan could be used too. It is more the high DTIs that are assumed than the required savings for a down payment. High DTIs are tolerable when your home is an investment vehicle. When the investment doesn’t look as attractive, neither will the higher DTIs.
There is a great tool at the NYTimes using data from the American Community Survey census info. The highest priced median home census area in my city was $460k, and that area had 30% of mortgages consuming > 30% of income. In Irvine, the area with the lowest % consuming > 30% of income was 40% – the area bounded by Irvine center dr, Culver, Yale, and Barranca (Census tract 52511). Many tracts had 50-60% or more having mortgages consuming > 30% of income. How people view housing as an investment impacts how much of their income they devote to it.
This is exactly why the market in Irvine erupted into a bubble. Via lax lending and investors, homes were purchased at prices that had no relationship to incomes.
“It must be difficult for many of them to sleep at night.”
As a strategic defaulter, I can promise you that most of us sleep well.
We live in the NOW. So now, we are saving. If the banks come after us, it would be easy to buy a free year with a bankruptcy filing.
Personally, as to when I will be kicked out, who cares? The monthy savings (3K)from squatting has allowed me to save enough money to rent, or buy outright?
Just curious: if you file for bankruptcy, don’t they take whatever savings you have before declaring you bankrupt? Why isn’t whatever is saved by not paying mortgage(s) or rent lost at the next step, either bankruptcy or the bank or collection agency going after whatever they can to cover their recourse-loan foreclosure losses?
Yeah, bankruptcy probably won’t work in Chicago’s situation (maybe as a delay tactic?). If you’re working and your household income exceeds the area’s median, you’re pushed into 13 (reorganization), and the savings account will be taken into account if/when other debts are restructured.
Perspective is correct. Bankruptcy will not give you total relief but it can be used a a delay tactic. 10 months delay is 10 of cash saved.
What savings account? Any strategic defaulter who is careless enough to put his savings in a bank account is acting in error. There are ways to shield your assets.
Collection agencies run your credit to determine if you have any assets worth pursuing. A noncompleted bankruptcy is an excellent deterrent, in addition to several letters you can get at the following link: http://www.debtdefense101.com/p/3-must-send-debt-defense-letters.html
I am not speaking in hypotheticals. I have been through all of this. I expected the banks and collection agencies to be waiting outside my place of employment.
Instead, I found an overworked system in which banks, collection agencies, mortgage services, and the 3 credit agencies act independently of each other.
ChicagoWalkAway,
I wasn’t suggesting anyone who strategically defaults would lose sleep from any moral compunctions. I think most are doing what’s best for their families.
However, does the uncertainty of not knowing when you will have to get out cause you any grief? I think that part would be very difficult. What is your experience?
Personally, I benefit from several factors that I took advantage of.
First I had help. Resources like this blog, Patrick.net, and Christine Springer from YouTube, helped me make informed decisions about how to walk away, and how to protect my assests.
In my county, the foreclosure timeline is well over 300 days for foreclosures that are uncontested.
Even better, a contested foreclosure in which the homeowner represents himself in court, can drag on for 4-5 years due to the sheer volume of cases. Without trying, I got nearly two years just by showing up in court, and posing questions to the lender’s attorneys.
The savings from my sqatting action will be significant enough to offset any discomfort that the impending move may bring.
This is not my first house, or walkaway. So I know that foreclosure is not the end of the world, and life goes on.
Most importantly, I have my wife as a partner, who instead of pressuring me to stay and pay, is praising me for walking away and putting our family in a better financial situation.
I did not mean to suggest you were proposing squatting was a moral issue. I just wanted you to know that on the whole, squatters DO NOT feel guilty,nor are we on pins and needles. When it’s time most of us will leave. But our attitudes, tend to be “come and get me”.
We realize we are benefitting on the once-and-a lifetime circumstance that enables us to stay in our homes for free.
In IL, under the law, whether or not I leave now or later, I am responsible for what happens in the bank’s house until my lender gets an order of possession from a judge. So what could be my motivation to leave.
I hope this post is a joke. If not, where did we put the pillory?
This post is no joke. It is the reality millions of Americans who are currently going through foreclosure, and my reality as well.
I am only answering a question posed, to me. I do not feel proud or ashamed. I really don’t feel anything. I am making a business decision.
Yet, I shudder to think what you what do to the scoundrels that received nearly one trillion of our hard earned tax dollars, yet who continue to manipulate the real estate market to their benefit……
Not to be mean, but if this is your second walkaway, you haven’t beed too good at making business decisions. Maybe you should just rent for the next decade?
On the surface you are right. I have failed and gained and lost a small fortune in real estate.
I have also travelled the world (not in the army thank God!) and lived in foreign countries and had have beautiful and equally crappy experiences that taught me more about me.
Most importantly, I have learned through my failures that my attempts are no greater or less than anyone else’s.
Isn’t that what this country is about? The right to try and fail in the effort to pursue self-determination?
Yet would I try again in a heartbeat. And I may fail, but as long as I learn I am not afraid, and money is not really real.
I probably should rent, but I will probably will end up living in a home without a mortgage.
ChicagoWalkAway,
“So what could be my motivation to leave?”
Do you feel groundless or unrooted because you know you must leave?
Do you feel the desire for closure and resolution to the process?
I suppose in many ways you must feel like a renter who got a fantastic deal.
What do you see as the endgame?
It’s hard for me to feel groundless or unrooted because as you have explained in your blog many times: “Mortgage holders are money renters with the bank as landlord”. (or something like that)
I do desire closure yet for me, each month’s delay represents 3K. The question is 3K worth an additional month of uncertainty. For me, 3K represents 60% of my monthly take home pay, or 96 hours in labor.
I ask myself, is squatting in my home worth the risk that my foreclosure case will resume? For me, the answer is yes.. Maybe it’s because IL is a judicial foreclosure state. Would you squat in your home if you were guaranteed 18K?
For me, living in a judicial state means that I have a minimum 8 months to stay in my home if I do nothing to defend myself in court. But I will not do nothing. I will prolong my case as long as possible.
I actually look foward to showing up in court looking at the various attorney’s faces when I file my motions. (I have had the judge admonish two of the bank’s lawyers based on their malfeasance). I don’t really look like the lawyer type, if you know what I mean.
I feel like a “money renter” who is exercising his rights under the law. No matter what the opionions of others may be. And I thank the law firm of my mortgage servicer for their incompetency, and Christine E. Springer (My hero) for her invaluable advice.
The endgame is me walking away with as much money saved as possible. But I must admit, in my county there is a 90-day redememption perdiod that I could exercise, even if I was foreclosed on tommorrow. This means that I would still have 3 months to move after the 8 month original process, that I plan to contest.
And that is if I do not appeal the judge’s foreclosure ruling to the Judicial Review Board which will give me another 6 months)…..
Why does your mortgage represent such a huge portion of your net income? Did you lose income since you bought?
“…I don’t really look like the lawyer type, if you know what I mean…”
I don’t know what you mean. Please explain.
Not counting my wife’s income, my mortgage represented 60% since I take home about 5K a month.
But to be truthful, after being denied a loan modification, and discovering mortgage document fraud with the help of a lawyer who pointed it out, I just got tired of paying when I knew I could squat and it would be years before the bank could put me out.
I lost money when I bought, and even more after each 3K payment. I am now 50% underwater.
Let’s just say, judging by appearances, no one would mistake me for a lawyer. I have had people who were not trying to insult me, tell me “you’re a smarter than you look”, LOL.
ChicagoWalkAway,
Thank you for sharing your experience. I have been sympathetic to strategic default, although less so for the squatting thereafter.
I see your reasoning, I can’t say I disagree with your choices. You have clearly thought through your alternatives and understand the pros and cons of what you are doing.
Yes, thanks Chicago for sharing. You don’t have to justify your decisions to us, but thank you for explaining your situation.
It’s a little different here in CA, as you probably know. There are layers of protections for borrowers to avoid defiency judgments, but it’s also a non-judicial foreclosure state where in theory at least, a foreclosure can occur rather quickly.
IR-
you missed this:
“In IL, under the law, whether or not I leave now or later, I am responsible for what happens in the bank’s house until my lender gets an order of possession from a judge. So what could be my motivation to leave.”
This is generally true across the US, as I understand it (and IANAL). Why on earth would anyone leave prior to the note-owner assuming control legally, if they are opening themselves up to liability?
So….the real question is ethics. In my 35 year career, I have explained every sentence, phrase, and implications in real estate contracts, escrow instructions, loan documents to thousands of buyers. A part of ‘this country’ you might have missed is ethics.
You are correct. I forgot the ethics portion when I was a strung along by my lender for 2 years waiting on pins and needles for an agreed-upo loan modification that never came.
I forgot the ethics portion when I was finally advised by my lender to miss 3 payments in order to get the mod, then told to pay up and be prepared that I could be foreclosed upon. Yeah Right…
I have acted ethically. My highest ethical responsibility is to my family finances which dictate that I jettison an underperfoming investment asset, my underwater home. A simple amoritization table tells me that on my 415K loan, at 6.75% interest, I would have paid back over 969,000. My home is now worth 159K. I should stay and pay? Yeah Right…
I’ll be the first to admit I would have stayed in the home if I could have sold for more than I paid. But since I am under water, I would have paid nearly 1 million in principal and interest, and have been unalbe to recoup my investment. So I am walking away. That is the nature of investments. When you will never get back your money, engaged investors cut their losses.
I will be the first to admit that part of the risk of walking away is getting a deficiency judgement, being issued a 1099 and having bill collectors come after me. I have already been issued a 1099, and it’s not so bad. I have a gameplan for the other outcomes. After all, it is the ethical thing to do.
Excuse me. But who was it that convinced you that you should make money on this ‘invenstment’ in the first place? Was that your own idea? You don’t get it. Residential real estate is not a short term investment vehicle, like stock. It just doesn’t work that way. You cannot pick up the phone one day and call your broker and say, “SELL” and expect it to happen. You bought apples thinking it was oranges.
I made the decision and I am taking the risk of getting a 1099 and/or deficiency. I am ready.
Come now, residential as well as commericial real estate are short AND long term investments. It was working fine that way before the market declined, and no one complained when they flipped and made money, and sold high. I just got burned. So what. I am not complainaing. Just telling my story.
Just because the market is down and many like me lost our equity does not preclude the fact that government leaders touted housing as an investment, people bought and sold homes as investments, and banks loaned on homes as investments. They were AND are investments. Now people say homes are investments because like equity investments, people with buyer’s remorse walk away. I now possess cognitive dissonance too, so I am dumping the home. Who cares….
Not so fast CO, I could pick up the phone and have my property sold tommorrow just like any stock, bond or commodity. The difference is that the sale price that buyers are now willing to pay will leave my debt unsatisfied, because the perceived value is less today that it was 4 years ago. There are other options.
In reality the utility of the house never changed, just others perception of what my home worth. This is why I said earlier that I learned through all of this, that money itself isn’t real, just a tool to exercise other options.
In my past, I’ve traded stocks and mutual funds and made and lost money. However today’s housing exists in a unique environment that allows one to recover any downpayment, loss equity, and years of mortgage payments by squatting and walking away.
I would be remiss if I did not try to recover my losses since whether I do or not has no bearing on the risk that the bank will come after me. I might as well be financially regrouped in order to be able to dance the nasty tango that lies ahead. I could argue that failing to squat and save, exposes my family to more unpleasant outcomes.
You’re wrong about one thing though, I bought apples, believing them to be apples. They went bad, so I am just making apple sauce.
@winstongator…..all of which means that investors have little place in the SFD market. They should buy, build: apartments, small strip centers, office buildings. Investors in a residential market often vie for early phase releases hoping for rapidly rising prices. This creates a false sense of demand. When the prices stop rising, they dissapear, leaving the project with a price level that cannot be met by actual users. Then enter the financial guys who gave almost anyone breathing a loan to buy a house they couldn’t afford. It’s the perfect storm.
Talk about creative:
Are they referring to the storm drain running right behind it? Or the parking lot next to the nursery?
LOL! I didn’t catch that. They must be referring to the concrete lined drainage ditch behind their house. Not exactly a beautiful body of water someone would spend time admiring.
The tax assessments on these columbus grove properties are pure insanity. I thought woodbury was bad but that’s childs play compared to columbus.
Racial side effects of the housing boom and bust
Wealth in America: Whites leave minorities behind
The housing crisis hit Hispanics and blacks much harder than it did whites
http://www.msnbc.msn.com/id/43887485/ns/business-eye_on_the_economy/
Not surprising. Those near the bottom of the economic food chain got in last, after the banks ran out of white middle class people.
The late-bubble minority buyers in my area were just as clueless as the red-blooded bubble believers, but bought in last, and have been left holding some serious bag.
One guy was barely earning anything, and paid $650K for his 3-year-old house, which sold new for $330K. He told me there was no point in worrying because he could handle the payments for a couple of years, at which point he would sell for $900K. 9 months later, after he was foreclosed, another hispanic buyer stepped in and paid $550K. This husband and wife both had good jobs, probably not enough to comfortably justify $550K, but enough to stay and pay forever, retirement savings be damned. They still had a realistic shot at life in the middle class – which is actually a cruel way of putting it, since what could be more middle class these days than a tight mortgage around your windpipe – but they took basically a $200K hit to their long-term financial security.
I would find all this less disturbing if I weren’t aware of how we all pay for the poor financial education of our citizens, whatever their race. Even if this hadn’t been used to rape responsible taxpayers, it would still be a large misallocation of resources and a needless redistribution of wealth from the gullible to the unscrupulous.
Did you notice how Asians were left out of this as they are in other stories about how non-whites are getting shafted? It kills your narrative if you have to disclose that Asians, with a healthy first generation and lower income percentage, are doing better than whites in the US.
Yes, the problem is socioeconomic, not race-based. Yet, these slanted news stories appeal to racist fears as if whitey is trying to keep the poor minorities down. The political left is missing its opportunity to wage class warfare on this one. It is really the rich and middle classes who are being coddled as the poor are being foreclosed on.
Actually, the story in today’s NYTimes shows that Asians have taken the biggest hit in dollar terms, three times the ‘white’ level.
hispanics, down 66%, to $5235
blacks, down 53%, to $5677
whites, down 16%, to $113149
asians, down 54%, to $78066
(household wealth, 2005 to 2009)
And now for a moment of armchair sociology.
I have always believed, without a shred of anything beyond anecdotal evidence, that recent immigrants have to make some of the same mistakes that those who have been around for a while have learned not to make; that is, certain things are passed on from our parents through bitter experience. I suspect that may be at work here.
It’s like Antonio Banderas marrying Melanie Griffith: a third- or fourth-generation American would know better than to do that, being aware of certain cultural cues and warning signs which someone born elsewhere might miss.
Of course, my remarks should be taken as seriously as my use of Melanie Griffith as an example of anything: not only do I not know her personally, but I have done no (zero = 0) research on this of any sort.
By and large, my best neighbors where I used to live were hispanic – yes, that sounds like “some of my best friends are …” – but it was true. I think they were happy to be living in middle-class suburbia in a low-crime area, and were dazzled by the newness of it all. Hence they lacked the jaded cynicism of longer term inhabitants of Rancho Del Stucco, who were a little more likely to see through realtor bullshit as the prices crossed $600K for an 1800-sq.-ft. 3+2.
Free Rent – wow, could I use some of that right now. Instead my tax dollars at work!
Wondering. Since the banks seem to select a small number of homeowners to quickly foreclose on, just to keep the rabble on their toes, why doesn’t a smart lawyer to hit them with some sort discriminatory lawsuit? Seems patently unfair to choose one homeowner in the same situation over another.
Found out over the weekend, friends of mine are strategically defaulting on their 2.4 mil house in RSF. The guy pulls down $250K annually from his business but the house is underwater – now appraised for 1.7mil. Tried to work with the bank on some sort of loan adjustment but when they stonewalled, he pulled the plug. Guess it chaps my hide. His family gets to live in a huge house with vanishing edge pool and view of rolling hills (think Tuscany). FOR FREE!
From the Redfin listing for this property:
“View: Reservoir”
Huh?! I hope they don’t mean the concrete-lined, weed-filled, flood channel that has only slimy runoff water in it! I ride along that flood channel all the time, and while I prefer it to riding along a busy street, I sure wouldn’t call it nice to look at.
-Darth
Well you neighbor is not “pulling a fast one”. The bank is allowing him to squat. In “normal” times the foreclosure process would be swift. The banks allows squatting to happen…your neighbor doesnt control the process. whats really scary is the answer to this question, How much bad loans do banks have? Could they be brought to their knees again like in 2008?
Would be interesting to see a property tax change analysis like this for irvine and other OC
Counties
http://online.wsj.com/article/SB10001424053111904233404576460131182881982.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsThird