A recent commentary in Housing Wire lays out the case against strategic default. It expresses a point of view worth examining.
Irvine Home Address … 24 SOUTHERN WOOD Irvine, CA 92603
Resale Home Price …… $1,250,000
Ya just got slapped
Across the face my friend.
Ya just got slapped
Yes that really just happened.
Well, everybody saw it, hah
Everybody laughed and clapped.
‘Cause it was awesome.
The way that you just got slapped.
Marshall Erikson Himyn — You Just Got Slapped
Today's featured article is a commentary from Housing Wire's Kerri Panchuk. Apparently, she does not accept the arguments I made in the following posts:
Strategic mortgage default has become common and accepted in 2011
Strategic default consequences minor and likely to decrease
Strategic default is moral imperative to prevent future housing bubbles
Widespread strategic default is essential to economic recovery
For a variety of reasons, I believe strategic default is a wise course of action for underwater loan owners who are paying more to own than the cost of rental. Let's read the counter-arguments to check their validity.
The new slap in the face of foreclosure
by KERRI PANCHUK — Tuesday, September 20th, 2011, 2:33 pm
Every American upset with the state of mortgage lending should read the Fox Business News article on strategic default in order to meet the “New Face of Foreclosure.”
Strategic defaulters are underwater borrowers who intend to remedy their “upside-down situation” by simply walking away from their mortgages.
The Fox Business article paints a clear picture of a 67-year-old strategic defaulter who is walking away from a $166,000 loan.
So is this man a distressed borrower who lost his job, fell ill or landed on unexpected hard times? No, not really. Those situations tend to garner sympathy, and rightfully so.
Instead, this man admits he collects two pensions, Social Security and generates additional income through a small business.
The defaulter also has the ability to make his payments, but lost his drive to do so when home values dropped, leaving him $45,000 underwater.
Isn't it also sad that he is $45,000 underwater? The unemployed didn't want to lose their jobs, which is sad, but the loan owner didn't want to see his house drop in value. Shouldn't that event also be a sad story deserving of sympathy?
The only difference between the two is the capacity to repay a lender — a lender who was part of a collective insanity in lending which created the valuation problem we are now correcting. The house this man bought at an inflated price would not have been so expensive if not for the behavior of lenders. Prices didn't fall because of the recession. Prices fell because they were too high, and the result was a recession.
The borrower's attitude recently changed in other ways. He now wants to live in the city, but he can't sell his home in this economy. Even if he could, it's impossible to get back what he paid.
The economy had nothing to do with his inability to sell the home. As I stated above, the lender-induced price inflation was the problem. The fact he can't get back what he paid is sad.
It's a type of new-car syndrome, but on a large scale.
Yet rather than sticking it out, the homeowner called a firm that readily advises homeowners on how to strategically default on their mortgages.
Why should he stick it out? Because some lender wanted to profit from his loan? Because of a moral obligation? LOL!
If the borrower gets his heart's desire, he will simply walk away from the mortgage, sending the home into foreclosure while remaining cash-rich and free to move on.
Good move, right?
Absolutely. It's the wisest course of action given his circumstances.
Of course, his neighbors won't be so lucky. They will now be living next to an REO.
So what? This guy is supposed to suffer so his neighbors can continue to sustain the illusion of home equity? The REO will sell at market value, and if that is lower than what the neighbors believe their house to be worth, the neighbors need to re-adjust their perception of value.
Call it the strategic default phenomenon, if you will, but it's more than a trend. It's a threat to the power of contracts
I don't think so… Strategic Default Is Merely Collecting On Home Price Protection Insurance Sold By Lenders.
People fail to keep the promises in contracts all the time. Good contracts spell out the consequences of failure to perform. Rather than forcing lenders to sue borrowers on a Promissory Note and wait for recovery, lenders compel borrowers to sign a mortgage agreement which allows the lender to call a public auction for the sale of the property. Mortgages exist because lenders needed to spell out the contractual consequences of non-performance by borrowers.
Failing to pay a mortgage note is not a threat to contracts. On the contrary, foreclosures are the enforcement of contracts. If you want to see what is a threat to contracts, look at new regulations concerning loan modifications and restrictions on foreclosures, those are threats to the power of contracts.
and an attack against all Americans who are paying for the mortgage crisis in the form of tax dollars that supplement housing initiatives and maintenance on foreclosures.
Strategic default is not an attack against all Americans by usurping their tax dollars; bank bailouts are.
Not to mention that declining home values and tighter lending standards that are keeping new homeowners on the sidelines.
Declining home values and tighter lending standards are wonderful for those sitting on the sidelines. It means properties are getting less expensive, and money is only being loaned to people who will pay it back. 
Mind you, we are not talking about those who are truly in distress. Foreclosures from unexpected life changes are a different beast altogether.
Why? I don't believe capacity to pay makes any difference at all. Both parties should be foreclosed on immediately and their properties recycled into the market. The notion that the two groups are separable gives rise to the idea that squatting is okay as long as the squatter is unemployed. Do you believe that?
While businesses should not be excused for unethical practices, the idea that homeowners are committing a permissible sin by not paying affordable debt is not admirable.
No, a loanowner who is sacrificing their family's future in order to pay off a loan they should never have been given is not admirable. The needs of the family outweigh the needs of a bank to make profits.
In fact, it's an insult to borrowers who never bought in the bubble and to other homeowners who keep paying on underwater mortgages despite their frustrations.
No, it should be a wakeup call to loanowners who are underwater on their mortgage. The slap in the face should be a sobering realization that they are being chumps for continuing to pay.
The fact that lenders inflated a housing bubble and taxpayers have to cover the losses is a slap in the face to everyone who didn't buy in the bubble, both homeowners and renters.
A few months ago, an attorney working in default raised the following question: What if the strategic defaulter had made money on the same house? If he bought the home for $144,000 and gained a $20,000 profit, could the originator then call the borrower and ask him to split the earnings?
No. That's exactly why lenders should be careful not to inflate housing bubbles by using 100% financing. Lenders all know now that borrowers will default and leave them holding the bag. If lenders did not fear this, they would repeat the mistakes of the housing bubble. The call option has always been embedded in a loan contract. It's only when down payments are eliminated that the cost of this option becomes so low that borrowers are foolish not to gamble with the banks money.
F. Scott Fitzgerald's famous American novel, “The Great Gatsby,” dealt with a similar phenomenon in his time. While Fitzgerald's rant against the “careless people” of society in Gatsby was interpreted as an assault against rich aristocrats. Fitzgerald's rant was more about carelessness in general. And the principal goes across class boundaries. In his worldview, those who are careless make decisions without consequences. They enjoy the fruits of the high-rolling times and let others pick up the tab when things go bad.
So who is she criticizing here, banks or borrowers? It is the lenders who were careless and abdicated their responsibility to loan to only borrowers who could repay their loans in amounts they could afford to repay. This abdication of responsibility is what inflated house prices and created the incentive for strategic default. Lenders are more culpable than borrowers.
Certainly in the mortgage crisis there were many people and companies who were careless. But the idea that strategic defaulters are common heroes pushing back against a rigged system is the biggest slap in the face to all homeowners who bought into the American Dream only to be stung by the mortgage crisis.
Write to Kerri Panchuk.
Strategic defaulters are common heroes pushing back against a corrupt system. This is not a slap in the face to homeowners, it is a slap in the face to foolish lenders. Lenders are the ones who ruined the American Dream.
I get the impression from the emotional tone of the article above that the author is underwater on her mortgage and lashing out at the injustice she sees as strategic defaulters are benefiting from their decision. Perhaps I am wrong, but she doesn't feel the outcomes she is witnessing are just, and if I were a loan owner still paying, I might feel the same.
Strategic default is about resolving conflicting values
The essence of the strategic default debate revolves around two conflicting values. First, there is the value of keeping one's word and following through with the terms of an agreement, and second, there is the value of providing a viable economic future for one's family. For those who are severely underwater and paying more than a comparable rental, they can't have both. They must chose.
There is no right or wrong, black or white, in cases of conflicting values. Each person must weigh what they believe to be more important. Whatever choices each of us might make does not give us the right to judge others by our standards. Personally, I would chose my family. Some would endure the pain to keep their word. Who's to say which is right or wrong?
They believe they got a good deal
The sellers of today's featured property followed a good buying strategy when they purchased. They found a motivated seller who had given up on the sale, and they negotiated a price well below their recent asking price. Based on what they are asking today — after three and one half years of falling prices — they must believe they got a good deal because know they believe they can sell for a profit.
Property History for 24 SOUTHERN WOOD
| Date | Event | Price | Source | ||
|---|---|---|---|---|---|
| Sep 17, 2011 | Listed (Active) | $1,250,000 | SoCalMLS #U11003957 | ||
| Aug 06, 2010 | – Delisted (Withdrawn) | — | Inactive SoCalMLS #2 | ||
| Jul 06, 2010 | – Price Changed | * | Inactive SoCalMLS #2 | ||
| May 05, 2010 | – Price Changed | * | Inactive SoCalMLS #2 | ||
| May 05, 2010 | Delisted | * | Inactive Zillow #1 | ||
| May 05, 2010 | – Listed (Active) | * | Inactive SoCalMLS #2 | ||
| Apr 01, 2010 | Relisted (Active) | * | Inactive Zillow #1 | ||
| Mar 31, 2010 | Delisted | * | Inactive Zillow #1 | ||
| Feb 15, 2010 | Listed (Active) | * | Inactive Zillow #1 | ||
| Jun 02, 2008 | Sold (Public Records) | $1,085,000 | Public Records | ||
| Jun 02, 2008 | Sold (MLS) (Closed) | $1,085,000 | Inactive SoCalMLS #S518133 | ||
| Apr 25, 2008 | Delisted | — | Inactive SoCalMLS #S518133 | ||
| Mar 25, 2008 | Price Changed | $1,198,000 | Inactive SoCalMLS #S518133 | ||
| Feb 19, 2008 | Price Changed | $1,248,000 | Inactive SoCalMLS #S518133 | ||
| Jan 16, 2008 | Listed | $1,298,000 | Inactive SoCalMLS #S518133 | ||
Turtle Rock has done amazingly well at holding its bubble valuations. That being said, I have my doubts about this one making a profit.
What do you think? Is this property fairly priced, and will it sell for near its asking price.
——————————————————————————————————————————————-
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599
sales@idealhomebrokers.com
Irvine House Address … 24 SOUTHERN WOOD Irvine, CA 92603
Resale House Price …… $1,250,000
.jpg)
Beds: 4
Baths: 3
Sq. Ft.: 2550
$490/SF
Property Type: Residential, Single Family
Style: Two Level, Contemporary, Traditional
View: Canyon, Fields, Hills, Mountain, Panoramic, Park/Green Belt, Tree Top
Year Built: 1979
Community: Turtle Rock
County: Orange
MLS#: U11003957
Source: SoCalMLS
On Redfin: 1 day
——————————————————————————
HIGHLY CUSTOMIZED VIEW HOME AT A QUIET CUL-DE-DAC IN PUPULAR HIGHLAND GARDENS WITH SWEEPING VIEW OF HILLS, TREES, SHADY CANYON AND TURTLE RIDGE. ELEGANTLY REMODELED WITH CATHERDRAL CEILINGS, TWO FIREPLACES, MARBLE FLOOING; FAMILY ROOM WITH WET BAR AND A TEMPERATURE CONTROLLED WINE STORAGE; GOURMET KITCHEN WITH TOP OF THE LINE APPLIANCES, GRANITE COUNTER AND BREAKFAST BAR, CHERRY WOOD CABINETRY AND GARDEN PICUTURE WINDOW. NEWER DOUBLE PANED WINDOWS AND ROOF. SOLAR TUBES, BUILT-IN MURPHY BED, RECESS LIGHTING. PROFESSIONALLY DECORATED, STAINED GLASS WINDOW, OPEN FLOOR PLAN, LIGHT AND AIRY. EXTRA SPACIOUS MASTER SUITE WITH PRIVATE BALCONEY; DUAL VANITY GRANITE COUNTER, SOAKING TUB. VIEW FROM ALL ROOMS WITH PRIVACY AND INDIVIDUAL D COR. FULLLY FENCED YARD WITH MANY FRUIT TREES. COVERED PATIO FOR INDOOR-OUTDOOR ENTERTAINING AMANITIES INCLUDING ASSOICATION POOL, SPA, PARK, CANYON TRAILS, CHILDREN PLAY GROUNDS AND MUCH MORE NO MELLOW ROOS AND LOW HOA FEES. THIS IS A MUST SEE!
——————————————————————————————————————————————-
Proprietary IHB commentary and analysis 
PUPULAR? CATHERDRAL? FLOOING? PICUTURE? BALCONEY? FULLLY? AMANITIES? ASSOICATION?
Resale Home Price …… $1,250,000
House Purchase Price … $1,085,000
House Purchase Date …. 6/2/2008
Net Gain (Loss) ………. $90,000
Percent Change ………. 8.3%
Annual Appreciation … 4.3%
Cost of Home Ownership
————————————————-
$1,250,000 ………. Asking Price
$250,000 ………. 20% Down Conventional
4.18% …………… Mortgage Interest Rate
$1,000,000 ………. 30-Year Mortgage
$244,694 ………. Income Requirement
$4,879 ………. Monthly Mortgage Payment
$1083 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$260 ………. Homeowners Insurance (@ 0.25%)
$0 ………. Private Mortgage Insurance
$99 ………. Homeowners Association Fees
============================================
$6,321 ………. Monthly Cash Outlays
-$1279 ………. Tax Savings (% of Interest and Property Tax)
-$1395 ………. Equity Hidden in Payment (Amortization)
$372 ………. Lost Income to Down Payment (net of taxes)
$176 ………. Maintenance and Replacement Reserves
============================================
$4,196 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$12,500 ………. Furnishing and Move In @1%
$12,500 ………. Closing Costs @1%
$10,000 ………… Interest Points @1% of Loan
$250,000 ………. Down Payment
============================================
$285,000 ………. Total Cash Costs
$64,300 ………… Emergency Cash Reserves
============================================
$349,300 ………. Total Savings Needed
——————————————————————————————————————————————————-
Strategic default is a simple breach of contract. It is more efficient to breach the contract than it is to perform under the contract. Law and economics should encourage this scenario. It allows you to divert resources to a better/higher use than would otherwise occur if you performed under the contract.
True, it’s not a typical “efficient breach” scenario in that both parties are not left no worse off than they would be under the contract, but the lenders made their bed in this scenario when they didn’t properly price the risk of a default coupled with a decline in asset value.
I’ve been persuaded that a strategic default is not an ethical slip. The contract is pretty simple in most cases: one party holds title to a property but grants a mortgage lien to a second party and that second party owns a future cash flow from the first party. At the first party’s option, they can reclaim that cash flow and – after a process – the second party gains title to the property by exercising the mortgage lien. But there are two areas where I do think ethics of the first party are often compromised: until the foreclosure process is completed, the first party owns the property and is responsible for property tax levies. Likewise, the contract requires that the property be insured adequately while the lien is in place and therefore the first party ethically should maintain the insurance until the title actually is no longer theirs. Should the first party not want to pay these amounts they should resort to a deed in lieu of foreclosure and give up the title immediately. Frequently people look into the future and see that they will not have ownership of property at some point and use that as a reason to discontinue paying taxes and insurance. I believe taxes accrue and are assumed by the second party when they take title, but I don’t believe that practice makes not paying the taxes ethical behavior. Not paying insurance is risky in addition to not being ethical.
It’s all part of the risk the lender takes when making the loan. The only option is to foreclose/evict more quickly.
Like I said earlier, lenders did not (and are not) appropriately pricing the risks given the protections that exist for the borrower under the contract and that the law provides.
“lenders did not (and are not)”
These days the government is making almost all the loans. What are the odds the government will price risk correctly?
That said, they are doing a much better job then the Countrywides did.
You are correct. The problem (or maybe not the problem if you want low rates) is that lenders have no skin in the game so the risk is passed onto the taxpayer and/or whoever is still buying MBSs.
Borrow all the cheap money you want. The risk of default is then passed down the chain and/or diversified.
Bizzare we have gotten to this point. I’m not sure why everyone underwater isn’t defaulting at this point.
I’m not talking about what people can do – I’m talking about ethics. If you own property, the ethical position is to pay the taxes. If you have pledged an asset against a loan that you do not intend to pay, the ethical position is to insure it adequately. That lenders should price in the risk of dealing with unethical borrowers is correct, but doing so does not mean that such behavior is ethical.
Deed-in-lieu:
Ideal solution, problem is that many banks are not “accepting” them, last I heard. Does anyone have more recent info on this phenomenon?
I read that the banks are refusing them as they do not want to be burdened by the carrying costs of the property, or to immediately accept the revaluation to their portfolio.
Where is the law to “force” lenders to “accept” the DIL? Or even to foreclose in a timely way (rather than serial withdraw of properties from courthouse auctions?
This would mitigate the “squatter” problem
I’m not sure what the legislative fix could/should be?
ou could speed the timeline for default/cure/foreclosure and specify a speciic time period with which the lender has to act or waive/lose an interest in the property. This would give bank the incentive to rapidly eject defaulters and ensure the property is returned to the market or they lose the property.
No more short sales/no more delayed auctions/no more squatting? Just a whole bunch of foreclosures. Not sure hoe palatable that would be for anyone given that the government wants to slow the number of foreclosures and backs appear in no rush to take back properties.
DIL’s can only be considered in cases where the deed can be conveyed without any additional encumbrances as the lender accepting the DIL is accepting it subject to liens of record. With most properties having equity lines this nullifies the DIL option for the 1st TD holder.
A couple of quick points.
I think the safest asset class right now is distressed real estate, and none of it exist in Orange County.
Gold is gonna get hammered as it becomes clear that we’re facing deflation, not inflation.
The stock market is gonna test the lows set a couple years ago.
JMHO
Can’t argue with any of this, and I speak as someone who holds a lot of gold.
The irritating thing is that none of these things ever happens by the time I think it will. That’s why I don’t play in the options market: one has to be right about the timing as well as the direction.
Distressed real estate will be an excelling investment in many places by some time before 2025.
If you and I are friends and I loan you $100 and you refuse to pay me back, that’s a moral failing.
You and the bank are not friends.
But if you have a deposit of $100 at the bank and the bank lends it out to someone else, what is the difference?
If a million people have a deposit of $100 and the bank lends out $100 to a million other people, what is the difference?
If a million people have a deposit of $100 and the bank lends out $100 to a million other people, then the bank folds and the govt has to make good on the FDIC guarantee and another million people make up the difference in taxes and bank fees, what is the difference?
Basically you are arguing if you stiff someone you don’t know personally, it’s not a moral failing. That doesn’t make much sense.
1) It is not people money, it used to be 3% capital requirement so the actual money isn’t there. If banks lose money it is the share holders and bond holders who have blindly purchased those assets. They would have never share the profit with the people if there were any.
2) People don’t get paid (for their money deposited in the bank) as much as executive of the banks are paid.
3) By saving the banks, instead of banks and investors, we the people have to suffer. It was the system fault (Dem and Rep.) who failed to realized that too big to fail is an illusion
what doesn’t make sense is mixing up principles of our system of fractional reserve banking with ideas about moral and ethical considerations when it comes to business dealings and contracts.
When the bank loans out my $100, I’m not at risk at all (thanks to the FDIC).
Banks pay premiums for FDIC insurance. Usually, this is enough to cover a ‘normal’ rate of bank failures and taxpayers are unaffected. Of course we live in anything but normal times… brought on principally by the ‘financial innovation’ unleashed by deregulation, which led banks and non-bank lenders like Countrywide to issue all kinds of crazy loans to people without the means to pay them back, in order to generate commissions while passing on the hot potato of the risk to someone else… anyone else.
If you want to have a discussion about someone who habitually breaks contracts or enters into contracts knowing they will get an advantage by gaming the system, that’s an interesting discussion to have. Your example is pretty weak.
I agree. Strategic default like many decisions is a business decision to re-allocate resources to better uses as described by Prof. Brent White at the University of Arizona.
I do think Housing Wire receives ad revenues from NAR, banks, Mortgage Bankers Association and other housing advocates so their view is often reflective of the views of the people that bay their bills. I think the term “Don’t bite the hand that feeds you,” is the policy that Housing Wire is following.
Mortgage rates expected to slide on new Fed move
http://latimesblogs.latimes.com/money_co/2011/09/mortgage-rates-fed-housing-home-buyers-refi-operation-twist-.html
I’m trying to think how to calculate something here.
If someone bought the median house in, say, 2004 and is now underwater in 2011 and wants to walk away… how much have they paid in interest over those years?
2004 median x 2004 avg interest rate x 7yrs = ?
How does that compare to the bank’s loss:
2004 median – 2011 median?
I was just thinking if you’re 1/4 of the way through the 30yr payment schedule, and the total payment far exceeds the actual loan amount, that this might not even be that big of loss overall to the banks (on those loans that are still current anyhow).
I dunno, just thinking aloud really.
The total payments on a 30 year lan will never exceed the actual loan amount. The theory of amortization was created by and for the banks in the 1930’s to make home ownership easier.
If you take the interest paid over the average life of a loan, which in California was 5.4 years, and look the interest paid compared to the principal (money used) you’ll find that the rate of return was approximately 55%. For a loan paid off after just 1 year the interest aid against the money used (principle reduction) is over 500%.
There’s no reason to shed any tears for the banks. The past few years they’ve taken it on the chin but historically they’ve done fine.
The first floor of the house of cards we’re all living in was built when the banks made housing prices irrelevant. “If you could make the payment… you’d pay the price”
My actual example:
Purchase Price $200,000.00
Date January, 2000
Interest 7%
Annual interest Payments ($200,000 x 7%) $14,000.00
(ignoring principal reductions)
Total interest Payments $140,000.00
Less original loan (100% LTV) $200,000.00
Bank loss upon foreclosure $ 60,000.00
Bank sells at fair market value $220,000.00
(1% inflation for 10 years)
Bank total profit $160,000.00
Comment, I want to be a bank!
You are missing a lot. Maybe you’re kidding?
#1, the bank pays interest or borrows from someone else, so it’s money isn’t obtained for free.
#2, if you’re defaulting, they are unlikely to sell for more than mortgage. I
#3, in fact, most REOs go at a discount and the tyically ethically and morally challenged “owners” leave the place trashed and in poor repair, so the bank has to clean up, repair, replace stolen fixtures or discount for not having them, pay property taxes, pay maintenance, then realtor fees, etc.
Then they pay tax on the profits they do make, but in foreclosure scenarios there typically would only be losses, not profits.
Under the mortgage contract, there should be no moral or legal issue regarding defaulting.
I think the problem people have with defaulting is when they stay in the home months/years before actually getting foreclosed on and the indirect effect it has on taxpayers.
Or did we forget about the bailout packages we all are paying for?
Even if you don’t personally have any moral issue with default, you still will have to explain it to everyone.
“How did you sell your house Bob? Didn’t you and Jane buy in 2005? Did you have enough equity to get out? Did you write a fat check?”
You KNOW those questions will come, and you’ll either answer them honestly, lie, or decline to talk about your personal finances. None of that will be fun.
Maybe it’s just me but those type of questions wouldn’t phase me.
“We didn’t feel it was worth it to continue paying the mortgage and the best way out of the situation was to default.”
That’s it. Everyone understands that real estate took a dive so there’s really no explanation or cover-up you have to create. Just tell the truth.
I don’t see how “fun” factors into it. I hear stories about this from people occasionally and I don’t even ask more about it or judge them on it.
Here’s my reply to the ridiculous questions.
“Are you kidding? Do i look like a dummy? I stopped makin’ my payments two years ago after the banks got their government bailout and then refused to modify my loan with a principal reduction.
I saved the payments and we’ll buy back in after the market bottoms in 4 or 5 years… wait a minute… you bought the month after I did… you’re not still makin’ payments are you?!”
“The truth shall make you free” Jesus
This was an excellent entry and has generated the best discussion I’ve seen here yet.
Lawrence, you know your stuff and I like your advice in the abstract (!) but in real life it’s not that simple. Especially if you are a woman. For some reason, women rarely see logic when it comes to their houses.
The truth is, there is no good way to tell neighbors and friends that you are defaulting, not for any reason, not at any time. It elicits pity and contempt in roughly equal measure. You may try to deflect all that by saying “why are YOU paying?” but that just adds anger and moral outrage (and maybe a bit of embarrassment) to the mix. Doesn’t help if you still want to stay in touch.
When we did out DIL last year on a house we bought in 04 we said “we sold it” (true, back to the bank) and, if pressed, “we lost our shirt, but it was worth it to us” (also true, we put 25% down on a house that declined by 50%).
If you are in this situation my advice is: don’t be confrontational and don’t tell lies, but give out only as much information as the hearer can handle and wants to hear (not much usually).
One year on I can tell you it was a great decision but it was in no way easy and the repercussions are still ongoing. I’d do it again, and press others in similar straits to do the same. Most do not listen until it’s too late.
I think it’s easy to be removed from the situation and speculate that if you were in it, it would be easy to say, “We walked! Its value crashed way below our debt on it, so we chose to walk away from it.” That just generates so many more questions.
Granted, the worse your housing situation and overall financials are, the easier it is to accept these converations. “It was really our only legitimate option.”
The banks paid back their bailout, and the US Govt in fact made a profit on that already. They borrowed and repaid, unlike you.
If I ran the banks, you’d be on a blacklist, and never able to borrow again. (You wouldn’t loan money to someone who screwed you last time, would you?)
I would judge you as your friend, coworker, employer, or acquaintence. I’d also wonder why you were quoting Jesus, but acting in a less than upstanding manner. Would Jesus default on his mortgage and brag about it?
Also, there are some problems with the ‘it’s what the bank bargained for’ theory. All contracts have an implied covenant of good faith and fair dealing. So purposely breaching doesn’t meet that definition, in my opinion. And with banks heavily regulated, they are unable or perhaps in some cases unwilling to enforce all of the legal rights they should be entitled to. E.g., Obama running around asking for principal writedowns and talking them up as bad guys because they are exercising their right to foreclose upon breach of the borrower’s commitment to pay the mortgage.
My rate call continues to pay out. Cashed in more positions today. Only left with a third of my original positions from 2 years ago. This trend has more legs.
As I predicted the 10 year treasury continues to break record lows, and you can now get a fixed rate mortgage at 3.x%.
Premium Irvine tracts will continue to benefit from this manipulation. Your top shelf floor plan in the best neighborhood on the best street has an anti gravity belt. This continued manipulation will not bode well for Vegas employment.
Your rate call turned out very well. Your top shelf house purchase is losing value and will continue to do so. Low interest rates make the cashflow investments in Las Vegas even better.
“Your top shelf floor plan in the best neighborhood on the best street has an anti gravity belt.”
Awesome statement!
And what, pray tell, do you think will happen to all those HAMP’s, or other modifications when they are *still* underwater, and watch new homes being financed for less than their “modification”? Not too mention the value of homes is still dropping.
Very interesting when the rich are now paying less than those underwater…again. More defaults coming unless the gov breaks out more free cheese to homeowners, which should not happen, but will.
I loaned $50k to a friend last year and put a lein on a house they owned free and clear. The property, right now, has a value of around $150k. If he was to default, I would not think he had morally failed. Under our agreement, I would take possession of the house. It is a contract and our terms have been laid out in advance.
If I had loaned $200k to that same friend and could not recoup my money upon default…it would still not be a moral failing. It would have been me not making a good deal for myself, just as the banks failed to do during the bubble.
If the banks forclosed on properties worth more than was owed, there would be no complaining, but there really is no difference in the deal.
What if you knew he could afford to pay, but didn’t?
What if he left trash and a leaky roof and stole the fridge and stove on the way out?
You know, like the typical ex-house sitter?
If none of that would bother you, then you and I have a very different set of requirements for friends!
IMHO, it would be the end of the friendship. But the banks are not our friends.
They have no moral duty to modify our loans.
They have no moral duty to reduce our principal.
They have no moral duty to help us in any way.
And anyway, who the hell would clean up and repair a home that was in foreclosure? It defeats the purpose of walking away and squatting.
You are misrepresenting integrity by creating an either/or: either you hold to your word or you choose your family.
Consider, others, especially our family, know us by our word. When you understand that, choices become less difficult.
there are big differences between personal relationships and business relationships.
We have mechanisms and structures in place to deal with people who habitually break contracts in business relationships. It is common for apartment renters to sign a lease. If you choose to break the lease by moving out early, nobody (without a giant stick up their rear) would consider that a moral failing. Lease contracts commonly spell out the terms for breaking a lease; usually requiring the renter to pay a penalty or even 100% of the remaining rent due. If you don’t pay that, then that usually goes on your credit record, with all the consequences of that. Do it once, you’ll probably still be able to get credit cards or a mortgage loan. Do that kind of thing repeatedly, you may find it next to impossible to get credit cards or any sort of loan or even another apartment lease.
In personal relationships, we pay a price for not honoring our commitments, financial or otherwise.
You make an interesting and valuable point; I would regard someone who habitually breaks contracts as not someone I would trust in personal dealings, financial or otherwise. However, I know plenty of people who are dealing with the consequences of buying a house during the bubble. I have heard every story within my circle of friends and acquaintances, from strategic default to textbook examples of BofA’s ‘mortgage modification’ scam to people who are struggling to keep a house they should probably walk away from.
I would not have many friends left if I regarded all of these people as being lacking in integrity because they walked away from their house. In fact I know some of these people well and it would be a complete mistake to judge them in that way.
It’s the difference between someone who gets drunk once, and someone who *is* a drunk.
“Business relationships are different than personal relationships.”
Different relationships yes, but is integrity situational? Does one’s integrity depend upon the other person, business, relationship, or situation?
“Lease contracts commonly spell out the terms for breaking a lease; usually requiring the renter to pay a penalty or even 100% of the remaining rent due.”
Maybe you’re in another state? This is not an enforcable provision of a residential California lease, so it may be what the parties would bargain for or what they would agree was fair under the circtumstances, but the legislature has taken that ability to freely contract away from them.
Ohhhh boy…. BIG sell off happening now in global markets. Deflation and deleveraging happeining across global economies.
SoCal expensive / high end RE is going to come down hard! The bubble at the high end (anything north of 8-900K) is going to get hit the hardest! Even with 50 year low interest rates and now the ‘twist’ people can’t afford these properties. Why in the heck would anyone pay 1.2M for junk in Irvine when you can have ocean front in HB for same price??
Just a question….
BD
Maybe because HB is considered by many to be nothing less than “909 West” with an ocean close by?
I.E. by the sea?
skin heads
That’s what a lot of folks keep saying. Meanwhile, the higher end and higher income areas have been least affected by the housing crisis, as logic would seem to dictate. The people there on average have more resources to draw from, more equity, are last to be laid off because they have more and more in demand job skills and education, etc. There have been several studies of L.A., including at least one by ZIP code, that has clearly demonstrated that at least for now, the low end has been hit the hardest, the middle the next, and the higher end, established neighborhoods the least.
Subprime bubble lending after all benefiting the marginal borrower, not the high income earner – the latter already qualified for a conventional mortgage, the former probably didn’t and doesn’t now and is in foreclosure.
Have to admit PR was right when he called rates going down in the 3’s. Surprised he’s not gloating more.
Even more surprised that IR hasn’t mentioned any of this. For those with good credit it allows better affordability and easier to make payments.(if you’re not underwater, of course)
It doesn’t matter if I agree with what the Fed is doing now. If it benefits me I will take advantage of it. No, I’m not a realtor/broker,etc. by the way.
Just wondering how many others out there are now thinking of refinancing?
I am doing it now. Locked at 4.2 a month and a half ago, bummer, wished I had locked today.
I live in the Valley. Nice neighborhood. There was a run-up in prices in 1989. I know, because we thought about selling, and we were planning on asking the going price: $600,000. (paid 325.000 in ’86) Then there was ‘dum dum dee dum’ a DOWNTURN. Oh the horrors! Interest rates went from 12% to 10%. But, the price of homes fell a lot. Our home was now appraised for 380.000 in 1994. Gee, should we have walked away? Well, no. We had put 20% down, and it never occurred to us. We refinanced, and kept living happily. Home prices started back up again. Wow. Now it was 2005, and even our clean lady was buying a home a flipping it. I was just living in my same old home. Didn’t take out a 2nd or 3rd. Just paying down the principle. Prices went up to 1,000,000. Oh well. Nice. Still living along–2011, prices are back down. Don’t really know ‘how’ low–maybe 30% off peak, like to 700,000. So what. What is new? Who am I supposed to feel sorry for.
Help me here with some simple math. You bought at 325,000, put 65,000 down, and financed 260,000. Homes went DOWN and your home was still at 380,000 and you wondered about walking away?
You had 120,000 equity, how does “walking away” even enter in to the picture. Perhaps if you owed a cool $500,000, and WERE CARRYING that debt, the realization of walking away would have suddenly made sense.
Even if prices dropped 50%, you would still walk with a cool 175,000. 25 years ownership = 7,000 per year increase. At 700,000 = 15,000 per year.
I can understand how you would not have compassion for someone who has not benefited so greatly from the housing bubbles.
Swiller-
Didn’t mean to sound like a saint or a sinner–and I DO have compassion for every homeowner that is underwater. It is terrifying. If they default, they will give up a lot, and I know many friends who have had to do so.
My prediction is that housing will go down, down, down. As will incomes. I haven’t had a raise in over 15 years. I work in private industry (animation) and it has been dismal. The reason housing will go down is because of jobs. They’ve been given to other countries. I see many more defaults in the next few years. I place no value judgment on the individual. The Banks, politicians and Wallstreet are to blame.
p.s.In ’94 we added a couple of home offices and a pool, which cost about 100,000. Took out a loan and paid it back in a year. Then the housing smackdown happened up here. So we were in for a bit more cash than the 65,000. We did scrape and save and work very hard the next ten years. Then our incomes really dried up–and, sadly, it is now hitting almost everyone. I just wanted people to know that housing has plummeted in the past, however, not on this scale–and it’s global.
Really, the invidual has no blame in any of these situations? It was never a greedy, naive borrower getting in over his or her or their head(s)? I would beg to differ.
Do you blame credit card companies, too, for making credit available, when the users buy stupid stuff they can’t afford?
Credit is a tool, to be used wisely or stupidly.
Of course, some found themselves in unfortunate circumatances, but how many of these could have been avoided with buying less house, making sure cash reserves and savings were in place, etc?
I want you to read this article about how the banking industry heavily marketed home equity lines. People used to view second mortgages as something only a lowlife down on his/her luck would turn to. The marketing was designed to make HELOCs something “smart” that would give you “what you want.”
The people writing these campaigns know a sh*tload about psychology. How many people who don’t understand how money and finance work had the tools to withstand this relentless marketing?
Article: http://www.nytimes.com/2008/08/15/business/15sell.html?pagewanted=all
I read it, and so what. People are naturally resistant to advertising messages – they know someone is trying to sell them something. Auto makers are trying to make a car look sexy, food and beverages companies would have everyone 800 pounds if they were all completely susceptible to their message.
Now, because of these morons who couldn’t figure out whether they could afford and how they were going to pay these back those of us who are responsible borrowers don’t have accesses to these tools any more. The stupid have thwarted the smart.
Larry,
While I agree with your logic, there are some problems that bother me:
1) The interest rates we pay don’t have strategic default factored it. If strategic default becomes common (and we get the gov’t out of the mortgage business), we will end up paying much higher interest rates. Just sayin’–the system assumes moral obligation right now, but apparently it shouldn’t.
2) What about other assets like cars? If I take out a car loan and my equity goes below book value, do I default and buy a new one? It’s OK if everyone does that?
3) What about Helocs? If I take out an “equity” loan and go on a spending spree, then later find myself underwater, is it morally acceptable to keep the loot?
4) What about squatting? Is it morally acceptable to live in a house that isn’t yours rent free?
Regardless of the contract, the status quo has moral obligation built in. Perhaps that’s foolish, but I think that the future won’t and as a society we will be worse off for it.
2) Car loans are generally recourse loans, so the bank can and will come after your other assets to cover their losses. The down payment typically covers any initial loss of value, and the duration of the loan is comparatively short, so that payments typically exceed loss of value over the payment period. Even if they gave you a no-money-down loan: The moment you drive off the lot, you’re underwater. So you make a U-turn and give the dealer the car back, and won’t start making the payments. Now you’re still without a car, and ruined your credit in the process. Why would you do that?
3) HELOCs that aren’t used to do the initial home purchase generally are recourse loans (at least in California), so you will have to pay them back if there’s not enough equity in the foreclosed home.
4) I would say the bank wouldn’t be able to use (e.g. rent out) the house during the foreclosure process anyways, so it’s a kind of victim-less crime and I don’t see much wrong with it. But purposely wrecking and trashing a place, or deliberately delaying the foreclosure process, that’s definitely immoral and should be punished in my opinion.
I think the main purpose of the anti-deficiency laws is to share responsibility between lender and borrower. Why now shift the responsibility completely back to the borrower, on moral reasons alone?
Why? Because the new morality demands it, just as with the car loans.
4 – I think it’s called stealing. Stealing rent, services, occupancy. And having toured many many foreclosures AFTER they have been cleaned up a bit and put back on the market, the vast majority show signs of the former occupants having deliberately damaged or stolen from the property – usually be removing appliances and other fixtures that by law stay with the property (and in a less than careful manner). And of course we’ve all heard about those properties where the owner has deliberately trashed the place.
Squatting not victimless because it encourages more to default, which depresses property values for all in the neighborhood. (As does strategic default in general.)
If someone put down 20%, let’s say $100,000, and their payment is $3,000 a month, how long do they have to squat to break even?
Squatting doesn’t encourage more people to squat. Over-priced housing, un-realistic loans and loss of income causes this.
That’s not a relevant question. The buyers are the ones who new most about the property and chose to buy it when they did, instead of others, instead of earlier or later, instead of renting, intead of buying in a different city, state, country, or time. They also selected the loan product used amongst many options available to them.
If the housing was overpriced, why did they buy it anyway? Are they stupid?
Of course squatters encourage more squatters, just as speeders encourage more speeding, litterers encourage more littering. Apparently, you are unfamiliar with the broken windows theory of crime, may want to check it out.