Everyone walking away from their homes is also hoping to walk away from their debts. Will our system let them slide? Should it?
Asking Price: $850,000
Address: 5 Hawk Irvine, CA 92618
Could you whisper in my ear
The things you wanna feel
I’ll give you anything
To feel it comin’
Do you wake up on your own
And wonder where you are
You live with all your faults
Chorus:
I wanna wake up where you are
I won’t say anything at all
So why don’t you slide
Yeah we’re gonna let it, slide
Slide — Goo Goo Dolls
Back in February of this year, I wrote a post titled The Financial Implications of Short-Sales and Foreclosures. It links to a post written by an attorney on what happens to those who cannot or will not sustain their mortgage payments. To paraphrase the attorney, when people are in these circumstances, they break down into one of four groups:
- Those who still owe the bank much money;
- Those who have a big income tax bill with no cash to pay it;
- Those who owe the bank much money and have a big tax bill
- Those who owe the bank nothing and who do not have a tax bill.
Everyone wants to be the last case. Many end up as the third case.
Very few research the implications in advance. Since most people do not have any other options, it really does not matter because it does nothing to change their decision.
Even fewer take any initiative to do the right thing. Legally, it is the duty of the debtor and taxpayer to determine if they have any liability and pay it. Realistically, everyone will “keep their head down” and hope they do not get any letters from the bank or the IRS. No letter, no liability. The amount of tax cheating is enormous.
Most of the properties I profile would be the third case from above that owe the bank and the IRS because they were recourse loan refinances, and many were not primary residences. How many people do you think are going to pay either the bank or the IRS? Not many, IMO.
I know one person who walked away from a 100% financing deal on an investment property in Corona. His tax advisor told him not to pay taxes on the shortfall because he listed it as him primary residence on the loan application. That is one hard-working lie. He used it to qualify for an interest rate he did not deserve (owner-occupied housing gets a better rate), and he is using the same lie to dodge a tax bill. He isn’t the only one.
The lenders are finally wising up to the changing situation. Since most people believe they can walk away from their debts in a short sale, lenders are sneaking language into short sale agreements where the borrower is liable to repay the shortfall. Collection of these debts will be a booming business in the coming years.
So what do we do about this problem as a society? If we hold all these debtors liable to the banks and to the IRS, we keep them in a financial hole for a very long time, or we force them into bankruptcy. The societal effect will be diminished economic growth because so much disposable income will be diverted from consumer spending to debt service. However, if we just let these people slide, the moral hazard will be huge. If people see no consequences come from this behavior, they will repeat it. The societal effect will be endless Ponzi Schemes and periodic economic near-depressions as the financing collapses.
No matter what we do, the winners and losers will be determined by caprice. Those who owe either the lender or the IRS and get away without paying will be unjustly rewarded. Those who do the right thing will be punished. There will be no pattern of reward or punishment for behavior good or bad. It is a dysfunctional system, and nobody knows how to fix it.
What is your solution? Let ’em slide? Crush ’em with debt?
Asking Price: $850,000
Income Requirement: $212,500
Downpayment Needed: $170,000
Purchase Price: $404,000
Purchase Date: 12/14/1999
Address: 5 Hawk Irvine, CA 92618
| Beds: | 4 |
| Baths: | 3 |
| Sq. Ft.: | 2,780 |
| $/Sq. Ft.: | $306 |
| Lot Size: | 3,320
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Other |
| Stories: | 2 |
| Year Built: | 1998 |
| Community: | Oak Creek |
| County: | Orange |
| MLS#: | S580691 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 4 days |
waiting for. Where else are you going to find a home in IRVINE that is
in a gated community, that has 4 bedrooms, 2.5 bathrooms, 2,700 sq ft
with a 2 car attached garage, on a Cul-D-Sac for this price. RIGHT
HERE!!! This great Ashford Place home will not be on the market long so
HURRY and get one of the best deal in Orange County.
Multiple exclamation points, ALL CAPS, HURRY — all standard realtorspeak is present.
- This property was purchased on 12/14/1999 for $404,000. The owners used a $322,850 first mortgage, a $80,700 second mortgage, and a $450 downpayment.
- On 7/3/2001 they refinanced the second mortgage for $170,000.
- On 9/14/2004 they opened a $280,000 HELOC.
- Total property debt is $772,580 assuming they maxed out the HELOC.
- Total mortgage equity withdrawal is $369,030 including their $450 downpayment.
If this property sells for its current asking price, the lender will recoup all of their money and make $26,420 after a 6% commission. I don’t think anyone believes that is going to happen. Check out the listing price history:
| Date | Event | Price |
|---|---|---|
| Jul 06, 2009 | Price Changed | $850,000 |
| Jul 06, 2009 | Listed | $580,000 |
| Mar 20, 2009 | Sold | $640,000 |
| Dec 14, 1999 | Sold | $404,000 |
They listed this property for $580,000, then changed their mind and listed it for $850,000. Perhaps this was a transposition error, or perhaps it was a Freudian Slip where the lender put down what the property is really worth…
Don’t miss your chance to get one of best deal in Irvine. Not only is it “one of best deal”, it is priced $100k plus over market, even according to our friends at Zillow.
You know, I work with many people who speak English as a second language, and who are native Mandarin speakers (in fact I’m married to one). All of them seem to be able to put together a grammatically correct sentence when they need to. Why can’t any of these Irvine realtors seem manage that?
I two married won. How’s that for grammar?
I say we grease the skids for those drunk on koolaide. Let them walk from their homes with no recourse whatsoever. Place no derogitories on their credit. I know it sounds crazy, but the more incentive these upside downers have to walk, the sooner we will see price stabilization.
the only problem is, that home price stabilization will be much lower than where we are today and too many people do not want to see that happen.
Is there spell checker on blogs?
BKrazy
I could have let this slide, because it looks like I did it on purpose, but the error in the last sentence of the above post wasn’t intentional — but hey, I’m typing fast, not writing an advertisement for an $800,000 house.
I guess sloppy realtor work can include typos in the asking price.
Might have sold for $580.
Total mortgage equity withdrawal is $369,030 including their $450 downpayment.
LOL!
Can you really consider $450 a dp on a $400k home? Isn’t it more like closing costs, or a contribution to the 6% commission? That is a security deposit on a decent 1 or 2 bdrm rental.
What bothered me about the mortgage cramdown legislation was the fact that 2nd homes can get cramdowns in BK. IMO, 2nd homes should be sold to pay the debt that got them into BK. If the full sale will more than cover debt, mortgage it.
Is the ability to have multiple loans listing the home as primary residence, due to anything other than shoddy underwriting? Couldn’t a bank sue for fraud, not that it would be worth any more than a full-on recourse loan FC. I’ve seen people with 3+ homes, none with 2nd home riders on the public mortgage docs, and all with >90% financing – including two homes next door to each other!
The money going to debt service will eventually be spent, and probably in a more prudent way than if you let a FC’d debtor spend it. Banks will have better capital positions meaning less bailout money and more lending. However, I don’t understand how a bank that loans 100% for a 2nd home realistically ever thought they would be repaid – without continued house price appreciation.
I’m much more inclined to crush specuvestors than owner occupants.
The case I saw had 7 total properties owned, 5 have been FC’d already. Total sale value was in the $3M ballpark. From dates, you could see a heloc on one providing the dp for the next. Last sales on new >800k homes were > 90% financing. Classic specuvesting.
This should not be allowed.
How long does it take a mortgage to show up on your credit score? Wouldn’t a credit check show a mortgage app or open mortgage? Maybe the mortgage approval process should be slowed down a little. Banks aren’t innocent either.
What if this buyer at some point wishes to upgrade the carpets in his 850K house to the clean and non-stained brand? How much extra would that cost?
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http://www.crackthecode.us/images/Hurry_Dirty.jpg
It’s an REO, so sometimes you get no repairs. However, you would think for $850k they would at least do carpet and paint.
It’s dirty, dark, and thoroughly second-rate. This is a lousy tract house going for close to $1M. The owners should pay someone $850K just to move in and take it off their hands.
And “the owners” would be the bank. Hey, they let former owners live in houses mortgage-free for months; why not try paying for long-term renters? (At that price, that’s all anyone who bought the property would be doing for a decade.)
Foreclosure Filings Hit Record 1.5 Million; One in Eight Americans Delinquent; Obama’s Mortgage Rescues Create ‘Confusion’
“Foreclosure prevention programs are going to continue to fail as long as home prices are sinking and unemployment is rising. Attempts to manipulate the market and/or prevent foreclosures will merely create “perverse incentives that distort the housing market”.
The only real solution is time and price. Homes have to fall to the point of affordability and people have to have jobs before any house is affordable. This should be obvious but given the number of failed programs it must not be.”
This is why I say that we just need to lower the retirement age to 15.
We’ll just re-classify all those unemployed people as ‘retired’ and re-calculate the unemployment rate to be 0%.
Their social security money can then be diverted back to the banks via mortgage interest payments.
The best part of all is that nobody has to work anymore. We just take government handouts instead.
You look in the wrong direction: lower the age of eligibility for 125% NINJA loans to 15. You can sell the resulting Clearasil MBS’s to the ratings agencies as loans to people with rising incomes – which is true enough – who will have earning power for 50 years.
All these can be 50-year mortgages, with the mortgagee still under retirement age at maturity.
This gets us out of the Ponzi scheme by replacing it with a pyramid scheme which will last far longer. If first-time buyers get scarce again, just drop the age to 10 and write 55-year mortgages. Also, the birth rate can be cranked up spectacularly to keep the younger age cohorts plentiful and willing to pay for their homes just walking distance from elementary school.
Hell, I say let’s just start cranking out 100,000 year mortgages at 1000% interest and get everybody a monthly payment of 5 cents. The masses would love that.
Back in 90’s Japan actually tried 60-year, multi-generational mortgage to add more “affordability” to their falling housing market. So the father would pass the unpaid balance down to the son. You have to admire their ingenuity – definitely beat our 40-year loan mod.
I’ve pretty much done a 180 on mortgage mods. I agree prices need to fall and FC’s are the only way. Delaying is delaying the inevitable. I don’t want to see people kicked out of their homes, but I didn’t want to see a housing bubble form either. If they could afford a mod’d mortgage, they can afford to rent.
There are already perverse incentives: mortgage interest ded, Fannie, Fed buying MBS’s, etc, not that we need more of them.
I want to see an express lane to foreclosures where the house is already vacant. If someone never moved in (straw buyers, fraud, etc.), it is a rental that is now vacant, or the owner moved out for whatever reason, 30 days to the foreclosure sale sounds good.
It does; unless you’re in Florida which allows only judicial foreclosures.
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http://www.crackthecode.us/images/government_solutions_inc.jpg
I suggest that horse read Animal Farm…
DAMN that is funny. I almost choked on my Dorito.
http://www.cnbc.com/id/31895367
I surprised that the media is even reporting this with the Cyrus or the Messiah in office. He was to lead the people back to rebuild the promise land. — bank bailouts, recovery with high unemployment instead. Not much of a recovery.
Even with a job, people can pay the mortgages in Western coastal states. The mortgages for both old and new sales need to be subsidized to get people to bid up the houses based on monthly payments. Change the song and dance to “… Fetch another round, Brandy. I can still hear him say what a fine house you would be …Just another round of fees…” The Fed and industry can fool the people once, shame on them, fool them twice, demand a bailout, fool them thrice, shame on the investors, fool them four times, no more investors unless at gun point (naval battle groups sitting off shore).
Good article, but Mish’s headline is misleading, as much of what Mish writes usually is. (I was reading Mish back when he was just another poster on The Motley Fool: http://boards.fool.com/)
It’s 1 in 84 Americans are delinquent, not 1 in 8. It’s 1 in 16 if you narrow it to Nevadans (1 in 13 in Vegas) or 1 in 34 if you narrow it to Californians.
-Darth
That’s a bit too close to…
1. High voltage power lines.
2. The 405.
…for my tastes. Now, you can make arguments about the power lines, but being that close to the 405 is certainly not healthy, especially for children.
This is right across the street from an elementary school, so the kiddies are going to be exposed regardless.
A $450 down payment!! That was another cause of this causing implosion…lack of significant down payment. I doubt the shady used car dealer on Harbor Blvd would allow that kind of down on a 10 year old Accord. This just makes me sick!
Sticking your head in the sand with respect to your tax bill is probably bad advice for a lot of these HELOC abusers. If they truly are insolvent when they go into foreclosure, that’s the time to come clean to the IRS. Because that’s the one excuse you can use to have debt relief not count as income. At least that’s the IRS website seems to imply.
BTW, we had a business that lost a lot of money…not as much as what we see here, but it still took over 7 years to pay back the loans. So just making them pay the IRS will teach them a lesson for a long time. Guess we should have invested in housing instead of trying to actually make something.
Agreed.
The only problem is how do you drop the hammer on the borrowers while giving freebies to the crooks that are running the lending shell game? It’s like offering a milkbone to a hungry puppy dog and then smacking it in the face, yelling “NO!” when he eats it out of your hand.
While the majority of us were smart enough to ask questions, do our homework, and not give in to the lies – we were essentially going against what the government told us to do.
How does the government get off on hanging the FB’s out to dry when they were just being good little lemmings by playing ball under the rules that the government set up for them to play by?
The only sensible solution is that everyone gets bailed out in the end and we throw away the entire system and rebuild it from the ground up – complete with debtor prisons, and the elimination of mortgage interest deductions, government sponsored “affordability” programs, and Wall Street mortgage casino gaming.
One action rule means most people who walk away will end up with a big tax bill since non-judicial is the primary way to FC in CA. Short sales are for suckers for buyers AND debtors…it’s about as bad as FC on your credit AND you just might end up liable for the balance if the bank is sneaky enough, don’t forget people coming to see the house.
That said…when would the bank try to collect this deficiency? If if it becomes unsecured after a SS, wouldn’t it then be subject to statute of limitations? Going to court is probably more hassle than it’s worth since the debtor will end up filing bk anyway, otherwise, the bank would have pursued a judicial foreclosure in the first place.
If I am not mistaken, this debt becomes an unsecured debt, and the borrower is still liable; although, the debt holder has no collateral or any way to force collection. My guess is that you will see zombie debt collectors buy up these loans for pennies on the dollar and start harassing people for payment. If they will do that for a $100 credit card bill, what will they do with a $100,000 second mortgage?
What will their ‘stick’ be? Walker A. Way already has crappy credit, what will the penalty be for continuing to not pay that debt?
They won’t have a stick. If you only pay $1,000 for $100,000 in debt, if you even get a 2% recovery, you make a fortune. The zombie debt collectors have much experience with recovery rates, and they know how to bid on this debt. If it is cheap enough, someone will buy it and see what they can collect.
I figured if someone had the balls to just walk away, why wouldn’t they just walk away from the debt collector. Credit is already trashed. From what’s written below many will pay some percentage. How long before scammers claim to own your old foreclosed debt and ask you to pay, without even buying the debt?
Hire The “Los Sopranos Financial Agency” for your collections. No one walks away from LSFA, they may hobble, hop or crawl away, but they never “walk” away.
Capisce?
For a person who loses their residence, most likely they don’t have a lot of other assets on hand to chase after. What about speculators, flippers, Realtors who were buying and selling for themselves? Or all the people who claimed multiple primary residences? I don’t know what percentage of the foreclosures they are, but it seems more likely that they do have other assets to go after. Perhaps some of the HELOC abusers didn’t spend it all on outright consumption, and likewise have at least parts of it tucked away.
If the debt is cheap enough to buy, I’d guess there are people with time on their hands to go fishing through it to see what is buried.
I don’t see how this could ever be a viable business.
It’s one thing to harass someone for 100.00$ that you know they have or could easily scrounge up from some friends and family – but $100,000?
It’s a waste of time – no amount of phone harassment is ever going to produce that kind of money from somebody who simply does not have it. That is way too much blood to try to squeeze from a turnip.
I would think that any company that tries to buy up these loans and go after the borrowers will be out of business very quickly.
True…it’ll depend on:
1) how much the debt collector buys the debt for
2) how convincing/threatening they are to get the debtor to settle for ~$5000 or get a payment plan going.
If I were in that situation, I’d tell them to stick it somewhere and let the statute of limitations expire. Then again, I know how to play the game. If I were to quantum leap back to 2000, I would have bought, sold in the bubble, and move to the mountains to watch Rome burn.
I’ve had nice coworkers who don’t know jack about $$ (ie took out payday loans, harassed by creditors, etc…) I offered to look at one person’s financial picture…turns out she was paying collections (payment plan) and some of that debt was way too old. She even took out payday loans to cover these things, bad bad stuff.
That’s just one person….given the # of know-not-much/know-nothings out there, debt collection can be viable. That’s why FC is the way to go for these debtors…one action, 1099 issued, done and over. 2nd TD is going to be a different story, however.
It’s certain that there are plenty of morons out there who will pay. 12% of e-mail users have admitted to answering spam, which puts a floor of 12% under those who will pay money to a collection agency. Figure another 20% who can be garnished through legal channels, and it makes sense to buy the debt at a few cents on the dollar.
So you get a judgement. They will bankrupt out of it.
The whole debt collection system is nothing but a mind game. They don’t actually sue people because there is no money to be made and they know it. It works by pestering and making threats against a person’s “credit score”. You can stop the phone calls by writing a simple letter to the collector stating that they are no longer allowed to call you. The only thing after that is fear of the credit score. How is this threatening to someone when the average person in society has wrecked credit as well?
How do you back this up when it becomes socially acceptable to have a house foreclosure on your record?
If I ran a credit card company, I would open up a special unit to extend very limited credit to foreclosure people with a huge interest rate because more than likely they will be able to payoff a small credit card debt and I can totally take advantage of their situation by charging a huge interest rate.
If this sold in March 2009 and is relisted in June, it’s a flip isn’t it?
No, this is still REO. The listing agent is trying to get top dollar.
The March sale was probably the bank “buying” it from itself after it failed to sell at auction.
I had the opportunity to visit a new listing on Lewis. There were 8-9 families jostling with each other to see the house, nothing special about the place. Looking at the people clamouring to see the place one would think that it was the last open house on the planet. The common refrain was similar to this listing ‘Don’t miss your chance to get one of best deals in Irvine. ‘
Its a bit sad to see such kool aid induced frenzy. The Irvine market will take a while to come down to realistic levels…provided people are willing to wait.
Subprime debt’s new threat to housing
The MSM is starting to get the word out.
“The housing market is facing new downward pressure as holders of subprime-mortgage bonds flood the market with foreclosed homes at prices that are much lower than where many banks are willing to sell.”
This article is more about the residual effect of the subprime clearing process. It makes no mention of the Alt-A and Option ARM problems. Three years from now, this same article can be written looking at Alt-A and Option ARMs in the rear view mirror.
An interesting companion article on finding housing bargains caught my eye. Could be good fodder for a post.
http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/5-keys-to-finding-housing-bargains.aspx
I’m amazed this place sold for over $400k in ’99. Talk about your box with little in the way of curb appeal and the fixtures and furnishings can only be charitably as “builder basic”.
Way back in ’99 I was renting in Oak Creek (same neighborhood this house is in.) At $400k, this place is almost at rental parity. Sure, its a builder basic, Irvine standard issue box. But if you bust out the RentVsOwnulator, its a win.
What do we do with ’em?
Well…it depends on who it is.
Men: Roadside work crews…chain gangs…let ’em work it off.
Women: Nevada Legal Brothels…let ’em **ck it off.
Capitalism without bankruptcy is like Christianity without hell.
The bailout was a moral hazard. Requiring people to pay the difference of the underwater mortgage who walked out of there home is not. The difference is the banks loaned the money to individuals hoping to triple their initial investment over the life time of the loan through interest payments. The banks are suppose to vet the future homeowner to make sure they can live up their obligation because it’s their money.
If a homeowner fails to live up to his obligations then he should have to take a hit on his credit, where he can’t buy another house for a period of time.
That’s the way it should be, but the banks figured out that you can make a lot more money by designing loans that never get paid off.
Sell 30-year loans to people who will want to move out by year 10 and transfer the debt to someone else. A never-ending stream of money. This is the root of the problem.
What you have to do is make the 30 year mortgage unavailable to buyers who do not have significant levels of equity like anything less than 50%.
Anybody who does not come to the table with 50% cash can only be issued a 15 year loan. This forces the buyer to payoff the loan in a timescale that is consistent with how long he is likely to be in the house. It will also put a ceiling on house prices at the bottom of the ladder because it limits the prices that first time buyers can afford which will put a check on prices at the higher levels.
When the buyer sells his house, he will have a lot more equity to put into his next house. If his equity is not enough to satisfy 50% of his move up house then he gets another 15 year loan. If he has more than 50% equity then he can be issued a 30 year loan.
The bank earns less interest than in the 30 year model but they will still earn plenty of money. The buyer builds equity faster by paying less interest. Prices stay affordable because they are limited by the amount of cash a first time buyer brings into the transaction and payments on any loaned amounts will have to be affordable according to a 15 year off schedule which will keep prices down.
That’s it. Simple and fair. No government Ponzi programs or interest deduction gimmicks. More focus on paying off debt and keeping the system equally balanced between cash and credit.
Will it ever happen? No.
That doesn’t maximize profits for the banks.
So for this to come to pass, the GSEs would have to become truly the only lenders of mortgage money to the American people. AND then the government would have to benevolently decide that they wanted to implement this.
Do two impossibles make a possible?
You can just picture the banking moguls shaking in their suits as they consider what life would be like under such a system.
The reason that the system will never change is because the average person is a moron.
Suppose politician AZDavidPhx comes along and says I want to reform mortgage lending by implementing my 50/15 plan.
The existing banking cartel that controls the media would immediately issue a 2-pronged propaganda blitz.
“Experts” in fancy suits and hot babes with too much makeup and nice boob jobs would be popping up all over the network NEWS stations in mock debates telling the masses that AZDavidPhx wants to raise their mortgage payments and lower their house values.
Old people with nothing better to do will start showing up near NEWS cameras with signs that say “Leave My House Alone”.
In the meantime, the opposition starts telling the masses that all we need are more tax incentives and government goodies.
It will spread enough confusion and diffusion to bamboozle the majority of dumbass voters who will opt to do nothing and keep everything the same.
This is why it is never going to change. They have us right where they want us.
AZDavidPhx,
You and I have not seen eye to eye in the past but this concept of yours is very interesting. It would definetly keep the long term debt load many people carry at more manageable levels. I am trying to think of all the residual effects this would have in the US economy but I am too tired and it would never happen anyway.
My security deposit for my rental was 1800.00, 4x what their down payment was to move into this home.
I have friend’s that live in Oak Creek and I’m sure they paid around 340k for their home brand new. That was around ’99 or 2000. They took out money and bought a spec place in Idaho with the guidance of Marshall Reddick. Ha! I pleaded with them not to buy in Vegas and finally they listened.
It seems like everybody wants to rule the world.
I am beginning to feel like an aggrieved special-interest group. Foreclosures and for-sale signs abound, yet few single-family homes for rent. It’s still just worn-down stucco apartment buildings for the most part.
Total silence in the media about the effect of the ownership society housing prop-up is on renters, many of whom called it right and are being punished by artificial depression of supply. An artificial shortage keeps rents high and limits renters’ choices.
Every foreclosure kept off the market, every cramdown, every mod, and every bankrupt homeowner living rent free during foreclosure equals one renter or renting family who can afford to pay the market price for the residence but remains shut out.
b/c the fed prints money and backing up banks as long as needed. if i’m bank, i’ll put those houses in shadow as long as possible.
Where exactly is there a shortage of houses for rent? For example, I see 36 housing units with 3 bedrooms or more in Irvine posted for rent on Craigslist-just those posted today (many more posted yesterday, the day before, the day before that). I’m sure some of them are condos, but Irvine houses are on such small lots that there’s not that much difference, IMHO.
There are a lot of people with “investment” or other second houses (inherited, moved away, etc.) who are renting them out for less than the mortgage payment so they DON’T take the hit to their credit score.
Denver, CO 80218.
(Yes, I know this blog is about Irvine…)
Plenty of stucco boxes in the outer-ring suburbs, but most of the houses nearer to downtown are owner-occupied or already rented out.
The essence of my complaint is that Denver is still holding up well, for the nonce – everyone is nodding and saying “It’s different here!” – so that rents have not dropped, even though vacancies are edging up. Yet I see for-sale signs in the neighborhoods which interest me, but few rentals in those same neighborhoods.
so, if it sold for $640k in MARCH 2009, why on earth would it be worth $850k just FOUR months later?! Jerks.
Because, according to their logic it is worth 640K in a cash transaction – but it’s worth 850K in an IOU transaction.
Think of it as changing currencies from dollars to IOUs.
The $640k was not a real sale. That was the bank “selling” it to itself when it failed to find a bidder at auction.
It was a real sale – the buyers just couldn’t pay for the thing with Coldwell Banker monopoly money. Just because the currency was cash does not mean the sale was any more real than one arranged by a mortgage broker.
The bank is not selling the house to itself. It is buying it back from the borrower that defaulted but the court awards the proceeds of the sale back to the bank instead of the borrower since the bank holds the lein on the asset. If the bank were selling it to itself, it could do so for 1$ and dispense with the whole auction charade.
The only reason the bank is buying it is because it is gambling that it can re-sell the house on the real estate market where people shop based upon monthly payment amounts and credit approvals. In other words, it gets a higher exchange rate by switching from a cash market to an IOU market.
But the key bit here is that the amount that the “sale” is recorded at is completely arbitrary. It’s usually, but not always, the amount owed on the first mortgage. This could be above, or below, the fair market value-all it means is that nobody had a cashier’s check for more than that amount on the courthouse steps (with no title check, no home inspection, no contingencies at all). In this case, the amount is (probably) below fair market value.
My point stands. You can not use that price to determine the house’s value, since it wasn’t a hands off, fair market transaction. A similiar type of transaction would be if a parent sold their house to their kid for 10% of it’s actual value. You can’t use that as a comp either.
I agree that it definitely throws a wrench into the perceived “fair market” because “fair market” to most people implicitly assumes payment tendered in IOUs. It certainly shines a light on how perversely the market is distorted by easy credit.
However, I don’t think you can totally ignore the sale as totally baseless. It has to say something about the value. Somebody would have bought it eventually if they kept dropping the price…granted it would have been at a very unfavorable price as far as the bank is concerned.
I don’t fully agree with your parent/child analogy because a sale on the courthouse steps is more hands off free market than a parent discretely arranging a sale to a child at a favorable price that cannot be competed against by a third party.
No courthouse purchaser buys a foreclosure with no title check/no home inspection. Title checks are easy to do on your own through the public records.
As for home inspection, 10 years ago I helped my parents inspect many empty foreclosures. Open windows, unlocked glass doors, lots of possibilities.
At the very least, you can do an outside inspection and peek in the windows. Or, with many of these short sales turned foreclosure, take a tour of the property months before the foreclosure sale.
If a third party purchased it at auction, it would be a hands off purchase. If the bank buys it to pay off it’s own lien, it is not.
I guess we will agree to disagree here.
I should point out that the price recorded here is frequently wrong in the other direction-that is, a property worth $100,000 is “purchased” in this manner for $250,000. Very common out here in Riverside.
Doesn’t mean that buying it for $200k would be a bargin. But if the $250k was counted as an actual sale, it would be.
Question for irvinerenter:
When a bank “repurchases” a home on the courthouse steps on which it has the mortgage (assume only a 1st mtg is outstanding), is it legally considered “an arms length transaction”? If so, is it usable as a comp by independent appraisers? Tx.
WTF
Are “no-income verification” loans back?
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