Some of the knife catchers from 2007 and 2008 are changing their minds about their great investments. This former REO buyer from last year is looking to get out at even.
Yesterday, All my troubles seemed so far away, Now it looks as though they’re here to stay, Oh, I believe in yesterday.
Suddenly, I’m not half the man I used to be, There’s a shadow hanging over me, Oh, yesterday came suddenly. Yesterday — The Beatles
Knives can be very dangerous, but they also can be a useful tool in the hands of the right person. It can be used to trim away the excess and leave a lean and useful core; however, it can also cause serious harm.
The foreclosure and bankruptcy process works like a knife cutting away at excessive debt. We still have a large amount of unsustainable debt held by many homeowners in the mid- to high-end of the housing market. There are only two realistic scenarios where these debts are cut down to size: (1) property sale, and (2) loan modification.
Current incomes do not support current debt loads under stable loan terms. Many people are trying to blame the foreclosure crisis on the bad economy and unemployment, but we would have had a huge foreclosure crisis even if the economy had remained sound. The implosion of subprime had nothing to do with the bad economy, nor was it the borrower class that created the default problems; it was the loan terms. The ARM reset and recast problem we are now facing is just like subprime. Remember, It’s not the Borrowers; It’s the Loans.
Many people would like to sell to cut loose of the mortgage payments they cannot maintain. As long as the market has owners in this situation, there will be pressure to sell and excessive home inventory. We are not seeing this inventory yet for reasons discussed on many occasions (most recently in The Lenders Are the Market), but this inventory is on its way. (see also this article in the LA Times: Another wave of foreclosures is poised to strike)
Loan modifications have failed to make a significant dent in the problem, nor is it likely that it will in the future. These programs help a few on the fringe, but they don’t do much for the hopelessly underwater and those who simply cannot afford their debt service under any loan conditions. There will be No Forgiveness of principal.
Even if loan modification programs were to work, it may be good for the lenders, but it will do little for borrowers or the economy. The payments under loan modification programs are still onerous, so people will not have much money left over to enjoy their lives. It isn’t likely that lenders will be giving out HELOCs to those people with loan modifications any time soon.
Much of the homebuying population seems to think that the free money from HELOCs will be available in a year two. Once prices go back up, won’t lenders be giving out this free money again? It doesn’t seem very likely that lenders or investors would put their money into loans that defaulted and cost them a trillion dollars. Would you?
{book6}
I first featured this property back in July of 2007 in the post Sumac Attac. It has been two years since this house began its quest for a stable homeowner. So far it has managed to find a knife catcher. Will the next owner be stable?
FAVORITE FLOORPLAN IN COLLEGE PARK WITH 5 BEDROOMS AND 2.5 BATHS ,
BONUS ROOM CONVERT TO BEDROOM WITH 2 CLOSET. REFINISHED CABINETS
,GRANITE COUNTERTOP, STAINLESS STEEL APPLIANCE ,CELLING FAN ,SECTIONAL
GARAGE DOOR , RECESSED LIGHTING , NEW PAINT IN & OUT , NEW FLORRING
, GAS STOVE ,ROSE GARDEN AND FRUIT TREES,CLOSE TO PARK , SCHOOL , FWY ,
SHOPPING .
ALL CAPS
FLORRING?
FAVORITE? Whos favorite?
This property was originally purchased on 10/28/2005 for $795,000. The owner used $636,000 first mortgage, a $159,000 second mortgage, and a $0 downpayment. He defaulted in late 2006, and the property was purchased by U S BANK NA, ; HOME EQUITY ASSET TRUST 2006-1HOME EQUIT, ; SELECT PORTFOLIO SERVICING on 05/22/2007.
Foreclosure Record Recording Date: 04/27/2007 Document Type: Notice of Sale (aka Notice of Trustee’s Sale) Document #: 2007000272756
Foreclosure Record Recording Date: 01/25/2007 Document Type: Notice of Default Document #: 2007000052690
The lender did not waste any time in the foreclosure process, but they held the property for 9 months before they sold it.
The property was purchased by the current owner knife catcher on 2/28/2008 for $600,000. He used a $417,000 first mortgage, a $128,000 second mortgage, and a $55,000 downpayment. If he gets his current asking price, and if a 6% commission is paid, he stands to make $11,000. Basically, he has enough room to negotiate without losing any money. Do you think he will get out without a cut?
Bailouts are rescuing the irresponsible at the expense of the prudent, or so we all believe. But didn’t the prudent benefit from the Great Housing Bubble as well?
Today we have a guest author, Dejnov. It is good to get differing perspectives and points of view, and I don’t mind taking a break once in a while. So, with that introduction, the IHB presents:
The Bailout for Prodigious Spenders by Dejnov
In numerous housing blogs, there is a current pervasive meme circulating about how responsible prudent renters, to their own personal detriment, are being forced to bailout the spendthrift homeowners. Like Aesop’s fable of the ant and the grasshopper, the industrious ant worked long and hard every day to build a nest egg for the long winter months approaching, while the carefree and lazy grasshopper frittered away the summer days. When winter approached the ant was comfortable knowing that he had enough stores to last until the next summer, while the grasshopper found himself starving. The grasshopper, or homeowner and equity spender, decides to ask the ant, a renter and saver, for charity to help him weather through the winter months. Depending on the version of the fable the grasshopper either is personally rebuked by the ant for his laziness and allowed to starve, the ancient version, or has pity shown upon him by the ant and allowed to weather the winter within the grasshopper’s home, the current Christian version.
Currently, the general consensus on housing related blogs is that a third more sinister version is occurring. The grasshopper, through political influence, has his crony banker buds forcibly steal enough of the ant’s nest egg to make himself whole. While the current news about endless bailouts seems to imply such a schadenfreude inspiring situation, I think that the analogy is incorrect, and given the current situation a different, fourth ending, to the story might actually be occurring; one where the ant wins, and the grasshopper, even with bailouts, loses.
To fully understand the future outcome, the summer months must first be analyzed. During the late 90s and early 2000s our economy enjoyed huge expansions in credit and leverage, with many people being able to assume debt-to-equity and debt-to-income ratios far above what was earlier considered prudent and standard. This allowed house prices to rise and home owners to extract their nominal equity gains through loans and spend that money freely. With credit (and leverage) ratios expanded every year and required equity amounts reduced, those who owned tangible assets saw their net worth increase yearly, while those who had no large tangible asset base didn’t. But this is all old news, and has been stated ad infinitum in many housing blogs. The basic premise is that leverage only helped those with assets and hurt or hindered those who didn’t. The reason such an idea is so pervasive is that it’s easy to quantify and calculate. Houses, and to a lesser degree stocks, are the single largest identifiable line items on an American’s balance sheet. Net worth growth due to house (stock) appreciation is currently tracked by endless agencies and investors. Whole sell-side industries continuously shill about the large appreciation and net worth growth that occurred to help sell their products.
While the earlier assertion is somewhat true, leverage has also helped less asset-heavy Americans’ balance sheets. Karl Denninger on the Market Ticker had a great article about leverage (http://market-ticker.denninger.net/archives/865-Reserve-Banking.html). Leverage is, inherently, not a financially ruinous concept and something to be avoided at all costs. If used prudently, it reduces interest expenses and allows savers to annually save a larger percentage of their earnings. High bank leverage rates for the last ten to fifteen years allowed Americans to finance zero-interest loans on cars, access student loan credit at near or below long term inflation rates, get zero-interest short term credit card loans, and allowed the government to reduce the overall tax burden. From 1987 till today, the top bracket on income tax has never been more than 40% and has been as low as 28%. A comparative look at the history of federal income tax in the 1900s shows that for most of this time, top bracket tax rates were much higher than what we’ve seen in the last twenty years (http://en.wikipedia.org/wiki/Income_tax_in_the_United_States). In the last century top tax brackets have been as high as 91% to 94%. The same holds true for capital gains tax rates.
So what does this all mean for our hard-working exploited ant? Whatever he was earning, he got to keep more of it. He had to pay less in taxes, and all of life’s interest expenses were cheaper. A strong saving ethic would have been amply rewarded in this climate. While it might not have been prudent to invest all of one’s excess returns in either housing or stocks, someone who diversified his investments and held money in a savings account has done well. Granted, interest payments on a savings account have been pitiful (in some instances near zero), there hasn’t been any loss of capital, and long-term financial security was never more possible to achieve. The last ten to fifteen years have allowed responsible thrifty consumers and strong savers the potential to grow positive balance sheets by reducing their incidental and financing costs.
“Well that might be true,” states the ant, “I’ve done moderately well these days. But it’s nothing like how the grasshopper has done. I mean he’s completely blown past me in net worth. Look at his house, with the pergraniteel, the Bentleys and Lexuses in his garage, and all the fancy leather furniture he’s got. I myself just rent an apartment and drive an eight year old Pinto.”
“Pssst, hey ant, don’t forget all the MEW-funded bling-bling I bought for the SigO” chimes the grasshopper!
There hasn’t been any contention that the grasshopper has lived a more consumption-conspicuous lifestyle. What really is the issue, currently, does the grasshopper with bailouts, actually have more resources than the ant to survive the onset of winter? The winter I’m referring to is the ongoing credit deleveraging and subsequent contraction in pay, jobs, car/house prices, prices on everything else, etc. A current wonkish paper (The Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble) by Rosnick and Baker tries to elucidate on the current state of affairs.
The last accurate measurement of net wealth was completed in 2004. Well it’s currently 2009, how are we doing now. Rosnick and Baker answer unequivocally: “badly.” Net wealth for baby boomers cohorts (ages 45 to 54 and ages 55 to 64) is significantly down, with the younger cohort’s median net wealth down by 45% and the older cohort’s median net wealth down 38%. But what is more surprising, and pertinent to this article, is their finding that over all wealth quintiles and age cohorts, those who were renters in 2004 currently have a greater net worth than those who were owners in 2004. In some cases, the renters have a lot more net worth. Even with the great run-up in home equity after 2004 until 2008, a little over a year of losses has put house-owners into a worse financial position than renters. That’s a somewhat contrarian conclusion. For many years, the real-estate shills have espoused how owners, through owning real estate, are a more capable and financially secure class of people than renters. Presently, this doesn’t seem to be the case for baby-boomers.
While Rosnick’s and Baker’s paper considers only baby boomers net wealth (we’ll have to wait until next year for a more accurate assessment of how everyone is doing) there are a number of inferences that can be made.
First, wealth loss has been greater for those who are younger. Older generations typically have a larger net worth, higher paying jobs, stronger job security, and less financial leverage, while younger generations are saddled with student loans, larger loan balances on their mortgages, and starter careers.
Secondly, as one ages typically the more intransigent one becomes. Baby boomer renters, with their ample time to accumulate wealth, rent for one of two reasons. They could never qualify for home ownership (which seems a historic impossibility given the conflux of option ARMs and Alt-A loans pervasive around 2004) or were accustomed to renting instead of owning. If it’s the former, the renting cohort is represents a less financially stable, creditworthy group; if it’s the latter, the cohort has the same financial strength as a typical homeowner, but chose not to rent for a different reason. That reason most likely was real estate’s inflated price in 2004.
Lastly, Rosnick’s and Baker’s estimated the average price loss on houses from 2008 till the end of 2009. They initially estimated that real estate prices would decrease between 10% and 28% (depending upon market severity), but had to revise their estimates for a loss between 21% and 33% to reflect current trends. This brings up an interesting situation. At the end of this year, irrespective of the wealth quintile, cohort, financial situation, or house loss estimate, baby boomers who owned properties are less wealthy than those who rented. This also includes all prior bailouts to date. Maybe the grasshopper’s banker buddies aren’t so friendly after all? If the present downturn in housing doesn’t end this year, what does the current situation portend for Americans’ future balance sheets?
To date, the ant’s lifestyle choices haven’t actually impaired him, while the grasshopper’s has, but what about the future? What happens when the grasshoppers start to foment rebellion and earnestly petition their representatives in Congress to strong-arm help from the ant? After all, they are the voting majority and wield much more political muscle than the lowly ants.
In the near future there will be a lot of policies and laws that will help coerce a large majority of house owners into recourse loans that will destroy this cohorts long term wealth. Housing represents the largest line item on the majority of Americans’ balance sheets and to have such a large negative interest rate and loan amount will have profound effects on Americans thirty years from now. While the data just two years into the housing crash already shows renters wealthier than owners, twenty years from now the difference in wealth will be even larger. This will mostly be due to the large amount of positive equity that renters have accumulated and will subsequently loan to owners for an increased risk premium (interest rate).
Commentary from IrvineRenter
I agree that renters also benefited in as much as everyone benefited
from the economic prosperity of the bubble. I don’t think people really
dispute that. The question is one of degree. Owners received huge
financial benefits and lifestyle benefits by owning and borrowing and
spending their equity. This benefit was many orders of magnitude higher
than the benefits renters received from the economic expansion caused
by all the homedebtor spending.
Now that the crash is on, the losses
are not typically being borne by homeowners because they are walking
away from the bills and leaving it for lenders and taxpayers to pick up
the tab. In the end, the benefit to renters during the bubble will be
wiped out by the increased tax burden caused by the collapse, whereas
the benefits of the homedebtors will not be fully erased by the same
collapse. Homedebtors may look worse on paper because many will be
penniless, but they will have years of memories of rampant consumerism
that cannot be taken away.
In the end, renters will come out ahead
financially because they were never given free money to spend, so they
never got used to the spending, and they did not have to endure
foreclosure and bankruptcy; however, former owners will have the
memories of the trips, big houses, fancy cars and other perks of free
money that renters never got to enjoy. Personally, I am glad I am in
the renter camp, but sometimes I wonder if the party would have been
worth it; so do many other renters.
Located accross from the park. Cathedral ceilings in the living and
dining room. Granite countertops in the kitchen. Family Room has two
bedrooms built in the space and are not permitted in tax assessor
informaiton. Sold as is. Located close to all schools. One bathroom on
lower level, two bathrooms upstairs. Pool and spa have a removable
child safety fence.
informaiton?
This property was purchased on 3/16/2004 for $740,000. The owner used a $592,000 first mortgage and a $148,000 downpayment.
On 10/26/2004 he opened a HELOC for $87,000.
On 6/23/2005 he opened a HELOC for $125,700.
On 8/23/2005 he refinanced for $735,000 with an Option ARM with a 1.9% teaser rate.
On 10/28/2005 he opened a HELOC for $140,000.
Total property debt is $875,000 assuming he maxed out the HELOC.
Total mortgage equity withdrawal is $283,000 including his downpayment.
The property went into default, and IndyMAC bought it at auction for $619,742.
Foreclosure Record Recording Date: 11/07/2008 Document Type: Notice of Sale (aka Notice of Trustee’s Sale) Document #: 2008000524952
Foreclosure Record Recording Date: 07/07/2008 Document Type: Notice of Default Document #: 2008000323207
Foreclosure Record Recording Date: 05/22/2008 Document Type: Notice of Default Document #: 2008000244983
If this sells for its asking price, and if a 6% commission is paid, the total loss to IndyMAC/FDIC/US Taxpayer will be $260,240.
How do you feel about paying for that? Is the fact that we may have extracted some benefit from this behavior enough to make you feel better about it?
One of the most important “big picture” lessons of The Great Housing Bubble is that when people believe they have no risk, they behave in very foolish ways. One of the most destabilizing impacts on our financial system was the development and widespread use of credit default swaps that convinced lenders and investors that they had no risk in large financial transactions. The people originating and pricing these instruments did not property analyse and price the risks they were taking on, and the resulting collapse destabilized our entire financial system and created the financial debacle we are enduring today.
This foolish belief that there is such a thing as a no-risk financial transaction filtered down to individual buyers of residential real estate. With the easy money being supplied by the fools on Wall Street, the greater fools on Main Street were able to bid prices up on residential real estate to mind-boggling levels. There is an important concept to note with regard to this phenomenon:
The degree to which people believed neighborhoods were immune to price drops is the degree to which these neighborhood prices became inflated.
There is a direct correlation to the acceptance of the price immunity idea and the degree of price inflation; therefore, there is a direct correlation between the price immunity idea and the degree to which prices will collapse. I want to share three anecdotes with you today as indirect evidence of this phenomenon.
In early 2008, I remember looking at properties in Newport Beach that were both for rent and for sale. I saw one property that was a small 3/2 ranch that needed updating. It was for rent at $2,700, and it was for sale at $1,400,000. WTF? A GRM of 518? One of our astute observers at the time was Surfing in Newport, and he said he had been researching properties like this for quite some time, and GRMs over 400 were the norm. That really opened my eyes. Best case scenario for these neighborhoods is that prices only cut in half.
Back in 2007, we had a guy come into our forums and ask about
properties in Newport Beach across the 73 from Turtle Ridge. When we
suggested to him that these properties may decline significantly in
value, he was incredulous. He said, “But this is practically in Corona
Del Mar?” The implication of his statement was that there is some place
on the planet where prices cannot go down, and this property is very
close to it. Do you see the mentality? This is what drove prices so
high.
At the OC Register Blog, there is one of the long time bulls who lives near the water in Newport Beach. He has expounded his brilliant investment philosophy on a number of occasions; the gist of it is that you buy the most desirable properties in the most desirable neighborhoods because you will get the most appreciation, and your house values cannot go down. So far, this idea seems to be correct. That will change. Since this investing idea is not exactly unique or novel, many people acted on the same belief, and their actions drove prices up to unsustainable levels. I know a property owner in Corona Del Mar who purchased a home for $500,000 in 1995. That property appraised in 2007 (they were doing a renovation and needed to refinance) for $2,400,000. Does anyone think incomes have gone up nearly 500% since 1995? Realistically, the property is worth $800,000 at the bottom. Getting there from 2007 comps will require a 66% drop in prices; that is what’s coming.
Think how you would behave in a financial transaction if you really believed you had no risk of loss? Is there any price that is too high? I wrote a post in early 2007 titled How Sub-Prime Lending Created the Housing Bubble. The text of that post made it into the book. Below is an excerpt that may help you understand how the belief that there is no risk impacts a financial market:
Imagine a room with 100 people representing the pool of subprime borrowers. These are new entrants to the market. They were previously unable to buy due to bad credit, lack of savings, and other reasons. All of them are told they are going to bid on an asset that never goes down in value, [this is where the belief that there is no risk takes over] and they will be given the ability to borrow unlimited funds (stated-income “liar loans”) The only caveat is the borrowed money must be paid back when the asset is sold (not that they care, they already have bad credit). Imagine what happens?
People start to buy the asset, and prices rise. Others in the room seeing the rising prices come to believe that the value of the asset never declines, and they join in the bidding. As the bidding drives prices even higher, a manic quality takes over the bidding and people compete with each other, often bidding higher than the asking prices. Nobody wants to be left out. There are fortunes to be made. Greed drives prices upward at a staggering rate. As the last of the 100 people buy, prices are very high, everyone has made money, and it looks as if prices will continue to rise forever . . .
Then something strange happens: there is nobody left to make a purchase. (A key indication of the end of a speculative mania is a huge decline in sales, as was witnessed over 2006 and 2007). Transaction volume drops off dramatically, and prices stop their dizzying ascent. Nobody is particularly alarmed at first, but a few of the more cautious sell their assets to pay off their loans. Since there are no more new buyers, the first selling actually causes prices to drop. This is unprecedented: prices have never declined! Most ignore the problem and comfort themselves with the history of rising prices; however, a few are spooked by this unprecedented drop and sell the asset. This selling drives prices even lower. Now those who still own the asset become worried, some continue to deny that there is a problem, and some get angry about the price declines. Some of the late buyers actually owe more than they paid for the asset. They sell the asset at a loss. The lenders now lose some money and refuse to loan any more money to be secured against the asset. Now there are even fewer buyers and a large group of owners who all want to sell before prices drop any lower. Panic selling ensues. Everyone wants to sell at the same time, and there are no buyers to purchase the asset. Prices fall dramatically. This asset which was sought after at any price is now for sale at any price, and there are few takers. People in the market rightfully believe the asset will continue to decline. Owners of the asset have accepted the new reality; they are depressed and despondent.
In any group of people, there are always a few who do not believe the “prices always rise” narrative. Some recognize that asset prices cannot rise indefinitely and cannot stay detached from their fundamental valuations. These people witness the rally and the resulting crash without participating. They wait patiently for prices to drop back to fundamental values, and then these people buy. As these new buyers enter the market, prices stop their steep descent and market participants start to hope again. It takes a while to work off the inventory for sale in the market, so prices tend to flatten at the bottom for an extended period of time; however, just as spring follows winter, appreciation returns to the market in time, and the cycle begins all over again.
What is written above is true of any asset whether it be stocks, bonds, houses or tulips. In this case, it is the local housing market, and the room of new buyers represents subprime borrowers, but the concepts are universal. One phenomenon somewhat unique to the housing market is the forced sale due to foreclosure (stocks have margin calls). Even if the psychological factors at work during the panic could somehow be quelled, the forced sales from foreclosures would drive down prices anyway. True panic is not required to crash a housing market, only dropping prices and an inability to make payments. Subprime lending was one of the leading causes of the Great Housing Bubble, and its implosion exacerbated the market decline.
When you track the psychology of the market, you can see the low end is reaching capitulation. There is no more denial and fear, there is only acceptance of their fate. The mid- to high-end of the market is starting to feel fear, but their is no capitulation — yet. The very-high-end in the “immune” areas may never capitulate. Like some of the crazy bulls that come and go, they may maintain their denial in the face of the obvious. The next couple of years will be an interesting market train wreck; we will all be watching.
3 bedroom 2 bath home. Many upgrades throughout. Kitchen with granite
counters, custom cabinets, pantry, and built in range. Master bedroom
with private balcony and walk in closet. 2 car attached garage. Living
room with fireplace. Property is missing carpet and some speakers etc,
great opportunity to customize!
The quintessential no-risk neighborhood in Irvine is Turtle Ridge. This neighborhood was overpriced from the beginning, and prices went into the stratosphere from there. Things are not as crazy there as they are in coastal areas, but prices at the peak were still very inflated. When you look at some of the WTF asking prices in this neighborhood, it is easy to imagine those numbers coming down by 60%. Rents in Turtle Ridge have gone up a great deal, so unless rents crash there as well, the carnage may be somewhat muted. As with other areas in Irvine, it is the low end that is seeing distress first.
Today’s featured property was purchased for $636,500 on 6/10/2004. It was originally purchased with a $508,850 first mortgage and a $127,650 downpayment. Not to worry though, the owner extracted all their equity in late 2006 with a $720,000 refinance.
Foreclosure Record Recording Date: 12/08/2008 Document Type: Notice of Sale (aka Notice of Trustee’s Sale) Document #: 2008000564646
Foreclosure Record Recording Date: 08/14/2008 Document Type: Notice of Default Document #: 2008000388593
The property went back to the lender on 04/16/2009 about 11 months after the owner quit making payments. If this sells for its current asking price, and if a 6% commission is paid, the total loss on the property will be $123,100.
I am always surprised by the low quality of many listing photos on the MLS. In many instances these pictures are so bad that no picture at all would be better. What is the point of putting up a picture that reveals nothing about a property?
Occasionally these pictures are atrocious in an attractive way. We have a thread in our forums devoted to Funky Listing Photos. Let’s take a look at what our members have found:
Sometimes the listing agents want to enhance their pictures with a little photoshop work.
Isn’t the oil painting effect picturesque?
Sometimes the listing agent can’t be bothered to get out of their car and photograph the property.
Perhaps they are worried about running into a meth lab or crackhouse.
Some places are just dirty and need to be cleaned.
Some are downright crappy. Can someone tell me what that board is doing in the toilet?
It isn’t only the people who have bathroom problems.
Some animals are in better shape than their owners.
And some have more taste.
Pink is the new black.
Dean Martin is the man.
It is possible to over stage a property. Am I buying the dishes too?
The pictures of today’s featured property has a unique artistic effect. Perhaps an artist will want to buy this dungeon property for a studio? Perhaps not.
Lender owned. Quiet,Serene location for this studio unit in the Springs
complex.Lots of trees and overlooks stream. Extra storage. Close to
shopping and freeways.
Quiet,Serene… yes, the tranquility is everywhere… Particularly since this is almost half off its 2006 purchase price.
This property was purchased at the peak for $253,000. The owner used a $202,400 Option ARM first mortgage and a $51,600 downpayment. He did open a HELOC for $28,900 a year later, so he may have pulled out his downpayment. In either case, he lose whatever he put into the property, and now his credit is trashed.
If this property sells for its current asking price, and if a 6% commission is paid, the total loss on the property will be $123,374.
This propperty is being offered for 46% off its peak purchase price.
I hope you have enjoyed this week at the Irvine Housing Blog. Be sure
to come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.
Many analysts have noted that lenders are often better off doing a loan modification with principal reduction than going through the foreclosure process. Despite this fact, lenders would rather foreclose and lose more money than do any kind of principal reduction. Why is that?
Confusion never stops Closing walls and ticking clocks Gonna come back and take you home
Cursed missed opportunities Am I a part of the cure? Or am I part of the disease?
Forgiveness is the supreme act of kindness. The beneficiary of forgiveness is not the person being forgiven, but the person doing the forgiving. Carrying anger is both spiritually and physically harmful. That being said, don’t expect forgiveness from lenders any time soon.
There has been much discussion about whether or not banks should modify loans, including giving principal reductions, or if they should simply foreclose and move on. There are compelling financial arguments that favor loan modification and principal reduction; it is not going to happen.
Banks are fully aware of the moral hazard of principal reduction. Once they go down that road, it changes the behavior of borrowers everywhere. l last wrote about this in Crisis or Cure? In that post,I noted the following:
At the conclusion of Mr. Mortgage’s most recent post, he stated, “Bottom Line — after seeing these latest figures I am
more convinced than ever that the next step is wide-spread principal
balance reductions that will reduce the massive negative equity burden
in America and be a first-step to solving the mortgage and housing
crisis once and for all.” Widespread principal balance reductions are
occurring in a process known as foreclosure. Once a property goes
through foreclosure and is resold, the new buyer has a much lower
principal balance than the old one. That is what needs to happen.
Does Mr. Mortgage believe this is going to happen through voluntary
“gifts” of principal reductions to existing borrowers from the lenders?
That is what his statement implies. I rather doubt it. There is no way
to make this “gift” equitable, and the moral hazard would be extreme,
and the lenders will resist this to the bitter end. Look at their
opposition to allowing bankruptcy judges to reduce principal balances;
they would rather take the home back in foreclosure than allow
principal reductions even in the case of borrower insolvency and
bankruptcy. Further, they have managed to kill that measure in the
Senate—a Senate completely controlled by an antagonistic Democratic
majority. Don’t expect to see either a voluntary or a politically
mandated effort at principal reduction any time soon.
At the bottom of the astute observations, there was this gem from grabasnorkel:
IR you and others
have mentioned the choice the banks face -> either mod the loan to X
amount or foreclose and get the same X amount.
Seems like equivalent options, but they are not. The threat of
foreclosure has to be backed up with real foreclosures, if that threat
is watered down, it becomes less of a stick they can use with other
loans. We see some of that in the marketplace right now because many
people are expecting a loan mod and have therefore stopped paying on
their mortgage.
It’s like a loan shark. When loans aren’t repaid, they have to break
bones, even if the borrower is broke. Even once in a while the borrower
is found dead – this has the purpose of keeping the threat real.
If you f#%k a mafioso over hard, and skip town, he’s still going to
come after you to kill you even if he can’t get his money back. Why is
that?
Or a credit card company. They don’t HAVE to ding your credit if you
default on a card, but they will. If they don’t then they won’t be
taken seriously and that leads to more defaults.
Two years ago a guy at work told me the banks would be reluctant to
foreclose because they wouldn’t net anymore than they would by working
with the borrower.. He was wrong then, and is wrong now. Think about it
for a moment.
I have been thinking about this comment for a couple of weeks, and I have come to the conclusion that grabasnorkel is right. The political behavior of lenders lends evidence to this same conclusion. Besides the lobbying for watered down legislation I mentioned above, consider the Bankruptcy Abuse Prevention and Consumer Protection Act passed in 2005. The main purpose of this major legisltation was to make it more difficult to obtain debt forgiveness. When you really think about it, lenders will do just about anything to avoid debt forgiveness even if the short-term costs are higher. Hence, we have loan mods that do not forgive debt (but do create lifelong homedebtors) and we have foreclosures.
The result of bank lobbying and practices is going to be a huge wave of foreclosures. It is clear that Americans have too much debt and need significant debt reductions. We will modify those few on the fringe, and we will foreclose on the rest. That is just the way of things.
One final ramification of lender policy is going to be the long-term exclusion of the foreclosed from the housing market. Previously, I had believed that we would see a resurgence of subprime to serve the needs of those with good jobs and healthy downpayments. Now, I don’t think this is going to happen. If current debtors believe they will be given a home loan in 18-24 months after a foreclosure, many more people will default. Lenders are going to exclude this group from home ownership for years just to serve as a deterrent to others. Current GSE policy is a five-year waiting period before they will buy or insure a loan from a borrower who has gone into foreclosure. Despite political pressure likely to mount in the future, don’t expect this to change.
In short, overextended borrowers are in deep trouble, and lenders intend to keep it that way.
I have joked about the Banker’s Prayer. Do you think they will forgive us our debts? or are overextended borrowers in as much trouble as I say they are?
BANK OWNED!!! Premier Quail Hill condominium. Granite countertops and
stainless steel appliances, ceiling fans, travertine flooring &
berber carpet. Fabulous master bath with spa tub and marble accents.
This property was purchased on 12/6/26 for $870,000. The owner used a $696,000 first mortgage, a $87,000 HELOC and an $87,000 downpayment. That is all gone as the property went back to the lender on 2/11/2009 for $590,750.
If this property sells for its current asking price, and if a 6% commission is paid, the total loss will be $218,768.
