Mortgage money can't buy our toys (or food)anymore, so why bother? Plastic money can still get us a little bit of fun. Plus, with such a huge surplus of decent homes, its easier to find a nice place to live. Still pretty wild though- people just walking away.
The question is, what is the consequence of walking away from an underwater mortgage, if you can afford to pay? In a previous post, Tanta mentioned that banks can go after these borrowers, but in practice have not usually done so.
Re: "I'm astonished that people would walk away from their homes"
Im astonished that banks would be party to no-doc loans and to not verify collateral and then to take that situation into a model and project cash flow for 30 years, in terms of the interest they planned to get by using false and misleading information which was falsified in the first place!
In retrospect, getting a home loan in the last couple of years has been like going to a casino: play any game you like, no matter how risky; the house doesn't care, because the house always wins.
So who bought, the last couple of years? A lot were gamblers and speculators, the kind of people who know how to cut their losses when things go bad. And let "the house" keep the house.
I'm going to talk my sister into it since the FED or GOVT is screwing the rest of my family out of our retirement! I'm going to write some great cry letters that will get everyone who walks back into a home within 4 years max. as long as they carry a couple cc cards and an auto loan w/0 missing any payments. Heck I could set up as a consultant, sell my templated cry letters, save homeowners 100,000's of dollars and charge a fee for helping them screw wall street and the banks...
Its the logical extension of the clueless lending of the bankers.
The bankers (and investors) didn't seem to care if people had the capacity to pay loans back. Why should anyone be surprised when the other party to a shameless transaction decides to act IN THEIR BEST INTERESTS?
If people are walking from loans that they fraudulently obtained, sure that is immoral. However, if they obtained the loans giving honest disclosure of their circumstances and the risks didn't pan out, well, that's what banks are supposed to manage isn't it? The risks?
These are homeowners with the "capacity to pay, but have basically just decided not to".
I am fully prepared to eat crow on this point as I argued that, although there would be exceptions, that the large majority of homeowners who could afford their monthly house payment would continue to pay it even if house prices fall consirably.
Before I begin eating however,
I would like to know how they determine "capacity to pay" however.
If the loan is anything but a 30 year fixed, that would imply that the couldn't afford a standard loan. Why else get a pay option, arm, etc?
Also, since there are many surveys that say people are optimistic about home prices, or that most don't think their own home has dropped, or any of the other dozens of surveys that show how out of touch most people are with the value of their homes, who is so sure than prices are dropping and will continue to do so that they will walk away during the first 6% of the drop? People don't even sell stocks that fast.
The banks have made tons of money burning the average Joe. Maybe they feel like it's payback time. "What goes around comes around?"
With 401K plans taking a huge hit along with the value of their main asset the home. Just maybe the average Joe is finding that it does not pay to be responsible.
The rate cut is certainly helping the financial and real estate stocks.
OT: Interesting article on the BAC CFC takeover over at Naked Capitalism. Any lawyer types who can throw more light on fraudulent conveyence and whether the CFC acquisition deal might fall under that category?
The question is, what is the consequence of walking away from an underwater mortgage, if you can afford to pay?
Access to future credit is basically the issue.
If you believe that lenders are going to resume writing subprime mortgage loans to people with an FC on their credit report in the last seven years, and you believe that this credit will be priced such that it is affordable even at reduced home prices, then you may consider that there isn't much of a consequence to this.
If you believe that it will be a while before anyone does that again, then you're looking at a substantial class of people who are going to be renters for a long time.
Such a culture change would not be limited to respecting the terms of their mortgage agreements. It would bleed out generally to our expectations of trust between parties that do business.
May I just say that I think that Mish runs his blog like a Nazi. Achtung! Vee vill have devlation! No dissent will be tolerated! You are all shtupid and veak of mind if you do not agree vith me!
What really amuses me, is that some of this is probably feuled by avoiding bankruptcy, given that the last round of "reforms" makes forclosure a better thing to have on your record than a bankruptcy!
Some of these people are possibly being premature. But if you are facing the possibility of being unable to pay your mortgage, then either a short sale or forclosure -- before sinking debt into your credit cards -- is simply the smart thing to do.
All you have to do is look at the stories of the people who stuck it out as long as possible then went into bankruptcy to see it.
Which is just schadenfruede to me given who freaking backed the draconian bankruptcy laws to begin with!
There are many many many people just walking away.
I think that 99% are doing so because they have to. They can't afford it now, or they know they won't be able to soon for whatever reason.
I just don't know how many people who have a 30 year fixed, paid no more than say 3 or 3.5X income, but are going to walk anyway because the house is worth less than they paid.
I don't understand how someone would believe that walking away is less costly than the alternatives. First, the damage to your credit would cause a large increase in your cost of credit (credit cards, future housing (rental or mortgage)). Second, you force the lender to value the property and come after you for any shortfall. You can avoid this only so long...a judgement can be enforced by seizing assets or garnishing wages. Third, if the lender does not come after you and forgives any shortfall, you're going to get hit with a big tax bill on the amount forgiven.
This, to me, sounds like the stupidest of all options.
I just don't know how many people who have a 30 year fixed, paid no more than say 3 or 3.5X income, but are going to walk anyway because the house is worth less than they paid.
Basically none, because almost nobody's bought a house for 3.5X income for several years. The question is what's going to happen with the 95% who paid more than that.
Why bother to walk away? How many underwater homeowners are going to figure out that they can live rent free for six months until the sheriff comes? And if thousands of people do this, how long before the foreclosure courts become so jammed that six months becomes a year or two?
I wouldn't want to be a servicer, or an investor holding mortgage paper right now . . .
Such a culture change would not be limited to respecting the terms of their mortgage agreements. It would bleed out generally to our expectations of trust between parties that do business.
Once again, the terms of mortgage contracts specify that borrowers can walk away.
If Wachovia was relying on a social norm of it being distasteful for people to walk away, they will face a lot of tough questions from their shareholders...
Re: "I'm astonished that people would walk away from their homes"
You people are missing the BIGGER Macro stuff. Our good friends @ NAR have almost finished lobbying to get the 40 year jumbo mortgage with zero down as a reality; Congress said yes and The Senate will make this a done deal within a few months. Thus, with Paulson and Helicopter Ben crashing rates to 2.5%, getting any dream home to live in our howe-ownership society is going to be easier than ever, and as some may recall, we just had a softland with subprime and stories related to, "I'm astonished that people would walk away from their homes'.
Guess what, if you can get a home next year for zero down with a 3% mortgage, NAR will be selling homes like hotcakes and we will have a building boom with one small caveat, which is that no one will have equity in their homes and it will then be not only equally as easy to walk away, but a macro dynamic to walk away and get a better deal in another place. America is being destroyed day by day!
Excellent posting Calc Risk. Now, given what you just posted, how can analysts possibly expect banks to be able to accurately value their balance sheets at this point in time. They can't. A tiresome question through 2008 will be "How much is left to write off".
I don't understand how someone would believe that walking away is less costly than the alternatives. First, the damage to your credit would cause a large increase in your cost of credit (credit cards, future housing (rental or mortgage)). Second, you force the lender to value the property and come after you for any shortfall. You can avoid this only so long...a judgement can be enforced by seizing assets or garnishing wages. Third, if the lender does not come after you and forgives any shortfall, you're going to get hit with a big tax bill on the amount forgiven.
Because, depending on the state in which you live, the scenario you paint is just not true.
Check out California's foreclosure laws. There is no garnishment. There is no federal income tax on debt forgiveness. You do take a hit to your credit rating, but if you are current with your credit cards, the lenders aren't going to pull them from you...
It would have really helped if Wachovia had read the terms of the mortgages they were writing before they handed out the money....
Some things just don't change, no matter how long I'm gone.
Even if there are 10-20 million homeowners who are upside-down on their mortgage, the question of "by how much?" is a significant one.
Would you walk away from your house if you're only upside-down by 5%? 10%? Especially when you still need housing and are going to have to pay for it, anyway.
Even as this situation evolves, it remains a California-centric problem, since real estate there is consistently high-priced in dollar amounts.
IOW, being underwater by 10% on a median-priced home in California would mean the homeowner was out $50k, which might make it "worthwhile" for him to walk. But in an area where median-priced homes were going for $250k, a $25k "loss" wouldn't be as difficult to recover, so the motivation to walk is far lower.
Our government doesnt show fiscal responsibility or responsibility in general - why should we reward them by paying an unfair debt while they screw us via inflation and monetary control?
If they hadn't messed up rates to much people wouldn't be in as much over their heads.
Im all for personal responsibility - but not when it bails out an irresponsible government.
Average Joe, I'm not sure if this is what Wachovia is seeing, but I've noticed in recent years the emergence of a new type of homeowner (as I see it) that doesn't fit the conventional mold and may be more inclined to walk. These are the people that see houses as temporary places to live (a glorified apartment if you will with equity) and tend to move frequently. In my view, this is like treating your house like an auto lease where you move every other year to the next new shiny model. These people are more transient than your typical homeowner and would be more inclined to walk if trapped by negative equity. It'll be interesting to see if this is just a surge of these highly mobile folks or if this starts that trend that CR is talking about.
Oh, and Tanta, if you're interested, it looks like Fair Issac (the people who bring us the FICO) is looking to tweak/update how they calculate FICO scores to prevent abuse.
"Such a culture change would not be limited to respecting the terms of their mortgage agreements. It would bleed out generally to our expectations of trust between parties that do business."
It's not a question of trust. The homeowner is living up to the letter of the contract. When a hedge fund does this, it is considered normal, even something to applaud.
As a refresher; my sister in law is upside down on her interest only mortgage and HELOC.
Now she's paying 8.9% on the $87k HELOC. She tried to refinance into a fixed HELOC. The bank, that only has the HELOC, not the primary, arrogantly told her she'd have to pay a higher rate..nothing they could do, too bad, etc.
This suggests to me that the banks remain completely out of touch with the marketplace.
Combine this attitude, news stories of abuses at origination, Wall St bonuses and I think people will soon stop paying their mortgages in droves. Many will even be proud of stiffing the banks.
"Our good friends @ NAR have almost finished lobbying to get the 40 year jumbo mortgage with zero down as a reality" -anonymous
In which case I will abandon CA and buy a small farm house in BFE. Spending my time with my kids and reading by the fire. There is no way I will work to keep up with these fools and their leverage.
I am going to guess you are not in Florida. As of right now i am pretty sure 4 people I work with in Sarasota are going to be mailing thier keys in. We have roughly 40 people here. Flat out...they bought to much at to high of a price. Can they make the payments...Yes,but it is killing them financially.
This happened in Socal in the early nineties. Even with 10-20% down. I just don't think it was widely heard about because the local fishwrap was not going to write about people walking with little to no recourse. I personally know of a couple of neighborhoods this was common in(50% drops).
We have to wait and see...But I am on the side of once people figure out and weigh the effects you will see more.
You may be right, but these people very likely bought (or over refinanced) recently meaning that they overpaid. Most bought something that was more expensive than 3X income since they wouldn't probably be caught dead in it, and thus they likely didn't get a 30 year fixed that they "had the capacity to pay".
My point is....in the last 3 years no one would be willing to buy a house that they could actually afford.
That was the nature of the market and that is why we are in deep trouble.
The media is already portraying the evil, "predatory lenders" as the bad guys. It will become a matter of pride to stick "them" with a failed mortgage.
Of course, it's not the media's fault. It's easy to do stories on weeping mothers who are forced out of their homes. Not so easy to portray a bank sympathetically.
Ken - you Phuckin retard...
how much have you paid yourself the last 8 years?
How many have you laid off thru 6-sigma?
God help me, I'm gonna wanna kill him
Re: As if they weren't renters before walking away. An economy running on debt is not exactly an 'ownership society.'
Let's all wake up and face the fact that a lot of divorce stuff is going on and our society is changing very fast with Generation X variables which have not been accounted for as variables that change dynamics, like walking away from a house connected to a bad job, a bad social life, something went bad and people are now much faster to bail out; in a nutshell (no pun there) this is the lotto/casino society not the ownership society!
this is the lotto/casino society not the ownership society!
this is the lotto/casino society not the ownership society!
this is the lotto/casino society not the ownership society!
Tanta, since FN/FR guidelines are just that, guidelines, I can envision a time where they expand their definition of "extenuating circumstances" to include the great RE Crash of 2006-07-08-09 whereby people made rational decisions to walk from overpriced RE bought with unaffordable mortgages.
You'll need at least 25% down to get a mortgage, but houses will definitely be cheaper!
Of course, if the FCL is on a prop owned by someone in the mortgage biz-derivatives-Wall Street, job loss will be the easy explanation!
There is always a way to get something done. FN/FR needs assets too at some point.
I agree with lama.
People are going to stiff the banks, just like the banks have been stiffing them.
Trust, surely you jest. Trust went out the door with the neighborhood S&L in the early 90s.
A lot of the midwestern types seem to think this is just a coastal problem, but it isn't. Deflation in housing prices will be coming soon to a place near you. Further, in a bunch of states with "no recourse" CA, AZ, etc. it makes much more sense to walk away and save for a rainy day rather than to stick it out.
What is also not being talked about is that most of the houses sold with almost no equity were to younger folks, who would have been ready in a couple of years to purchase with some skin in the game. They have time and can easily turn back into renters.
What this does is destroy the mantra real estate always goes up, just before the boomers begin to retire. Now who are they going to sell their houses too? Gen X? Got one if they wanted one, Gen Y? They are going to look at it as shelter, not an ATM.
Geez, the banks have been setting themselves up with how they rape the public on Wall Street, and they think they common man won't stick it right back?
Glass Steagal is going to make a return, and banking will descend back into a sleepy backwater, as will much of Wall Street.
Fools killed the golden goose with excessive greed.
Refi loans in CA are "recourse", so if there is a balance remaining following a foreclosure, the creditor can can continue collection efforts, including litigation, and potentially garnishment.
The federal tax laws are not preempted by states, so I am not sure where you got the idea that a 1099 would not be issued for any forgiven debt.
Have you ever heard of universal default provisions? They are pretty much the norm these days on credit card agreements.
So, there is a very real cost to 'walking away' from mortgage debt, in CA or anywhere.
First? Where is everyone. Is everyone else watching their portfolios shrink?
cube dweller
As soon as I could get through to Ameritrade, which took about 2 hours, I bought some SRS. This is a great buying op for bears, don't you think?
I think the quant long/short hedge funds had to do a lot of covering this a.m. and that's why emerging markets, homebuilders, bond insurers, and other crap stocks rallied. I'll bet some hedge funds blew up timing this mess wrong.
one of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes.
Is there a way we renters can help in moving this process along? How do we get 'walking away' to be as American as apple pie?
How many underwater homeowners are going to figure out that they can live rent free for six months until the sheriff comes?
Depends what state you're in. Don't know how many states are like NH, but here we have 3 months. That's barely enough time to pack, can't save much money by the time you're behind far enough to lose your house...
As far as complaining that people who bought in the last 3 years bought way over their affordability, I remind you that houses within 3.5x income were not available unless you wanted to live in a pigsty. Remember that the AVERAGE family income is somewhere around $60,000? Something along those lines. How many houses do you personally know of in the $180,000-$200,000 range these past 3 years would you want?
As far as walking away becoming the norm, am I the only citizen on this planet who would rather pull their toenails off than move AGAIN? And do these people have KIDS they have to move? I'm having a hard time understanding the whole walk-away-because-you're-underwater thing. Then again, it may be starting in Cal./Fla. and migrating to the rest of the country as a coming trend? Still, I can't really imagine. If I lost my house, I'd still be devastated. Definitely not socially acceptable where I am.
"...A new fear crept in: not interest rates, but Texas. Crazy S&Ls down there had been lending money in the oil-patch boom. People in Houston who'd gotten mortgages with 5% down were leaving the keys in the door and walking away from their houses and their mortgages. Fannie Mae owned a lot of these mortgages."
Off topic: Marty Whitman of 3rd Avenue Value took a position in bond insurers 4Q07 and wrote about it extensively in the shareholder letter. Interesting read.
I wonder how much the bailout "uncertainty" has to do with this? Perhaps people are hoping for a bailout or some sort of forgiveness. That is a bit premature, of course, since nothing has been passed yet. On the other hand, and CERTAIN bailout will open the floodgates to affected borrowers immediately.
NAR successfully lobbied for the passage of H.R. 1852, the Expanding American Homeownership Act of 2007, which helps modernize FHA by expanding the availability of safe and affordable FHA-backed loans for purchases and refinances. The bill includes
provisions to eliminate the 3% down payment requirement, (that is ZERO DOWN)
increase loan limits up to 175% of the conforming limit in high-cost areas,
streamline condominium purchases,
and eliminate the cap on Home Equity Conversion mortgages (HECMs).
The Senate Banking Committee passed a similar bill. The Senate bill is expected on the floor by the end of the year.
Freddie Mac/Fannie Mae Reform
NAR also successfully lobbied for passage of H.R. 1427, the Federal Housing Financing Reform Act of 2007, which overhauls the regulatory structure of the nations housing finance government-sponsored enterprises (GSEs). H.R. 1427 provides for regional adjustments to the caps on mortgages the GSEs may buy for high-cost areas, helping more working families qualify for safer GSE loans. The House passed H.R. 1427, 313-104. The Senate has taken no action to date.
Time to change the laws and not allow people to walk away if they can afford the payments. Think of it, a debtors prison without having to build more prisons.
"We're seeing people who are current on their credit cards but are defaulting on their mortgages," Mr. Lewis says. "I'm astonished that people would walk away from their homes."
Again, people should learn a bit from history.
This is what you always get when you constantly bail people out and reward wrecklessness and complacency.
Credit, the foundation of the modern economy, is fundamentally about honesty and believability in obligations.
I don't think we have that, and if we keep moving in that direction then money, the most fundamental form of credit, is likely to be compromised also.
I have to laugh that Wachovia says that they (the owners) walk away. I am sure that everyone waited their free six months and then sprinted away in the non-recourse (sp?) states (ie: California). Their credit will be crap but what will they care.
I'd always thought 7 years of bad credit was a slap on the wrist. Now it's merely a scolding
The banks need to figure out what to do with all of these empty homes, either sell them to the municipalities on the cheap or become landlords. In some cases entire neighborhoods could be bulldozed and turned back into wilderness areas, that would be pretty cool
Average Joe, I agree with you. In the areas where this is happening Debt-To-Income ratios had gotten way out of hand. Measuring "capacity to pay" by "willingness to pay my mortgage on credit cards until I am above my credit limit" is quite dishonest.
If you own a home, you need to be able to save money for upgrades/repairs and be able to put some into savings each month for emergencies. If you got yourself into a situation where you can just barely get by for a few years paying your mortgage, something's going to happen. You may have the capacity to pay for a short time, but you do not have the capacity to pay the loan for 3-5 years. Those are the people who are walking.
Sure, for a while the theory was that 55% DTI buyers would be able to cover the real gap in expenses by taking money out every few years. Well, that's not gonna happen now.
Btw, in a lot of cases they are walking from second homes, or the home they left to buy the latest one, and hoped to sell.
In a lot of states purchase money mortgages are non-recourse. And if these people can put substantial money away for a few years, in a few years they WILL be able to buy a loan. They will. They'll either be able to buy from a desperate seller, or they'll be able to buy with from one of the foolish institutions that gave them the 55% DTIs in the first place.
[ You do take a hit to your credit rating, but if you are current with your credit cards, the lenders aren't going to pull them from you... ]
It's going to affect their rates for car loans, the cost of car insurance, the deposit for utilities, and even credit checks by potential employers. Must be more but I can't think of them right now. But it will impact their cost of living in multiple ways apart from credit card rates, surely..?
I wonder why people think credit will be easy after they walk away from their homes. Couldn't be the 10 credit card offers they receive every week, could it? Couldn't be the saturation-bombing level of Dietech ads on TV, could it?
The banking industry has brought this upon themselves.
The thing is, you have to get your credit score up to a certain level to get an apartment. So if you have driven yourself into the dirt trying to pay a mortgage that reset on a house you can't refinance or sell, then it is time to find a nice apartment building before anyone knows you are crushed. If you wait until after the banks, etc. wring you dry you will be lucky to be living in a car, maybe a van by the river.
On NPR the other day, a woman who can't speak English had bought a $470,000 house with no money down. She's a housekeeper. She brought in roommates to help pay the teaser mortgage, but the ARM adjusted to $3400/mo. and she's defaulting. It wasn't said whether or not she was in the US illegally.
The weeping ex-homeowners will win the battle for public sympathy.
rich - you may recall from last nights threads, I was saying get out of your shorts quick and wait to re-enter. I am with you that there was a nice re-entry window a little while ago. I mean, if you dumped the eev at opening, you can buy it back at a 10% plus discount, same with srs.
In which case I will abandon CA and buy a small farm house in BFE. Spending my time with my kids and reading by the fire. There is no way I will work to keep up with these fools and their leverage.
w | 01.22.08 - 1:15 pm | #
Here's a story -- I'm sure others can relate to this.
I was working at big financial firm "X" 4 years ago. The COO gives the rank and file a presentation, the centerpiece of which is a graph showing the firm's Revenue vs. Expenses. Both are growing, Revenue faster than Expenses.
But in his view, the gap isn't big enough.
He states, "Folks, this trend cannot continue."
Well, yes it can. It can continue to infinity. The lines are diverging. By definition, if Expenses are growing more slowly than Revenues, that can continue forever, Sir.
But that wasnt his point, and we all knew it. If the gap doesnt grow, he doesnt get promoted up to the parent company. He doesnt get the big payday.
So, yes, Expenses were cut and Revenue continued to grow and that gap widened and he was promoted.
Meanwhile, I (along with my co-workers) saw my workload double and my staff cut and my bonus cut and my salary hold steady. (Hey, consider yourself lucky, right: Your job wasnt outsourced.)
What are my options? How much power do I have?
(OK, in my case I left the firm and started my own business, but that muddies the storyline, so lets ignore that . . . .)
Give me one opportunity to stick it to that COO (and his top-dog brethren), just one, and I wouldve taken it.
(Such as quitting the day my bonus check hit the bank account as they scrambled to see if they could cancel the transaction, but that muddies the storyline . . . .)
Its a powerful emotion.
The Alpha Dog says Im going to eat until Im good and satisfied, and if theres anything left over for you, fine, and if not, thats good too. And all you want to do is take that dog down, and you know you cant. And youre ashamed of your weakness.
Im not saying underwater homedebtors should walk on their loans.
I see a lot of unsourced assertions in this thread, and a lot of chin-stroking about what people "suspect" about the cause of foreclosures, and the "containment" of the problem to California.
Well, we got into this mess partly because of excess deference paid to chin-stroking crather than, you know, data, so my patience with the gesture is, with apologies, short.
The fact is, the Fed of Boston attributed most of the rise in foreclosures in Massachusetts (other side of the continent from California) not to rising payments or other distress, but specifically to the decline in house prices that began here in 2005.
"The thing is, you have to get your credit score up to a certain level to get an apartment."
Jimmie Knickers | 01.22.08 - 1:33 pm |
Nope,you just find someone like my old man. We have 3 renters that walked on homes. As long as they have a verifiable job and the needed money to get in we rent. Of course in Fl you can get a deadbeat out in 3 weeks...BTW none have been a day late on the rents. They are paying less than 25% of the previous mtg in rent...Frankly if you don't rent your vacancy will skyrocket.
CalculatedRiskOmnibusPig - thanks for the back up.
Anon-
you still need to make a credit decision on the borrower, regardless of the loan product. Not everyone is going to qualify for it. Unless of course they legislated underwriting standards in those bills- which I highly doubt.
On top of that, the only agencies buying this new crap will be FN/FR/GN.
Check out http://www.efanniemae.com to see Fannie's current positions on BKs and FCLs. need to click the allregs link to get the Lots of talk about risk assessment.
We may actually see a return to the 5 Cs- Collateral, Capacity, Cash, Credit and Character- the last two being malleable by the underwriting guidelines.
It's going to affect their rates for car loans, the cost of car insurance, the deposit for utilities, and even credit checks by potential employers. Must be more but I can't think of them right now. But it will impact their cost of living in multiple ways apart from credit card rates, surely..?
How much are those things worth to you? If I offered you a 20k$ check, would you cut your credit in half? 40k$? 60k$?
The Capitalist system (particularly any version of 'pure' capitalism) has always depended for it's functioning on an assymetry in morality.
Lenders want ethical/moral borrowers whose motivations and actions are based in what they 'should do', while themselves demanding an environment (regulatory environment) in which they are free to 'maximize personal gain'.
Guess what, an ethic of maximizing personal gain is incomensurate with a healthy society -- and it ain't the borrows fault that this is true. Nor is it the borrows fault that powerful business interests embarked on a 25 year program of destroying the institutions whose purpose was to maintain a balanced ethical situation between the powerful and the weak. They deliberately destroyed it, and will now spend the next 25 years implementing military police crackdowns (and pseudo religious tirades) whose purpose will be to immitate the environment created by a societal commitment to ethics and responsibility -- that they destroyed.
Good luck with that.
Those that walk away are heros. The lenders, and the banks (actually the management of lenders and banks -- who have power due to control of something whose performance they are not (financially) responsible for) destroyed the balance of ethics in this society, such as it was. The will now attempt to confuse us about this fact, and get the bulk of society to marshal its forces in pursuit of their goals, just as they succesfully used the structure of the corporation to promote their own personal self interest to the detriment of the 'owners' of those corporations, as well as the society in which those corporations function.
We need only notice the Fed today intervening in markets in order to prop up the stock market to realize that the powerful have entirely subverted the system to serve their goals.
The only real question now is how long the unwinding of the great american empire takes, and how many lives are destroyed in the process.
OT: Interesting article on the BAC CFC takeover over at Naked Capitalism. Any lawyer types who can throw more light on fraudulent conveyence and whether the CFC acquisition deal might fall under that category?
tyaresun | 01.22.08 - 12:58 pm | #
Wild Rumor of Citi Chapter 11 Sorry. Page not found. ...browseItem.biId
FFDIC | 01.22.08 - 1:23 pm | #
It will not just become socially acceptable but may even become cool to walk away from high priced mortgages and under-water homes. Who likes the bank anyway??
Today the markets are calming down as Bennie came through. We'll likely see a clearing rally on the backs of some recovery in Asia and Europe. Another cut at the end of month.
But.... the aftermath of the credit bubble is not going away. The banks will have to be recapitalized which means existing shareholders will take a bath. And its going to get tougher for banks to raise more capital as each shoe drops - more residential mortgages, CRE, credit card debt, LBO debt, counter-party, etc. Lower rates and a positively sloped yield curve will provide the net interest margin, however, its likely banks will be writing down equity faster than they will be raising capital.
This credit crunch is for real. For lending to start back it will require the US consumer balance sheet & income statement to get back into balance.
EC. 6. MORTGAGE INSURANCE PREMIUMS FOR ZERO- AND LOWER-DOWNPAYMENT BORROWERS.
Yah...we have theoretical financing now with less than zero down?; anyone know what that means?
Re: Section 203(c) of the National Housing Act (NHA) authorizes the Secretary to set the premium charge for insurance of mortgages under Title II of the NHA
It will not just become socially acceptable but may even become cool to walk away from high priced mortgages and under-water homes. Who likes the bank anyway??
Just think if people could have walked away from their DOT.COM losses.
I would have taken the slam to my credit rating to retire 10 years earlier.
The Fed gave millions of bulls a huge gift this morning, namely the opportunity to get out of equities without losing their shirt.
Let's see how many of them take advantage. A lot of them were panicking and praying last night and now their prayers were answered, but only if they bail out for awhile.
If they don't bail out now, I'll guarantee you they'll be praying and bailing later.
I'm looking for the common thread here in a thread that's all over the place with moral hazard. Suffice it to say that the entire libertarian ethos of modern living and finance inevitably results in Ponzi schemes. You entice the rubes into the game when you want to inflate the bubble way past its maximal capacity. You make it absurdly attractive for them to play. And then you feign shock that they might not see the point in participating any further in YOUR con game.
What did you expect? You think the hoi polloi are really that stupid? Sure, they'll play because they're rubes. No, they won't make themselves indentured servants because your ideology demands as much.
Good luck trying to get an apartment even with that on your credit rating.
"Socially acceptable" given the crap wall street has pulled this decade bemoaning the death of common morals and decency isn't likely to bring a lot of tears.
Having said that, if you sign on the line you should live up to the debt, doing otherwise just contributes to the breakdown of the system.
If you believe that it will be a while before anyone does that again, then you're looking at a substantial class of people who are going to be renters for a long time.
Tanta, are there no legal issues. A person who has borrowed X dollars from the bank to buy a home, walks away from the home. If the home sells for significantly less than X, isn't the individual/family who borrowed that money liable for the balance ?
Quite sad. Good money chasing bad money. The cardinal rule you never break.
That is if you want to stay solvent or retain your sanity.
Those people have little chance of recourse against their real estate agent. And after already spending 75k in legal fees, they probably have little chance of retaining their health. To make things worse, after they lose their case, they will be liable for the real estate agent's attorneys fees which are also over 75k.
The Fed should have lowered the rate 100 basis points, no matter what the Fed does filters down in the same context to individuals. The housing slump, (construction and existing has caused our economy to meltdown. Refinancing at good rates would put immediate money monthly back into the economy and would continue for the length of the mortgage, as well as put mortgage writers & appraisers back to work. Just that activity would once again add to the economy in the form of spending in transportation, and entertainment. The problem is the rate cuts are not being felt at the lower levels on the same scale as the financial institutions. Look at the bank stocks today, even after write downs.
"The number of mortgage default notices filed against California homeowners jumped last quarter to its highest level in more than fifteen years, a real estate information service reported.
Lending institutions sent homeowners 81,550 default notices during the October-to-December period. That was up by 12.4 percent from 72,571 the previous quarter, and up 114.6 percent from 37,994 for fourth-quarter 2006, according to DataQuick Information Systems.
Last quarter's number of defaults was the highest in DataQuick's statistics, which go back to 1992."
To get a broader view -
'Access to future credit is basically the issue.'
And that, in a nutshell, is the American problem, isn't it? As if access to future credit is more important than actually having no debt.
In the eyes of those that live from the financial industry and its various spin-offs, of course a future with reduced access to credit (or let's be honest, a future where Americans reject debt) is a nightmare of vast proportions.
Even vaster than America's deindustrialization.
Even vaster than the lack of decent health care for all American citizens.
Even vaster than the morass of seemingly endless war in multiple countries.
Nonetheless, a nation which relies on the skills of its financial engineers, the talents of its 'intellectual property' owners (not the creators - just ask all the artists that SoundExchange couldn't find to distribute money collected in the name of said unfindable artists), and its advanced consumer base continuing to spend money it doesn't have, is a nation which pretty much ends up looking like America today.
A nation where people are walking away from the utopia that was exurbia, the most desirable form of human existence ever conceived of, at least according to those unable to imagine any other way to live. Or worse, imagining having to give up their prized beliefs in the face of reality.
America, love it or blah, blah, blah.
But Americans may really discover what having no access to credit means on another level - America has pretty effectively bankrupted itself under Bush, and you can be fairly certain that non-Americans (you know, those people that actually still produce real things in real factories requiring real skills - often referred to as 'old-fashioned' losers in the better circles of those creating the American economic miracle) are a lot less likely to be taking dollars in the future.
And that includes OPEC - happy motoring in exurbia.
VoiceFromTheWilderness. I could not agree with you more. However, had you worked for banks 15 years and then the FDIC 19 years as I did you would not have such a "healthy respect" for banks and their regulators...
In the end, I think perhaps my own personal story might be a good summation of the last 5 years.
At the height of the ownership era - I, too, investigated a home purchase. All my friends were doing it, so why not? It's the American dream.
Unlike them, however, I wasn't married to another income stream and I had my share of -- quite admittedly self-inflicted -- financial problems.
However, good job in hand - delinquencies brought current, and nothing bad for the last 12-18 months -- why not? Get out of from under a landlord, build that magical equity and net worth, and buy me a house (or condo, as the case was).
I figured the biggest hurdle was going to be getting myself a mortgage.
Boy was I wrong about that - even my own bank, a big national who is incidentally NOT among those most often mentioned furiously writing off debt - more than happy to make a deal.... My upwards bound career and salary... my whole year+ of paying bills on time... my having been with the same company for 5 years. Why - I felt like I was attending some sort of self-help seminar to build self-confidence!
Virtually everyone was willing to work with me.
Only it didn't add up... Here I was - just a few years removed from being afraid to answer my phone, and so many people willing to just cut me a 300K check?
Ultimately, I ended up following my instincts and NOT buying because I didn't think I was prepared for the responsibility and didn't want to bank on an ARM not biting me until I won the lottery... or flipped my condo for a tidy profit... or whatever.
I think that's a pretty sad state of affairs - when a financial nincompoop like myself is the one to walk away, rather than the guys who supposedly do this stuff for a living.
I wonder how many of the "Home Owners" are actually speculators. In that sense they are a business and walking away is what a business would do.
I just rented out an apartment that I own. One of the people that applied was coming from a complex in which the owner had financed for three times the value of the building. It seems that he has walked away, at least no one can find him. Who in their right mind hands someone $3 million for something that is worth $1 million and why are they surprised when the dude leaves town with the cash?
Guess what, an ethic of maximizing personal gain is incomensurate with a healthy society
That's the fundamental paradox of trying to have a healthy economy, however. Maximizing personal gain has been one of the most effective means of mobilizing and developing human capital because greed gets people out of bed in the morning. It's just an unfortunate but unavoidable fact that human nature is such that most people won't do stuff simply to "make the world a better place".
This almost makes a "healthy society" and a "dynamic economy" exclusive goals with our current technology and state of humanity.
I think that accounts for the seemingly endless back and forth swings we see in societies and economies over time -- we're kind of aiming at an imaginary target.
Jesse, That is, if the borrower cannot prove insolvency by IRS definition: "Liabilities in excess of Assets".
If the borrower is insolvent at the time, the forgiveness of debt is not taxable income.
Vikram, generally speaking it is not a good idea to say "there are no legal issues" when you don't actually know whether there are, in fact, any legal issues.
Some people believing that it will be easy to walk are just stroking their ego. Judgements are generally renewable every ten years. And if you ever plan on owning ANYTHING in title, you will more than likely pay if you are not eligible for BK.
Many entrepreneurs are going to buy this paper at ten cents on the dollar from the banks and pursue deficiency judgements against qualified individuals that will not be capable of claiming BK.
Unless one escapes to a judgement-proof country, the last thing anyone wants is a valid and binding judgement against them or a BK.
The thing is, you have to get your credit score up to a certain level to get an apartment.
Jimmie Knickers | 01.22.08 - 1:33 pm |
Meh. Of the dozen or so places I've rented over the past 20 years only one ran a credit check on me. It's really only an issue with professionally managed properties. Not coincidentally, I've only ever lived in such a property once....
I'm surprised no one has considered the situation that by walking away, one could theoretically rent a comparable house for half the money, in effect getting paid a couple thousand a month without the constant worry of a falling housing market. I realize this is particularly Californian, but that was Wachovia's area of concern.
This blog is symbolic of the change within society, i.e, people want to do things very fast and to solve problems faster and faster. This economic collapse which is essentially systemic is being dealt with by lotto/casino mentality where the immediate solution has to work within a matter of days or weeks, versus realizing that the solution here must be related to a long term sustainable solution which deals with accountability over the course of a few years! We have a government that was in denial for 8 years that wants to solve its lack of accountability by lower interest rates as fast as possible, as if that was the problem! They should buy lotto tickets!
I see your point Average Joe, due to the recent "do-they-fog-a-mirror" lending standards there is a whole class of people out there who simply can't afford their payments or barely can (as long as no financial catastrophe hits them) and these are the ones who will be forced to walk away, default, or go bankrupt. I think Paul McCulley of PIMCO described these folks as the speculative ponzi buyers of the Minsky credit cycle (the folks reliant on increasing value of what is bought with credit to even afford it).
I wasn't really arguing with that, I was just characterizing the mindset of what I saw as some of these people (who happened to fit into my arbitrary definition of them) towards their houses and neighborhoods, that being transient and shallow. Like it or not many people took a dotcom daytrader's view of real estate or an apartment-with-benefits view recently and I think that people with that shallow attitude are likely to bolt when it gets tough (i.e., Casey Serin). But as you point out, many people just got caught up in the frenzy and really just wanted a house, so they bought as much as they could afford before they were priced out. Because of this they become the unintentional speculative ponzi buyers of this credit cycle.
Well i have a prime example of this in my family, my sister inlaw filed personal bankruptcy...waited 1 month...1 MONTH! and walked in to a car dealership and drove out a brand new 2008 auto with no money down....so who really is the stupid person in the room...me or her...i vote the latter.
And as for the consequences of walking or for that matter anything else, we seem to have a large segment of adults in society unable to name five planets, so expecting them to see problems coming down the road is a bit much.
People can walk away and probably find a rental, but the big, bulbous housing inventory question is, will they ever in their lives be able to own a home again?
My feeling is legions will not, and that will be a very big factor in how veeeeery slowly this market will recover.
It would seem to me that those who are 50 + and debt free don't understand that the market is leveraging their "equity" for them. The benefits of being debt free have become largely psychological, while totally irrational. You're money is being leveraged and debased for you, whether you like it or not. Morality and debt long ago de-coupled.
Five years ago I bought well within 3.0 x hh income. Broker and mortgage lender both "advised" that I could afford much more house: go for it. Fortunately, at that time, stodgy, old-fashioned parent teachings about frugality, modesty and the work involved in maintaining a home prevailed. Feels so good to live within means, not over stretched; dare it be said, it feels like wealth.
Wouldnt that be some f'd up $#!+ if all us responsible people who lived within our means turned out to be the suckers for not living up the high life meanwhile our savings is inflated away?
Unless they actually talk to a bunch of people walking away from homes who admit to defaulting on loans they can pay, how in the world would they know the default resulted from people, who otherwise could afford to stay in the house, choosing to default due to an upsidedown loan?
Hedge fund managers are applauded and considered heros for registering their companies in the Caymen Islands to avoid taxes and law suits, and manipulating the system for their gain. And I am supposed to feel guilty for using the same "business judgement" that paying my mortgage on my underwater house. As I said before, I am apposed to a moral system that only benefits the rich. Either we all have obligations to each other, or none of us do and it is all "business". Surprising how upset the bankers feel now that the average jane and joe have decided to play by the same rules.
Basically none, because almost
nobody's bought a house for 3.5X
income for several years. The question
is what's going to happen with the
95% who paid more than that.
What is the absolute percentage of US homeowners who have moved and/or refinanced since 2000? I have a hard time thinking it is more than 20%, meaning that 80% are sitting with the same mortgage they had (and could afford) in 2000. Or is the absolute number that much higher? Even the transient suburbs where I have lived it is only a certain percentage of the houses that turn over regularly; a lot of people just stay put at least from 6th grade through high school.
Has everyone (except me) refinanced with bad instruments since 2000? I again find that hard to believe. Who has reliable stats on that?
Cranky
I once lost some money when a business declared bankruptcy. It was locally owned; the owners kept their nice houses and apparently got jobs in the same industry earning about the same amount (more than me, judging by their cars) within a few months. The estate paid off a few cents on the dollar to the debtors including me. Lucky for me the amount was modest and didn't hurt. A lawyer in my family explained the whole "bankruptcy workouts are best for society" speech and my rational brain accepts that, but the personal side still hurt. So why are businesses surprised when individuals treat them with the same cold calculating eye with which businesses and bankruptcy courts treat individuals?
The obligation to repay a debt is influenced by what is the right thing to do and what is legally required to do. There was a time when many people would do the right thing even if it was not legally required. They lived by a higher standard.
There was a time that the bank held the moral high ground. (In image, if not reality.) Since in the eyes of society an "honest man" paid his debts, the bank benefited from that ethical standard. Filing bankruptcy or having a foreclosure was shameful. There was also a time when collecting public assistance was shameful. Shame and social stigma is largely gone for the boomers and unheard of for the Gen X-ers/
That time is no more and all of these scams perpetrated by financial community has and will destroy any moral argument as to why a borrower should pay his debt to them because it is morally the right thing to do.
That leaves them with only the legal remedies and that is what is scaring some of them witless because they know that the legal remedies offer them little protection if the masses catch on.
Most of the concerns I read here are laughable. Landlords who won't rent to someone whose FICO is low because he walked? Please. LOL! Some will even pat the tenant on the back, but with all the homes that are going to be available, finding a rental will be easy. Likewise, calling in a credit card on a paying creditor when you have a shrinking and increasingly delinquent portfolio? I don't believe that one either.
Recourse? I will just speak for California. Non-recourse for purchase money. Practical non-recourse for refis (legal fees are hard cash and the prospect of recouping a deficiency from a defaulted borrower who had no down to begin with is a poor investment.)
So now the borrower is left looking purely at his legal risk vs. his personal self interest. Some have (and I suspect many will) purchase another home at the reduced price before defaulting on their upside down residence. Those who cannot figure this out for themselves will have no shortage of realtors and loan officers eager to coach them. This happened before in the 90's. This time I believe it will be epidemic. If the banks and lenders ever deserved trust and the moral high ground, they have surely squandered it away now and they are going to get it handed to them. As Michael Lewis wrote, "these poor people are sharks."
It's the same double-standard as when a company lays off workers with no notice. But it's expected that workers give a 2-week notice. It's also expected that workers feel loyalty to the company.
Morality is a one-way street in business, beginning and ending with the individual. Corporate or collective morality doesn't fit in a business model.
...had the capacity to pay, but have basically just decided not to because they feel like they've lost equity
If a large portion of these loans are stated income IOs or POAs and the borrower made minimum or IO payments and then walked, how did the measure the capacity to pay?
"As I said before, I am apposed to a moral system that only benefits the rich."
Somebody once said that the law applies to rich and poor alike: the rich, as well as the poor, are forbidden to beg on the streets and sleep under bridges.
Class warfare theory predicts that they will make it as hard or harder to walk away form negative equity as it is to do a decent bankruptcy. They are already sowing the seeds with their talk of the morality of "jingle mail".
Suze Orman recently had a home owner ask her what to do given the situation of owning a home with negative equity that didn't seem sellable. Orman said there were three choices for the home owner:
(1) home owner takes the equity loss;
(2) home owner bankruptcy;
(3) home owner default and go into foreclosure. So more than one of the CNBC gurus are implicitly suggesting default and foreclosure as a valid option.
Also, this guy called in to her "Can I afford it segment" last year asking if he could afford to buy this $950,000 house in CA. She advised him not to, that he couldn't afford it. She re-contacted him recently and learned he had bought it anyway. He was able to buy it for about $100-$150K less (it had dropped in value) and seemed to feel quite clever about the windfall discount, but she still said he made a mistake and was going to have to deal with a situation he couldn't afford.
Has everyone (except me) refinanced with bad instruments since 2000?
'bad instruments' is rather subjective, Cranky, but yes -- the 'absolute' number is waaaaaayyyy over 20%. Among all outstanding mortgages, those originated sometime after Y2K outnumber those originated before Y2K by 10-to-1. By $, it's more than $30 to $1.
But...I'm not sure why you would even find that remarkable, given the fact that rates bottomed out in '03.
I hope we all find it odd that BofA is expressing SHOCK that normal people are doing precisely with homes what BofA is attempting with CFC. Keep the good, ditch the bad.
All this talk about what a foreclosure will do to one's credit rating...aren't we looking backwards instead of ahead? In the years ahead, there will simply be less credit available. Less money to lend, because so much of the available capital has been consumed instead of invested and paid back. Lenders won't be cajoling us to borrow because they won't be awash in funds as they have been.
All I'm doing is summarizing the education you guys have given me on this blog.
If you bought a house at the peak of the market and it is now worth substantially less, so much so that you are unlikely to ever recover that loss, you would be foolish to keep paying the mortgage. Unless you can get the mortgage holder to go along with a short sale you should walk. The whole thing has to be considered as a sunk cost. To keep pumping money into it that you can never recover is not in your best interest even with a big foreclosure on your credit report.
"big, bulbous housing inventory question is, will they ever in their lives be able to own a home again?"
Who cares? They never did own one, the got a great rental deal for a while and they moved on. It is more common in CRE to walk away. And, tell me, what happened to those two hedge funds Goldman shut down last summer? Who walked away there?
The confusion here is that two things are being intermixed: business and a perception of 'morality'. All the big bankers will tell you in a heartbeat: business is business. Except now the shoe pinches.
All this talk about what a foreclosure
will do to one's credit
rating...aren't we looking backwards
instead of ahead? In the years ahead,
there will simply be less credit
available. Less money to lend, because
so much of the available capital has
been consumed instead of invested and
paid back. Lenders won't be cajoling
us to borrow because they won't be
awash in funds as they have been.
Many employers, and most health insurance companies, pull credit reports and use them for hiring and insurability decisions respectively.
If the banks and lenders ever deserved trust and the moral high ground, they have surely squandered it away now and they are going to get it handed to them. As Michael Lewis wrote, "these poor people are sharks."
Well, that's what you get when you break the backs of unions. The little fishies who traveled in schools now swim alone and hunt by tooth and claw.
How does the inventory overhang just "disappear" if only "good" borrowers have access to credit? Time? Sorry, there isn't enough. Don't forget the wave of downsizing boomers.
Short answer, it doesn't.
Multiply that formula across autos & everything else and it spells a screeching halt to the economy.
After enough people have walked FICO will mean squat.
A double digit FICO will be good enough to buy a house in 3 years.
I always found it ironic that underwriting guidelines treated Chapter 7 and 13 bankruptcies the same. Both were required to have reestablished their credit for 2 years after DISCHARGE of the BK. The difference is the Chptr 7 discharge came almost immediately whereas the Chptr 13 schmuck may have labored for years paying everyone off, but then found he got no benefit. I have spoken to many of these who thought they would be rewarded for doing the right thing, but found out that their Chptr 7 neighbor had bought another house years before.
This has been a one-way morality street for a long time.
I know many people who ran into financial trouble and tried to work things out with lenders and credit card companies and got nowhere. Then they went to the BK attorney and wanted to file Ch. 13. The Bk attorneys always say file Ch. 7 if at all possible.
After enough people have walked FICO will mean squat.
I may not be the smartest guy in the room, but I'm good at drawing parallels.
What would a random American have said if you had asked them in, say, 1997, what they would call logging onto the Internet and obtaining perfect digital copies of any popular artist's music without having to buy the CD or, indeed, pay a dime to anyone?
Almost anybody would have called it stealing.
Ten years on, we now have an entire generation of Americans toting around iPods stuffed with 40GB of music who have never paid for a piece of music in their lives.
It doesn't matter what you're talking about; once a few million people start doing it, whatever stigma it might have had vanishes. As long as the supply of houses (or mortgage bankers, or credit card issuers) exceeds demand, there will always be someone willing to take the chance on these folks sooner than rational people would ever think possible.
It's disheartening, but that doesn't make it untrue.
After enough people have walked
FICO will mean squat.
Sucks for the first couple million though.
Cranky
I understand your point, but absent the threat of red revolution as in the 1880s I think that the structure of money extraction is not much concerned about mass movements. They would be perfectly happy to classify 50 million people as bad credit risks and charge them more for everything for the next 30 years. And we seem to be into the age of mauve apathy rather than red revolution.
Let's see, a $250 40 GB Ipod can hold 10,000 songs at a buck each if purchased singly or by CD. So all of these kids are walking around with $10,000 worth of music in their pockets? Holy cow! Somebody should tell Apple these kids are stealing.
Where did the term "ripping" come from? Ripping off?
The "ability to pay" is determined by the "stated" income on the application at 55% DTI.In sonoma county if you had purchased a median priced home in the summer of '05 for $619k,it was worth 466.5k in december,and you are paying more than 3x more than the renter next door,if the neighbors aren't squatting.Even if you have a "recourse" loan and pursue it a 2% recovery on a large pool would be a good return,based on my experience (I was licensed to run collection agencies in Ca for more than a decade).
Wally, if you don't care about housing inventory, you shouldn't care. That's what my comment was about, not "moral" issues.
I also am fairly certain that ever tightening lending standards will catch up to most bankrupt homeowners wanting to buy again. There will also be a point - if it isn't here now- at which lenders, if not the govt, will stop lending themselves into insolvency by throwing money at bad buyers.
Ah, but the trick is that people who walk because their houses are deep underwater and will never be worth the cost of their loans are generally not "bad buyers". If they're in an affordable home with a 20% down payment they'll be very good buyers, and the banks know that. So when they go hunting for houses in a few years the bank will loan them money. It will just demand a decent down payment. The banks will figure ways to diddle their rules to make the loans.
While I have great empathy & agree with your social argument that ethics must be a 2-way street & that it makes economic sense to do what's best for you & your family, I shudder at the consequences for society as a whole. I'm reminded of a college course in which we discussed "lifeboat ethics", and now here we are.
Andrew: Nomadic investors who buy, sell & move according to economic gain is not new. They live in big houses devoid of furniture & personal effects, where voices echo from room to room. Twenty-five years ago in Phoenix, I was a flipper -- part of a group of investors who bought & sold fix-ups & houses not yet built, which we later flipped. That, too, came to a bad end. Most of them crashed & burned and never made it back up the economic ladder again. There can be moral hazard -- in the soul.
Dang it, I really screwed up on my S&P 500 valuation yesterday: S&P 500 Fair Value for Tuesday = 1294
We hit 1310.50
Where I screwed up and what I always forget to do, is factor in the actual dividend yield on top of the E/P, so sorry!
The more realistic forward valuation for fair value is:
1,310.50/ EPS: 78.74 = P/E of 16.64
Inversion of P/E is E/P yield of 6.00%
However, you really need to add in the div yield from the holdings in the index, thus you add in 2.11% (Div Yield) to get the new improved Total S&P 500 earnings yield of 8.11%
10 year Treasury @ 3.484%
That leaves us sadly 4.626% overvalued as of today, thus the dog and pony show today will need to sustain itself, so if your cost averaging, prepare for more opportunities!
I can't disagree with you more. Sharing, trading and copying tapes and later CD's as well as making mix tapes and CD's was pretty common when I was in high school and college. I don't think anyone thought of it as theft if you weren't doing it to make a profit. Besides, I can't really see anything wrong with going around a government granted commercial monopoly if you're goal isn't commerce but maybe that's just me.
I actually have about 40 GB of legally purchased (ripped from CD) music on my music server and my wife has about 80 GB on there. These are just rips from CD's that we actually own. It's pretty easy to accumulate a big music library over time. Especially if you shop at used record stores.
Most loans made in the past 7 years were fraudulent anyway, so turnabout is fair play. If the lender gets nasty, sue 'em for inflated appraisals, false GFEs, and on and on.
I dunno. About the time I lost 1/3 of my 401(k) plan when Enron/WorldCom skrewed over the country and got to keep the money, I stopped feeling like there was some kind of national standard to keep. When the FERC let Reliant keep Grandma Millie's money, while people on the west coast paid out the ass for electricity, a certain amount of my faith in fair dealing was spent as well.
If I get caught in a predatory lending scheme, or all my neighbors do and I am out all my savings and equity, the bank can kiss my lilly white butt.
What is the absolute percentage of US homeowners who have moved and/or refinanced since 2000? I have a hard time thinking it is more than 20%, meaning that 80% are sitting with the same mortgage they had (and could afford) in 2000. Or is the absolute number that much higher?
Cranky
I seem to recall a figure of something like 6-7% of Americans move each year, assuming some people move more than 1x, over 7 years that probably translates to 30%. Then add in the re-fi's which were going gangbusters for most of the period, and it is easy to see how about 60% of mortgages were written post 2000.
Couldn't agree with you more. Had friends who lost most of their retirement savings on Enron & World Com. They were in their 50s & have to start all over. Another lost most of her pension in the Pan-Am mess. Another relative, who's dead now, lost her retirement fixed-income in the Texas S&L scandals. They keep picking us off, one by one. Soon there won't be a middle-class pocket to pick.
I wonder of people ever realize what the total amount of their loans are, when they are said and done. I mean even a 30 year fixed after it's amortized over 30 years, you're paying a lot of money on. Just a thought.
I keep hearing about buyers paying 3x more than renters. I have a hard time understanding that. Why would anyone own rental property then? Let's say rent was $ 2,000/month. Thaa would mean payments to but would be $ 6,000/month, which would easily buy an $ 800,000 house at 6 % including taxes and insurance. So why would I hold onto that $ 800,000 house and collect $ 2,000/month in rent, rather than sell and stick the money in the bank. How much longer are landlord going to subsidize tenants?
By the way, that number is not true in most markets. Many places, renting is onloy mariginally cheaper than buying before tax and about the same after tax.
Homeowners apparently decide to act like business people. Banks could easily keep people from walking away if they rewrote their customers' mortgages by either forgiving some principle or giving them a great, great deal with dramatically lowered interest rates and making them 40-year fixed.
But no.
They want every goddamn cent in the original contract even though the value of the agreement to the other party has dropped dramatically.
Ahead,you get a neg-am loan,get the 15% appreciation per year that Gary Watts said was in the bag,and sell after 2 years...My ex and I leased a custom home in '05 for 1800 a month that had a market value of $1.2MM,conservatively.The owner had it built in the mid '80's as his retirement place,and still intends to retire there,he is OK.I know people who are shelling out $3k a month to experience the joys of being a landlord (with neg-am loans) because "Real Estate always goes up" which is what they learned at a Trump seminar.
Well, if the owner plans to retire there and it would otherwise be empty, then I could see it perhaps. My one experience in being a landlord was when I was an expat for a few years and we rented out our house at break-even after taxes, just so it wouldn't sit empty. We were planning to return to it, though ended up elsewhere and sold it. I couldn't see doing it for 20 years at neagtive cash flow though.
Other than in special circumstances like yours, I suspect landlords will sell out if the selling price is worth more than the rental income.
What People With Good Credit Dont Often Realize About Having Bad Credit
Having a bad credit score is a headache, but it is nothing akin to the mind-bending problem of hemorrhaging money on a depreciating asset coupled with a deteriorating capacity to pay. Low income workers, minorities, immigrants, elderly, the self-employed, the underemployed, the young and the migrant have always managed American life with bad credit scores and are probably noticing the decreasing penalties of maintaining a low FICO.
IMHO, in 2008, a truly F***ed Borrower in California that walks away from a mortgage not a refi - doesnt have much to worry about:
Car loans: Car financing is still notoriously easy: Since Henry Ford, car companies knows that their business depends on getting (working class) people into more car than they need.
The cost of car insurance: most car insurance is based on DMV driving and criminal records.
Deposit for utilities: They are renters now, right? Landlords usually pay gas and/or water. Electric companies and other utilities are regulated by strict laws that make allowances based on customers ability to pay.
Credit checks by potential employers, health insurances, etc: I guess even with A+ credit, this is an arbitrary part of life that just sucks anyway.
Cost of Credit (credit cards): While this may be uncomfortable for some, its not actually punitive. Using cash for purchaser for seven years could also be the best thing for someone in this predicament.
You may also be able to save and live rent-free for anywhere from 3 months to a year.
Where the H*ll did all this money (that funded the loans) come from? I realize there are plenty of other issues involved, but how were investors found so easily? It's not like there haven't been other systemic real estate lending problems (and fairly recent at that).
Low income workers, minorities, immigrants, elderly, the self-employed, the underemployed, the young and the migrant have always managed American life with bad credit scores and are probably noticing the decreasing penalties of maintaining a low FICO.
thank you. this thread amuses me, because it's clear that a lot of people here don't have a great deal of experience in the "alternative" economy (you may know it as the 'black market') and still cling to certain ideas as if they were shared by a majority. the paradigm shift has already occured; it's merely a matter of time before all the Big Brains in finance figure that out. and they should panic- the end of an illusion is coming, and all the suits up there are going to take at least one bite of that shit sandwich.
i can easily list groups of all kinds which have chucked the notion that as rubes, they must be honorable, while it's more than clear the elites are not. la plus ca, oui- but please understand, deciding to give up on the idea that "credit is important to me" is like popping your cherry. it may hurt initially or embarrass you for a time, but after that you never go back to the virgin state again, and a whole new world of possibility awaits you. if you're brave, some of it is even better and more fun, than you ever imagined as a Good Girl/Boi 'timely payment consumer.' but i digress...
some folks walking are failed flippers. some are people who got suckered into taking on 'if you can rent, you can own' mortgatges despite no proof that they understood the idea of "regular payment until note is met" or even "keep a job for more than a year." some are people like those who are going to populate a lot of media stories in the next two years: poor little old ladies and uneducated migrants, approved for $700,000 mortgages despite 8$/hr wages. and some are going to be Good (White, Exurban, Republican) Americans who would Never Do That, but somehow will, because as people describe, how stupid do you have to be to pay an interest-accumulating loan on a property now worth half what you paid for it initially? duh, of course you walk away and hope that by the time your kids are ready for college, you've cleared the BK hurdles and can get a loan again.
best line of this thread: being in debt up to your eyeballs doesn't make you an "ownership" society. consider that stolen. the Big Shitpile affirms my faith in the idea that it's silly to think that in the end, these little green pieces of paper mean anything at all, other than how it is we enslave ourselves to the unscrupulous.
I could easily see my neighbor doing that - bought at 560K, has put over 125 K into the house and it's probably worth about 500K now, maybe, if he could even sell it.
I can't imagine what they are thinking, but they just keep doing more and more work to the house - now they are paying their contractor's son $20 an hour to do the landscaping. They're basically spending another $200 a day on the house, if you count materials. I don't know what the hell they are thinking.
"First? Where is everyone. Is everyone else watching their portfolios shrink?"
Heh, maybe they are avoiding the internet to avoid thinking about it.
"The Capitalist system (particularly any version of 'pure' capitalism) has always depended for it's functioning on an assymetry in morality.
Lenders want ethical/moral borrowers whose motivations and actions are based in what they 'should do', while themselves demanding an environment (regulatory environment) in which they are free to 'maximize personal gain'."
Indeed. These bankers in particular have spent the last 30 years moving to more and more extremely unethical business models to maximize their own profits. Are there any banks who aren't making most of their retail banking money from gotcha fees for relatively minor mistakes on the part of customers? Are any banks not part of a credit card industry who's explicit goal is to maximize interest rates and fees by hook or by crook? Not to mention the immediate deceit involved in the mortgage industry.
If they really want to know who destroyed business ethics in relation to consumer banking they need only invest in the cheapest of mirrors.
But really isn't this the way of all inegalitarian societies? One set of rules for the elite another for the rabble.
Be it banking, military service, abortion, drug use... The story is always the same.
"I keep hearing about buyers paying 3x more than renters. I have a hard time understanding that. Why would anyone own rental property then?"
I believe that many rental property owners were either speculating on home values or see it as a very safe long term investment.
The first type were willing to own property and rent it even at a short term loss because they thought they could sell the property later for more. Thus their profit expectation was not based on rents, it was the greater sucker theory common to all bubbles. In the end the last wave of these people will loose a bunch of money.
The second type are likely not paying mortgages, and were simply accepting low returns on capitol for the last few years. They, however, have a super long term perspective and don't mind that. These are the source of and owners of those well built high end apartment buildings that can be expected to last more than 100 years.
I believe there was a major shift away from renting toward selling as the boom reached its height. This would represent rental owners deciding the profits from selling were too big to ignore. The condo conversion is the most direct expression of this.
"Let's say rent was $ 2,000/month. Thaa would mean payments to but would be $ 6,000/month, which would easily buy an $ 800,000 house at 6 % including taxes and insurance."
BTW cut those numbers in half and you have almost exactly the situation I saw early last year in Seattle.
I was renting a nice one bedroom apartment in a 1921 building. Across the street was an almost exactly matching 1920 building which was condo converted. My rent was $950 including a garage parking space, heat, and water. They were selling a kitchen renovated unit nearly identical to mine (1 br, ground floor, right across the street, mine had morning sun which I prefer, can't remember if the unit came with a parking space) for $400k. I went over to look at it and the total cost per month was very near $3000. They were selling studio's for $300k.
They pretty quickly sold every unit in the building.
In San Francisco, where I now live I am renting a 1br for just over $2k. Such units seem to sell for very nearly 800k in my neighborhood as I type. I haven't looked inside to see if they are the same (and I would be very lucky to find such an identical place as in Seattle), but again cost to buy is around 3x rent.
So I can say from personal experience that it is true. Such situations existed last year in Seattle and last month in San Francisco. I think it is likely that this is near the upper limit, but what is the break even point over the long term? Is it even 1.5x?
Why the surprise? After all, the reason these borrowers (okay, some of them, not all of them) are called "subprime" is because they're more likely to be behind on payments and just generally not CARE about the moral rightousness of paying their loan on time every month.
Fair E., I think your argument wafer thin, but show me how many mortgage banks are handing out loans now to the leveraged-to-the-hilt buyers who walked away from their homes and I will chomp my words.
You also assume today's "good" bad buyer will be just as appealing to a strapped bank (and assume such a buyer will have 20 percent down - a very unrealistic assumption these days). You also assume the banks are going to clamor for debt-junkie customers because they'll be able to do biz as usual -that is, bundle and pass off the loans to investors, who will be able to insure them, and get high bond ratings for them. That's a mortgage-pig sized assumption. But pls, let me know how you think this can still work..
This is what happens, when the middle class have no recourse. The banks pushed the bk reform, make it harder to default. Now, you have a situation when you decide, what can I afford. I honestly don't believe ppl are just walking for the hell of it. Its pay the cards and you know we cant live without them,or pay your house. Frankly with very little money for living expenses. The factor is which has more breathing space. I personally cant believe walking away from my house, but if you cant afford it.
Kim I think hits on an important idea. Bankruptcy law previous to the "reform" generally led to to people getting rid of their credit card debt and protecting their home. Now that Credit card debt cannot be gotten rid of, the perverse nature of that is to incentivize walking away from your home. I think there are good reasons not to do that in many cases, but to a desperate borrower, it seems like the better choice. One thing I think this problem suggests is to reexamine the bankruptcy laws, our regulation of financial markets, and the ideology of unrestrained capitalism.
The problem that the free-wheeling high times are now being realized.
When one goes for 'pre-approval' prior to buying a house, the calculations are based on the high-end of what a person qualifies for. Combine this with the 'housing boom' of recent years, a person when inflation borders on recession tends to become overwhelmed by what they want versus what they need.
The unemployment rate is going up so maybe some find their jobs in peril. The sub-prime and all the other 80-20, 70-30 % options were available to allow people to buy a house with a second mortgage hanging over their head.
This is the demise of the those that have homes that are losing value or those that can not sell theirs for as much as the tax value says. Are there going to be mandates to adjust the percentage rate since the Feds have lowered it again this week, will those on the verge of foreclosure be able to re-negotiate there loan rate without having to pay so much out-of-pocket? Probably not!
Let's look at this as a business transaction on both sides. Lenders have always kicked people to the curb if they stopped paying, and said "It's just business. You signed a contract. Nothing personal."
It seems to me that for the first time in a while borrowers have the opportunity to say the same thing to lenders. "Hey faceless hedge fund that bought my mortgage, we both signed contracts. I agreed to pay off this loan, and if I didn't make payments I would be kicked out. I am upside-down, I am not going to make any more payments. Here are my keys. Nothing personal. Just business."
Renting is now a smart option.
The glut of empty homes offers a hugh selection of rentals from which to choose, and many of us want the change and variety that comes with renting, and don't want to stay planted in the same old neighborhood forever, anyway.
Come on now! Times have changed, the banks and Wall Street made this mess and IMHO they can eat it. When they realize that we'll be better off. I have a prime loan, not a sub-prime loan and I have to move, but I'm upside down by more that 150,000 Grand.
I called HOPE now and they recommend I don't pay my credit card (or unsecured debts) because those don't matter. Maybe in the past (and if I wasn't moving) that may make sense. But come on, get a grip MORONS! You're upside down 150 grand in your home so you're going to quit paying $150 on your platinum card and that's gonna make everything perfect.
What idiots -
Dear Mr. Banker,
Thanks to the lax lending standards in your industry, I had to overpay for an asset that is the collateral for this loan. As I no longer intend upon living here and don't wish to donate 3 grand per month to offset the costs of becoming a landlord because in CA the cost of renting hasn't increased in years - Who would you like me to send the keys to?
If you're upset about the auction price - let me send you the appraisal that I finally got a copy of that has fraud all over it and shows how much of a great deal your getting. Bankers are idiots, you made the bed - you lie in it. Consumers are getting smart! Surprise, surprise. I hope the shoe on the other foot fits well for a change.
Hello. I find your blog very interesting. Recently, my friend had to deal with Wachovia company. It is not that he was dissatisfied with the services, but the charges are too high. I think that if the bank charges high fees then the customer service should be on the appropriate level. People, who commented on the bank on this great site Pissed Consumer - Consumer Reports, Complaints and Company reviews also think so.
"will they ever in their lives be able to own a home again?
My feeling is legions will not"
You're high. My ex in laws have walked away from more homes than I care to count over the years. And they STILL get home loans.
I'm about to walk on my home. Not because its under, not because I don't want to pay. Because I've lost my job. What really sucks, is now my job has been outsourced to India. And everyone expects me to work for
$5 an hr cause "that's what I pay the Indians". So now I'm done. fck the system. I did everything right. I went to school, got a good degree. Always came to work on time and left late. Both my cars are paid for, they're old but they're mine. I don't have a Cadillac with 24s and spinners. I don't have a big screen plasma tv. I have a simple, modest life, and I still got fcked.
Chicago dyke is right. It hurts at first, but now, the system is a joke. A house of cards crumbling under the weight of its greed. The funny thing is, they've killed the one thing that would pick up the pieces... the middle class. Good luck with that one corporate America.
First? Where is everyone. Is everyone else watching their portfolios shrink?
Well maybe they should come out with 200% financing? just kidding.....
Mortgage money can't buy our toys (or food)anymore, so why bother? Plastic money can still get us a little bit of fun. Plus, with such a huge surplus of decent homes, its easier to find a nice place to live. Still pretty wild though- people just walking away.
I guess the folks who seemed to be doing little more than renting from the bank realized that they were just, you know, renting from the bank.
"I'm astonished that people would walk away from their homes."
Why? When it cost nothing to get in. Easy come, easy go, Ken.
The question is, what is the consequence of walking away from an underwater mortgage, if you can afford to pay? In a previous post, Tanta mentioned that banks can go after these borrowers, but in practice have not usually done so.
Re: "I'm astonished that people would walk away from their homes"
Im astonished that banks would be party to no-doc loans and to not verify collateral and then to take that situation into a model and project cash flow for 30 years, in terms of the interest they planned to get by using false and misleading information which was falsified in the first place!
I don't imagine that Hillary's plan for a 90 day moratorium on foreclosures will help much.
In retrospect, getting a home loan in the last couple of years has been like going to a casino: play any game you like, no matter how risky; the house doesn't care, because the house always wins.
So who bought, the last couple of years? A lot were gamblers and speculators, the kind of people who know how to cut their losses when things go bad. And let "the house" keep the house.
What did lenders expect?
I'm going to talk my sister into it since the FED or GOVT is screwing the rest of my family out of our retirement! I'm going to write some great cry letters that will get everyone who walks back into a home within 4 years max. as long as they carry a couple cc cards and an auto loan w/0 missing any payments. Heck I could set up as a consultant, sell my templated cry letters, save homeowners 100,000's of dollars and charge a fee for helping them screw wall street and the banks...
Its the logical extension of the clueless lending of the bankers.
The bankers (and investors) didn't seem to care if people had the capacity to pay loans back. Why should anyone be surprised when the other party to a shameless transaction decides to act IN THEIR BEST INTERESTS?
If people are walking from loans that they fraudulently obtained, sure that is immoral. However, if they obtained the loans giving honest disclosure of their circumstances and the risks didn't pan out, well, that's what banks are supposed to manage isn't it? The risks?
These are homeowners with the "capacity to pay, but have basically just decided not to".
I am fully prepared to eat crow on this point as I argued that, although there would be exceptions, that the large majority of homeowners who could afford their monthly house payment would continue to pay it even if house prices fall consirably.
Before I begin eating however,
I would like to know how they determine "capacity to pay" however.
If the loan is anything but a 30 year fixed, that would imply that the couldn't afford a standard loan. Why else get a pay option, arm, etc?
Also, since there are many surveys that say people are optimistic about home prices, or that most don't think their own home has dropped, or any of the other dozens of surveys that show how out of touch most people are with the value of their homes, who is so sure than prices are dropping and will continue to do so that they will walk away during the first 6% of the drop? People don't even sell stocks that fast.
color me suspicious.
The banks have made tons of money burning the average Joe. Maybe they feel like it's payback time. "What goes around comes around?"
With 401K plans taking a huge hit along with the value of their main asset the home. Just maybe the average Joe is finding that it does not pay to be responsible.
The rate cut is certainly helping the financial and real estate stocks.
OT: Interesting article on the BAC CFC takeover over at Naked Capitalism. Any lawyer types who can throw more light on fraudulent conveyence and whether the CFC acquisition deal might fall under that category?
Another episode of "who could have predicted...?"
Almost everyone at this site could now apply for a job of "seer for hire".
The question is, what is the consequence of walking away from an underwater mortgage, if you can afford to pay?
Access to future credit is basically the issue.
If you believe that lenders are going to resume writing subprime mortgage loans to people with an FC on their credit report in the last seven years, and you believe that this credit will be priced such that it is affordable even at reduced home prices, then you may consider that there isn't much of a consequence to this.
If you believe that it will be a while before anyone does that again, then you're looking at a substantial class of people who are going to be renters for a long time.
Good for the home"borrowers", about time they learned the rules of the game!
About the only thing lower interest rates will do for housing is push out option arm recast dates further.
If you think a lot of folks are walking away now, wait until they have to pay the full payment on a house worth 20% less than the loan balance.
Disturbing ...
Such a culture change would not be limited to respecting the terms of their mortgage agreements. It would bleed out generally to our expectations of trust between parties that do business.
Trust systems are fragile.
We took ours for granted and abused it.
Ooops!
Sure would suck if it ended up wounded.
May I just say that I think that Mish runs his blog like a Nazi. Achtung! Vee vill have devlation! No dissent will be tolerated! You are all shtupid and veak of mind if you do not agree vith me!
It's the sensible thing to do.
What really amuses me, is that some of this is probably feuled by avoiding bankruptcy, given that the last round of "reforms" makes forclosure a better thing to have on your record than a bankruptcy!
Some of these people are possibly being premature. But if you are facing the possibility of being unable to pay your mortgage, then either a short sale or forclosure -- before sinking debt into your credit cards -- is simply the smart thing to do.
All you have to do is look at the stories of the people who stuck it out as long as possible then went into bankruptcy to see it.
Which is just schadenfruede to me given who freaking backed the draconian bankruptcy laws to begin with!
Just to be clear,
There are many many many people just walking away.
I think that 99% are doing so because they have to. They can't afford it now, or they know they won't be able to soon for whatever reason.
I just don't know how many people who have a 30 year fixed, paid no more than say 3 or 3.5X income, but are going to walk anyway because the house is worth less than they paid.
I suspect it's a very small number.
Again.."capacity to pay" is suspect in this case.
"capacity to pay, but have basically just decided not to"
Consuming with abandon, defaulting with abandon..
I don't understand how someone would believe that walking away is less costly than the alternatives. First, the damage to your credit would cause a large increase in your cost of credit (credit cards, future housing (rental or mortgage)). Second, you force the lender to value the property and come after you for any shortfall. You can avoid this only so long...a judgement can be enforced by seizing assets or garnishing wages. Third, if the lender does not come after you and forgives any shortfall, you're going to get hit with a big tax bill on the amount forgiven.
This, to me, sounds like the stupidest of all options.
I just don't know how many people who have a 30 year fixed, paid no more than say 3 or 3.5X income, but are going to walk anyway because the house is worth less than they paid.
Basically none, because almost nobody's bought a house for 3.5X income for several years. The question is what's going to happen with the 95% who paid more than that.
Why bother to walk away? How many underwater homeowners are going to figure out that they can live rent free for six months until the sheriff comes? And if thousands of people do this, how long before the foreclosure courts become so jammed that six months becomes a year or two?
I wouldn't want to be a servicer, or an investor holding mortgage paper right now . . .
just K
Such a culture change would not be limited to respecting the terms of their mortgage agreements. It would bleed out generally to our expectations of trust between parties that do business.
Once again, the terms of mortgage contracts specify that borrowers can walk away.
If Wachovia was relying on a social norm of it being distasteful for people to walk away, they will face a lot of tough questions from their shareholders...
Re: "I'm astonished that people would walk away from their homes"
You people are missing the BIGGER Macro stuff. Our good friends @ NAR have almost finished lobbying to get the 40 year jumbo mortgage with zero down as a reality; Congress said yes and The Senate will make this a done deal within a few months. Thus, with Paulson and Helicopter Ben crashing rates to 2.5%, getting any dream home to live in our howe-ownership society is going to be easier than ever, and as some may recall, we just had a softland with subprime and stories related to, "I'm astonished that people would walk away from their homes'.
Guess what, if you can get a home next year for zero down with a 3% mortgage, NAR will be selling homes like hotcakes and we will have a building boom with one small caveat, which is that no one will have equity in their homes and it will then be not only equally as easy to walk away, but a macro dynamic to walk away and get a better deal in another place. America is being destroyed day by day!
"The question is what's going to happen with the 95% who paid more than that."
My point exactly.
These people bought more than they can afford.
Therefore they dont have "capacity to pay".
There is a reason for historical lending standards.
Excellent posting Calc Risk. Now, given what you just posted, how can analysts possibly expect banks to be able to accurately value their balance sheets at this point in time. They can't. A tiresome question through 2008 will be "How much is left to write off".
CR,
Any idea how they determined "Capacity to pay"?
I don't understand how someone would believe that walking away is less costly than the alternatives. First, the damage to your credit would cause a large increase in your cost of credit (credit cards, future housing (rental or mortgage)). Second, you force the lender to value the property and come after you for any shortfall. You can avoid this only so long...a judgement can be enforced by seizing assets or garnishing wages. Third, if the lender does not come after you and forgives any shortfall, you're going to get hit with a big tax bill on the amount forgiven.
Because, depending on the state in which you live, the scenario you paint is just not true.
Check out California's foreclosure laws. There is no garnishment. There is no federal income tax on debt forgiveness. You do take a hit to your credit rating, but if you are current with your credit cards, the lenders aren't going to pull them from you...
It would have really helped if Wachovia had read the terms of the mortgages they were writing before they handed out the money....
Some things just don't change, no matter how long I'm gone.
Even if there are 10-20 million homeowners who are upside-down on their mortgage, the question of "by how much?" is a significant one.
Would you walk away from your house if you're only upside-down by 5%? 10%? Especially when you still need housing and are going to have to pay for it, anyway.
Even as this situation evolves, it remains a California-centric problem, since real estate there is consistently high-priced in dollar amounts.
IOW, being underwater by 10% on a median-priced home in California would mean the homeowner was out $50k, which might make it "worthwhile" for him to walk. But in an area where median-priced homes were going for $250k, a $25k "loss" wouldn't be as difficult to recover, so the motivation to walk is far lower.
Sebastia
Our government doesnt show fiscal responsibility or responsibility in general - why should we reward them by paying an unfair debt while they screw us via inflation and monetary control?
If they hadn't messed up rates to much people wouldn't be in as much over their heads.
Im all for personal responsibility - but not when it bails out an irresponsible government.
I think everyone should run not walk away from their homes. America, land of the freeeeeeeeeeeeeeeeeeee!
Supreme Court steps in to help limit the responsibility on Wall Street: that breeze you feel is the sighs of relief.
Enron Investors Suing Banks Spurned by Top U.S. Court (Update2) - Bloomberg.com
Average Joe, I'm not sure if this is what Wachovia is seeing, but I've noticed in recent years the emergence of a new type of homeowner (as I see it) that doesn't fit the conventional mold and may be more inclined to walk. These are the people that see houses as temporary places to live (a glorified apartment if you will with equity) and tend to move frequently. In my view, this is like treating your house like an auto lease where you move every other year to the next new shiny model. These people are more transient than your typical homeowner and would be more inclined to walk if trapped by negative equity. It'll be interesting to see if this is just a surge of these highly mobile folks or if this starts that trend that CR is talking about.
Oh, and Tanta, if you're interested, it looks like Fair Issac (the people who bring us the FICO) is looking to tweak/update how they calculate FICO scores to prevent abuse.
Fair Isaac hopes its new tools lessen lenders' risk of defaults | StarTribune.com
"Such a culture change would not be limited to respecting the terms of their mortgage agreements. It would bleed out generally to our expectations of trust between parties that do business."
It's not a question of trust. The homeowner is living up to the letter of the contract. When a hedge fund does this, it is considered normal, even something to applaud.
As a refresher; my sister in law is upside down on her interest only mortgage and HELOC.
Now she's paying 8.9% on the $87k HELOC. She tried to refinance into a fixed HELOC. The bank, that only has the HELOC, not the primary, arrogantly told her she'd have to pay a higher rate..nothing they could do, too bad, etc.
This suggests to me that the banks remain completely out of touch with the marketplace.
Combine this attitude, news stories of abuses at origination, Wall St bonuses and I think people will soon stop paying their mortgages in droves. Many will even be proud of stiffing the banks.
"Our good friends @ NAR have almost finished lobbying to get the 40 year jumbo mortgage with zero down as a reality" -anonymous
In which case I will abandon CA and buy a small farm house in BFE. Spending my time with my kids and reading by the fire. There is no way I will work to keep up with these fools and their leverage.
Average Joe | 01.22.08 - 1:00 pm |
I am going to guess you are not in Florida. As of right now i am pretty sure 4 people I work with in Sarasota are going to be mailing thier keys in. We have roughly 40 people here. Flat out...they bought to much at to high of a price. Can they make the payments...Yes,but it is killing them financially.
This happened in Socal in the early nineties. Even with 10-20% down. I just don't think it was widely heard about because the local fishwrap was not going to write about people walking with little to no recourse. I personally know of a couple of neighborhoods this was common in(50% drops).
We have to wait and see...But I am on the side of once people figure out and weigh the effects you will see more.
Chris
--Andrew,
You may be right, but these people very likely bought (or over refinanced) recently meaning that they overpaid. Most bought something that was more expensive than 3X income since they wouldn't probably be caught dead in it, and thus they likely didn't get a 30 year fixed that they "had the capacity to pay".
My point is....in the last 3 years no one would be willing to buy a house that they could actually afford.
That was the nature of the market and that is why we are in deep trouble.
The media is already portraying the evil, "predatory lenders" as the bad guys. It will become a matter of pride to stick "them" with a failed mortgage.
Of course, it's not the media's fault. It's easy to do stories on weeping mothers who are forced out of their homes. Not so easy to portray a bank sympathetically.
Ken - you Phuckin retard...
how much have you paid yourself the last 8 years?
How many have you laid off thru 6-sigma?
God help me, I'm gonna wanna kill him
the terrorist within.
Re: As if they weren't renters before walking away. An economy running on debt is not exactly an 'ownership society.'
Let's all wake up and face the fact that a lot of divorce stuff is going on and our society is changing very fast with Generation X variables which have not been accounted for as variables that change dynamics, like walking away from a house connected to a bad job, a bad social life, something went bad and people are now much faster to bail out; in a nutshell (no pun there) this is the lotto/casino society not the ownership society!
this is the lotto/casino society not the ownership society!
this is the lotto/casino society not the ownership society!
this is the lotto/casino society not the ownership society!
Conjure Clock
11:59:06
Tanta, since FN/FR guidelines are just that, guidelines, I can envision a time where they expand their definition of "extenuating circumstances" to include the great RE Crash of 2006-07-08-09 whereby people made rational decisions to walk from overpriced RE bought with unaffordable mortgages.
You'll need at least 25% down to get a mortgage, but houses will definitely be cheaper!
Of course, if the FCL is on a prop owned by someone in the mortgage biz-derivatives-Wall Street, job loss will be the easy explanation!
There is always a way to get something done. FN/FR needs assets too at some point.
Average Joe, I posted what I know. Sorry I don't know more. But that is two CEOs expressing the same concern.
Best to all.
JoeMortgage
Are you not in the loop in regard to zero down mortgages and new legislation in The Senate?
I agree with lama.
People are going to stiff the banks, just like the banks have been stiffing them.
Trust, surely you jest. Trust went out the door with the neighborhood S&L in the early 90s.
A lot of the midwestern types seem to think this is just a coastal problem, but it isn't. Deflation in housing prices will be coming soon to a place near you. Further, in a bunch of states with "no recourse" CA, AZ, etc. it makes much more sense to walk away and save for a rainy day rather than to stick it out.
What is also not being talked about is that most of the houses sold with almost no equity were to younger folks, who would have been ready in a couple of years to purchase with some skin in the game. They have time and can easily turn back into renters.
What this does is destroy the mantra real estate always goes up, just before the boomers begin to retire. Now who are they going to sell their houses too? Gen X? Got one if they wanted one, Gen Y? They are going to look at it as shelter, not an ATM.
Geez, the banks have been setting themselves up with how they rape the public on Wall Street, and they think they common man won't stick it right back?
Glass Steagal is going to make a return, and banking will descend back into a sleepy backwater, as will much of Wall Street.
Fools killed the golden goose with excessive greed.
Someday this war's gonna end...
4runner -
I don't know where to begin.
Refi loans in CA are "recourse", so if there is a balance remaining following a foreclosure, the creditor can can continue collection efforts, including litigation, and potentially garnishment.
The federal tax laws are not preempted by states, so I am not sure where you got the idea that a 1099 would not be issued for any forgiven debt.
Have you ever heard of universal default provisions? They are pretty much the norm these days on credit card agreements.
So, there is a very real cost to 'walking away' from mortgage debt, in CA or anywhere.
with people giving up and mailing in keys
and with the overbuilding of housing
and with a recession causing the average household to increase in size
and with babyboomers retiring and perhaps selling a house if they have two.
...will I be able to pick up a house in 2-3 years for pennies on the dollar?
Will cash be king?
Will downpayments go above 20%?
As soon as I could get through to Ameritrade, which took about 2 hours, I bought some SRS. This is a great buying op for bears, don't you think?
I think the quant long/short hedge funds had to do a lot of covering this a.m. and that's why emerging markets, homebuilders, bond insurers, and other crap stocks rallied. I'll bet some hedge funds blew up timing this mess wrong.
Spoke to some mortgage brokers - phones are ringing off the hook - The housing bubble is dead! TIme to reinflate!
one of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes.
Is there a way we renters can help in moving this process along? How do we get 'walking away' to be as American as apple pie?
Wild Rumor of Citi Chapter 11
Sorry. Page not found.
How many underwater homeowners are going to figure out that they can live rent free for six months until the sheriff comes?
Depends what state you're in. Don't know how many states are like NH, but here we have 3 months. That's barely enough time to pack, can't save much money by the time you're behind far enough to lose your house...
As far as complaining that people who bought in the last 3 years bought way over their affordability, I remind you that houses within 3.5x income were not available unless you wanted to live in a pigsty. Remember that the AVERAGE family income is somewhere around $60,000? Something along those lines. How many houses do you personally know of in the $180,000-$200,000 range these past 3 years would you want?
As far as walking away becoming the norm, am I the only citizen on this planet who would rather pull their toenails off than move AGAIN? And do these people have KIDS they have to move? I'm having a hard time understanding the whole walk-away-because-you're-underwater thing. Then again, it may be starting in Cal./Fla. and migrating to the rest of the country as a coming trend? Still, I can't really imagine. If I lost my house, I'd still be devastated. Definitely not socially acceptable where I am.
from Peter Lynch's Beating the Street, p. 268:
1985
"...A new fear crept in: not interest rates, but Texas. Crazy S&Ls down there had been lending money in the oil-patch boom. People in Houston who'd gotten mortgages with 5% down were leaving the keys in the door and walking away from their houses and their mortgages. Fannie Mae owned a lot of these mortgages."
Off topic: Marty Whitman of 3rd Avenue Value took a position in bond insurers 4Q07 and wrote about it extensively in the shareholder letter. Interesting read.
I wonder how much the bailout "uncertainty" has to do with this? Perhaps people are hoping for a bailout or some sort of forgiveness. That is a bit premature, of course, since nothing has been passed yet. On the other hand, and CERTAIN bailout will open the floodgates to affected borrowers immediately.
NAR successfully lobbied for the passage of H.R. 1852, the Expanding American Homeownership Act of 2007, which helps modernize FHA by expanding the availability of safe and affordable FHA-backed loans for purchases and refinances. The bill includes
provisions to eliminate the 3% down payment requirement, (that is ZERO DOWN)
increase loan limits up to 175% of the conforming limit in high-cost areas,
streamline condominium purchases,
and eliminate the cap on Home Equity Conversion mortgages (HECMs).
The Senate Banking Committee passed a similar bill. The Senate bill is expected on the floor by the end of the year.
Freddie Mac/Fannie Mae Reform
NAR also successfully lobbied for passage of H.R. 1427, the Federal Housing Financing Reform Act of 2007, which overhauls the regulatory structure of the nations housing finance government-sponsored enterprises (GSEs). H.R. 1427 provides for regional adjustments to the caps on mortgages the GSEs may buy for high-cost areas, helping more working families qualify for safer GSE loans. The House passed H.R. 1427, 313-104. The Senate has taken no action to date.
Time to change the laws and not allow people to walk away if they can afford the payments. Think of it, a debtors prison without having to build more prisons.
"We're seeing people who are current on their credit cards but are defaulting on their mortgages," Mr. Lewis says. "I'm astonished that people would walk away from their homes."
Again, people should learn a bit from history.
This is what you always get when you constantly bail people out and reward wrecklessness and complacency.
Credit, the foundation of the modern economy, is fundamentally about honesty and believability in obligations.
I don't think we have that, and if we keep moving in that direction then money, the most fundamental form of credit, is likely to be compromised also.
We saw signs of people walking away on our last trip to Florida:
http://www.viewfromsiliconvalley.com/id389.html
Cobradriver said: "Yes,but it is killing them financially."
So, is this defined as "capacity to pay" ?
Yes, people are walking.
And nearly everyone walking can't afford not to.
I have to laugh that Wachovia says that they (the owners) walk away. I am sure that everyone waited their free six months and then sprinted away in the non-recourse (sp?) states (ie: California). Their credit will be crap but what will they care.
I'd always thought 7 years of bad credit was a slap on the wrist. Now it's merely a scolding
The banks need to figure out what to do with all of these empty homes, either sell them to the municipalities on the cheap or become landlords. In some cases entire neighborhoods could be bulldozed and turned back into wilderness areas, that would be pretty cool
Average Joe, I agree with you. In the areas where this is happening Debt-To-Income ratios had gotten way out of hand. Measuring "capacity to pay" by "willingness to pay my mortgage on credit cards until I am above my credit limit" is quite dishonest.
If you own a home, you need to be able to save money for upgrades/repairs and be able to put some into savings each month for emergencies. If you got yourself into a situation where you can just barely get by for a few years paying your mortgage, something's going to happen. You may have the capacity to pay for a short time, but you do not have the capacity to pay the loan for 3-5 years. Those are the people who are walking.
Sure, for a while the theory was that 55% DTI buyers would be able to cover the real gap in expenses by taking money out every few years. Well, that's not gonna happen now.
Btw, in a lot of cases they are walking from second homes, or the home they left to buy the latest one, and hoped to sell.
In a lot of states purchase money mortgages are non-recourse. And if these people can put substantial money away for a few years, in a few years they WILL be able to buy a loan. They will. They'll either be able to buy from a desperate seller, or they'll be able to buy with from one of the foolish institutions that gave them the 55% DTIs in the first place.
My guess is "capacity to pay" to Wachovia means that they haven't had any late payments or loans haven't gone into default yet.
4runner wrote on walking away:
[ You do take a hit to your credit rating, but if you are current with your credit cards, the lenders aren't going to pull them from you... ]
It's going to affect their rates for car loans, the cost of car insurance, the deposit for utilities, and even credit checks by potential employers. Must be more but I can't think of them right now. But it will impact their cost of living in multiple ways apart from credit card rates, surely..?
Kind of OT: This was posted over at the Irvinghousing blog. Interesting story ...
Seattle Post-Intelligencer: File not found
Anon @ 1:06...
You don't get it.
It simply doesn't matter what structure of mortgage is OFFERED by agency. Underwriters still have to approve the families for anything to be useful.
The problems we're discussing are exactly the reason underwriters neg loans.
cues Tanta
I wonder why people think credit will be easy after they walk away from their homes. Couldn't be the 10 credit card offers they receive every week, could it? Couldn't be the saturation-bombing level of Dietech ads on TV, could it?
The banking industry has brought this upon themselves.
The thing is, you have to get your credit score up to a certain level to get an apartment. So if you have driven yourself into the dirt trying to pay a mortgage that reset on a house you can't refinance or sell, then it is time to find a nice apartment building before anyone knows you are crushed. If you wait until after the banks, etc. wring you dry you will be lucky to be living in a car, maybe a van by the river.
AC,
Its 'reckless' not 'wreckless'
Cheers.
"An economy running on debt is not exactly an 'ownership society.'"
Well said, sir, well said.
MaxedOutMama,
Thank you....you said it better than I could apparently.
Lest anyone confuse me with an optimist, I think that this fact makes it much worse. This is how out of whack things were for ALL buyers.
For anyone who struggles to make it ....math is working against you.
On NPR the other day, a woman who can't speak English had bought a $470,000 house with no money down. She's a housekeeper. She brought in roommates to help pay the teaser mortgage, but the ARM adjusted to $3400/mo. and she's defaulting. It wasn't said whether or not she was in the US illegally.
The weeping ex-homeowners will win the battle for public sympathy.
rich - you may recall from last nights threads, I was saying get out of your shorts quick and wait to re-enter. I am with you that there was a nice re-entry window a little while ago. I mean, if you dumped the eev at opening, you can buy it back at a 10% plus discount, same with srs.
In which case I will abandon CA and buy a small farm house in BFE. Spending my time with my kids and reading by the fire. There is no way I will work to keep up with these fools and their leverage.
w | 01.22.08 - 1:15 pm | #
I'll keep the light on for ya...
Does anyone know why banks don't take these kinds of borrows to the courts and try to get wage garnishment to cover the losses from short sales?
Its clear these people can afford it.
AC,
Its 'reckless' not 'wreckless'
Actually, I thought "wreckless" was a very interesting term. Kinda like walk-aways who have nothing bad happen from it?
"Trust systems are fragile."
Here's a story -- I'm sure others can relate to this.
I was working at big financial firm "X" 4 years ago. The COO gives the rank and file a presentation, the centerpiece of which is a graph showing the firm's Revenue vs. Expenses. Both are growing, Revenue faster than Expenses.
But in his view, the gap isn't big enough.
He states, "Folks, this trend cannot continue."
Well, yes it can. It can continue to infinity. The lines are diverging. By definition, if Expenses are growing more slowly than Revenues, that can continue forever, Sir.
But that wasnt his point, and we all knew it. If the gap doesnt grow, he doesnt get promoted up to the parent company. He doesnt get the big payday.
So, yes, Expenses were cut and Revenue continued to grow and that gap widened and he was promoted.
Meanwhile, I (along with my co-workers) saw my workload double and my staff cut and my bonus cut and my salary hold steady. (Hey, consider yourself lucky, right: Your job wasnt outsourced.)
What are my options? How much power do I have?
(OK, in my case I left the firm and started my own business, but that muddies the storyline, so lets ignore that . . . .)
Give me one opportunity to stick it to that COO (and his top-dog brethren), just one, and I wouldve taken it.
(Such as quitting the day my bonus check hit the bank account as they scrambled to see if they could cancel the transaction, but that muddies the storyline . . . .)
Its a powerful emotion.
The Alpha Dog says Im going to eat until Im good and satisfied, and if theres anything left over for you, fine, and if not, thats good too. And all you want to do is take that dog down, and you know you cant. And youre ashamed of your weakness.
Im not saying underwater homedebtors should walk on their loans.
But Im not surprised that they are.
I see a lot of unsourced assertions in this thread, and a lot of chin-stroking about what people "suspect" about the cause of foreclosures, and the "containment" of the problem to California.
Well, we got into this mess partly because of excess deference paid to chin-stroking crather than, you know, data, so my patience with the gesture is, with apologies, short.
The fact is, the Fed of Boston attributed most of the rise in foreclosures in Massachusetts (other side of the continent from California) not to rising payments or other distress, but specifically to the decline in house prices that began here in 2005.
http://www.bos.frb.org/economic/wp/wp2007/wp0715.pdf
In addition to lots of fancy modeling formulae, the Fed resorted to actual, you know, data.
Shnaps,
responding in order:
Refi loans in CA are "recourse"...
Fine. They can also garnish if you committed fraud on your loan app.
First and second purchase money mortgages aren't, as a practical matter, recourse in CA.
The federal tax laws are not preempted by states, so I am not sure where you got the idea that a 1099 would not be issued for any forgiven debt.
There are no 1099's issued for foreclosures on purchase money mortgages.
Have you ever heard of universal default provisions? They are pretty much the norm these days on credit card agreements.
Yes-- the credit card companies have the right to raise your rates, cancel your cards, etc.
Do you really think that the whores who send you 10 or so credit card every week are going to cut you off if you are current? C'mon...
"The thing is, you have to get your credit score up to a certain level to get an apartment."
Jimmie Knickers | 01.22.08 - 1:33 pm |
Nope,you just find someone like my old man. We have 3 renters that walked on homes. As long as they have a verifiable job and the needed money to get in we rent. Of course in Fl you can get a deadbeat out in 3 weeks...BTW none have been a day late on the rents. They are paying less than 25% of the previous mtg in rent...Frankly if you don't rent your vacancy will skyrocket.
Chris
AC,
Its 'reckless' not 'wreckless'
That's too bad. I like wreckless a lot better.
CalculatedRiskOmnibusPig - thanks for the back up.
Anon-
you still need to make a credit decision on the borrower, regardless of the loan product. Not everyone is going to qualify for it. Unless of course they legislated underwriting standards in those bills- which I highly doubt.
On top of that, the only agencies buying this new crap will be FN/FR/GN.
Check out http://www.efanniemae.com to see Fannie's current positions on BKs and FCLs. need to click the allregs link to get the Lots of talk about risk assessment.
We may actually see a return to the 5 Cs- Collateral, Capacity, Cash, Credit and Character- the last two being malleable by the underwriting guidelines.
It's going to affect their rates for car loans, the cost of car insurance, the deposit for utilities, and even credit checks by potential employers. Must be more but I can't think of them right now. But it will impact their cost of living in multiple ways apart from credit card rates, surely..?
How much are those things worth to you? If I offered you a 20k$ check, would you cut your credit in half? 40k$? 60k$?
The Capitalist system (particularly any version of 'pure' capitalism) has always depended for it's functioning on an assymetry in morality.
Lenders want ethical/moral borrowers whose motivations and actions are based in what they 'should do', while themselves demanding an environment (regulatory environment) in which they are free to 'maximize personal gain'.
Guess what, an ethic of maximizing personal gain is incomensurate with a healthy society -- and it ain't the borrows fault that this is true. Nor is it the borrows fault that powerful business interests embarked on a 25 year program of destroying the institutions whose purpose was to maintain a balanced ethical situation between the powerful and the weak. They deliberately destroyed it, and will now spend the next 25 years implementing military police crackdowns (and pseudo religious tirades) whose purpose will be to immitate the environment created by a societal commitment to ethics and responsibility -- that they destroyed.
Good luck with that.
Those that walk away are heros. The lenders, and the banks (actually the management of lenders and banks -- who have power due to control of something whose performance they are not (financially) responsible for) destroyed the balance of ethics in this society, such as it was. The will now attempt to confuse us about this fact, and get the bulk of society to marshal its forces in pursuit of their goals, just as they succesfully used the structure of the corporation to promote their own personal self interest to the detriment of the 'owners' of those corporations, as well as the society in which those corporations function.
We need only notice the Fed today intervening in markets in order to prop up the stock market to realize that the powerful have entirely subverted the system to serve their goals.
The only real question now is how long the unwinding of the great american empire takes, and how many lives are destroyed in the process.
OT: Interesting article on the BAC CFC takeover over at Naked Capitalism. Any lawyer types who can throw more light on fraudulent conveyence and whether the CFC acquisition deal might fall under that category?
tyaresun | 01.22.08 - 12:58 pm | #
Wild Rumor of Citi Chapter 11
Sorry. Page not found. ...browseItem.biId
FFDIC | 01.22.08 - 1:23 pm | #
Well maybe they should come out with 200% financing? just kidding.....
Actually, they already have this program -- it's called 100% financing, originated in 2006!
=======
It will not just become socially acceptable but may even become cool to walk away from high priced mortgages and under-water homes. Who likes the bank anyway??
Today the markets are calming down as Bennie came through. We'll likely see a clearing rally on the backs of some recovery in Asia and Europe. Another cut at the end of month.
But.... the aftermath of the credit bubble is not going away. The banks will have to be recapitalized which means existing shareholders will take a bath. And its going to get tougher for banks to raise more capital as each shoe drops - more residential mortgages, CRE, credit card debt, LBO debt, counter-party, etc. Lower rates and a positively sloped yield curve will provide the net interest margin, however, its likely banks will be writing down equity faster than they will be raising capital.
This credit crunch is for real. For lending to start back it will require the US consumer balance sheet & income statement to get back into balance.
Just wait until Congress passes strip down for ones primary residence. The banks/holders will have even less leverage at that point.
trouble w/ Halo,mm
Many of these owners had multiple properties and are choosing to let some of these over-leveraged properties go back to the bank.
They will keep one home paid so they won't be homeless.
Mortage reform by NAR:
H.R. 1852 [110th] - Summary: Expanding American Homeownership Act of 2007 (GovTrack.us)
H.R. 1852: Expanding American Homeownership Act of 2007
Extends the term for mortgages from 35 years to 40 years (Sec. 4).
Search Results - THOMAS (Library of Congress)
EC. 6. MORTGAGE INSURANCE PREMIUMS FOR ZERO- AND LOWER-DOWNPAYMENT BORROWERS.
Yah...we have theoretical financing now with less than zero down?; anyone know what that means?
Re: Section 203(c) of the National Housing Act (NHA) authorizes the Secretary to set the premium charge for insurance of mortgages under Title II of the NHA
It will not just become socially acceptable but may even become cool to walk away from high priced mortgages and under-water homes. Who likes the bank anyway??
Just think if people could have walked away from their DOT.COM losses.
I would have taken the slam to my credit rating to retire 10 years earlier.
The Fed gave millions of bulls a huge gift this morning, namely the opportunity to get out of equities without losing their shirt.
Let's see how many of them take advantage. A lot of them were panicking and praying last night and now their prayers were answered, but only if they bail out for awhile.
If they don't bail out now, I'll guarantee you they'll be praying and bailing later.
I'm looking for the common thread here in a thread that's all over the place with moral hazard. Suffice it to say that the entire libertarian ethos of modern living and finance inevitably results in Ponzi schemes. You entice the rubes into the game when you want to inflate the bubble way past its maximal capacity. You make it absurdly attractive for them to play. And then you feign shock that they might not see the point in participating any further in YOUR con game.
What did you expect? You think the hoi polloi are really that stupid? Sure, they'll play because they're rubes. No, they won't make themselves indentured servants because your ideology demands as much.
Good luck trying to get an apartment even with that on your credit rating.
"Socially acceptable" given the crap wall street has pulled this decade bemoaning the death of common morals and decency isn't likely to bring a lot of tears.
Having said that, if you sign on the line you should live up to the debt, doing otherwise just contributes to the breakdown of the system.
If you believe that it will be a while before anyone does that again, then you're looking at a substantial class of people who are going to be renters for a long time.
Tanta, are there no legal issues. A person who has borrowed X dollars from the bank to buy a home, walks away from the home. If the home sells for significantly less than X, isn't the individual/family who borrowed that money liable for the balance ?
Cheers,
orma-
Quite sad. Good money chasing bad money. The cardinal rule you never break.
That is if you want to stay solvent or retain your sanity.
Those people have little chance of recourse against their real estate agent. And after already spending 75k in legal fees, they probably have little chance of retaining their health. To make things worse, after they lose their case, they will be liable for the real estate agent's attorneys fees which are also over 75k.
Idiots.
The Fed should have lowered the rate 100 basis points, no matter what the Fed does filters down in the same context to individuals. The housing slump, (construction and existing has caused our economy to meltdown. Refinancing at good rates would put immediate money monthly back into the economy and would continue for the length of the mortgage, as well as put mortgage writers & appraisers back to work. Just that activity would once again add to the economy in the form of spending in transportation, and entertainment. The problem is the rate cuts are not being felt at the lower levels on the same scale as the financial institutions. Look at the bank stocks today, even after write downs.
Rememebr folks, before you stick it to somebody. The amount you walk awy from becomes taxable income.
California Foreclosure report is out on DQ:
DQNews - DataQuick Real Estate Headlines and Statistics
"The number of mortgage default notices filed against California homeowners jumped last quarter to its highest level in more than fifteen years, a real estate information service reported.
Lending institutions sent homeowners 81,550 default notices during the October-to-December period. That was up by 12.4 percent from 72,571 the previous quarter, and up 114.6 percent from 37,994 for fourth-quarter 2006, according to DataQuick Information Systems.
Last quarter's number of defaults was the highest in DataQuick's statistics, which go back to 1992."
To get a broader view -
'Access to future credit is basically the issue.'
And that, in a nutshell, is the American problem, isn't it? As if access to future credit is more important than actually having no debt.
In the eyes of those that live from the financial industry and its various spin-offs, of course a future with reduced access to credit (or let's be honest, a future where Americans reject debt) is a nightmare of vast proportions.
Even vaster than America's deindustrialization.
Even vaster than the lack of decent health care for all American citizens.
Even vaster than the morass of seemingly endless war in multiple countries.
Nonetheless, a nation which relies on the skills of its financial engineers, the talents of its 'intellectual property' owners (not the creators - just ask all the artists that SoundExchange couldn't find to distribute money collected in the name of said unfindable artists), and its advanced consumer base continuing to spend money it doesn't have, is a nation which pretty much ends up looking like America today.
A nation where people are walking away from the utopia that was exurbia, the most desirable form of human existence ever conceived of, at least according to those unable to imagine any other way to live. Or worse, imagining having to give up their prized beliefs in the face of reality.
America, love it or blah, blah, blah.
But Americans may really discover what having no access to credit means on another level - America has pretty effectively bankrupted itself under Bush, and you can be fairly certain that non-Americans (you know, those people that actually still produce real things in real factories requiring real skills - often referred to as 'old-fashioned' losers in the better circles of those creating the American economic miracle) are a lot less likely to be taking dollars in the future.
And that includes OPEC - happy motoring in exurbia.
VoiceFromTheWilderness. I could not agree with you more. However, had you worked for banks 15 years and then the FDIC 19 years as I did you would not have such a "healthy respect" for banks and their regulators...
4runner -
I guess I am taking it as a given that we are talking about the POAs and subprimes in CA. That is very heavy on refi (71%, to be exact - hi, Markel!).
Do you really think that the whores who send you 10 or so credit card every week are going to cut you off if you are current?
I dunno - just saying they can if they want to. I for one wouldn't take that risk.
In the end, I think perhaps my own personal story might be a good summation of the last 5 years.
At the height of the ownership era - I, too, investigated a home purchase. All my friends were doing it, so why not? It's the American dream.
Unlike them, however, I wasn't married to another income stream and I had my share of -- quite admittedly self-inflicted -- financial problems.
However, good job in hand - delinquencies brought current, and nothing bad for the last 12-18 months -- why not? Get out of from under a landlord, build that magical equity and net worth, and buy me a house (or condo, as the case was).
I figured the biggest hurdle was going to be getting myself a mortgage.
Boy was I wrong about that - even my own bank, a big national who is incidentally NOT among those most often mentioned furiously writing off debt - more than happy to make a deal.... My upwards bound career and salary... my whole year+ of paying bills on time... my having been with the same company for 5 years. Why - I felt like I was attending some sort of self-help seminar to build self-confidence!
Virtually everyone was willing to work with me.
Only it didn't add up... Here I was - just a few years removed from being afraid to answer my phone, and so many people willing to just cut me a 300K check?
Ultimately, I ended up following my instincts and NOT buying because I didn't think I was prepared for the responsibility and didn't want to bank on an ARM not biting me until I won the lottery... or flipped my condo for a tidy profit... or whatever.
I think that's a pretty sad state of affairs - when a financial nincompoop like myself is the one to walk away, rather than the guys who supposedly do this stuff for a living.
I wonder how many of the "Home Owners" are actually speculators. In that sense they are a business and walking away is what a business would do.
I just rented out an apartment that I own. One of the people that applied was coming from a complex in which the owner had financed for three times the value of the building. It seems that he has walked away, at least no one can find him. Who in their right mind hands someone $3 million for something that is worth $1 million and why are they surprised when the dude leaves town with the cash?
Guess what, an ethic of maximizing personal gain is incomensurate with a healthy society
That's the fundamental paradox of trying to have a healthy economy, however. Maximizing personal gain has been one of the most effective means of mobilizing and developing human capital because greed gets people out of bed in the morning. It's just an unfortunate but unavoidable fact that human nature is such that most people won't do stuff simply to "make the world a better place".
This almost makes a "healthy society" and a "dynamic economy" exclusive goals with our current technology and state of humanity.
I think that accounts for the seemingly endless back and forth swings we see in societies and economies over time -- we're kind of aiming at an imaginary target.
Jesse, That is, if the borrower cannot prove insolvency by IRS definition: "Liabilities in excess of Assets".
If the borrower is insolvent at the time, the forgiveness of debt is not taxable income.
Vikram, generally speaking it is not a good idea to say "there are no legal issues" when you don't actually know whether there are, in fact, any legal issues.
Vikram & Gary, If the bank fails the FDIC is likely to have some nifty and novel legal issues with a whole host of people.
Some people believing that it will be easy to walk are just stroking their ego. Judgements are generally renewable every ten years. And if you ever plan on owning ANYTHING in title, you will more than likely pay if you are not eligible for BK.
Many entrepreneurs are going to buy this paper at ten cents on the dollar from the banks and pursue deficiency judgements against qualified individuals that will not be capable of claiming BK.
Unless one escapes to a judgement-proof country, the last thing anyone wants is a valid and binding judgement against them or a BK.
People just love to paint lipstick on a pig.
Meh. Of the dozen or so places I've rented over the past 20 years only one ran a credit check on me. It's really only an issue with professionally managed properties. Not coincidentally, I've only ever lived in such a property once....
I'm surprised no one has considered the situation that by walking away, one could theoretically rent a comparable house for half the money, in effect getting paid a couple thousand a month without the constant worry of a falling housing market. I realize this is particularly Californian, but that was Wachovia's area of concern.
This blog is symbolic of the change within society, i.e, people want to do things very fast and to solve problems faster and faster. This economic collapse which is essentially systemic is being dealt with by lotto/casino mentality where the immediate solution has to work within a matter of days or weeks, versus realizing that the solution here must be related to a long term sustainable solution which deals with accountability over the course of a few years! We have a government that was in denial for 8 years that wants to solve its lack of accountability by lower interest rates as fast as possible, as if that was the problem! They should buy lotto tickets!
I see your point Average Joe, due to the recent "do-they-fog-a-mirror" lending standards there is a whole class of people out there who simply can't afford their payments or barely can (as long as no financial catastrophe hits them) and these are the ones who will be forced to walk away, default, or go bankrupt. I think Paul McCulley of PIMCO described these folks as the speculative ponzi buyers of the Minsky credit cycle (the folks reliant on increasing value of what is bought with credit to even afford it).
I wasn't really arguing with that, I was just characterizing the mindset of what I saw as some of these people (who happened to fit into my arbitrary definition of them) towards their houses and neighborhoods, that being transient and shallow. Like it or not many people took a dotcom daytrader's view of real estate or an apartment-with-benefits view recently and I think that people with that shallow attitude are likely to bolt when it gets tough (i.e., Casey Serin). But as you point out, many people just got caught up in the frenzy and really just wanted a house, so they bought as much as they could afford before they were priced out. Because of this they become the unintentional speculative ponzi buyers of this credit cycle.
Minsky moment - Wikipedia, the free encyclopedia
PIMCO - Global Central Bank Focus- March 2007 "The Plankton Theory Meets Minsky"
Well i have a prime example of this in my family, my sister inlaw filed personal bankruptcy...waited 1 month...1 MONTH! and walked in to a car dealership and drove out a brand new 2008 auto with no money down....so who really is the stupid person in the room...me or her...i vote the latter.
Adam
Cmith
And as for the consequences of walking or for that matter anything else, we seem to have a large segment of adults in society unable to name five planets, so expecting them to see problems coming down the road is a bit much.
I can just see the Time Magazine cover now... a happy couple tossing the keys to a terrified banker.
Perfect for the December 08 issue!
People can walk away and probably find a rental, but the big, bulbous housing inventory question is, will they ever in their lives be able to own a home again?
My feeling is legions will not, and that will be a very big factor in how veeeeery slowly this market will recover.
sdtfs, BINGO.
Just as one example, I have casually watched the price of gas versus the top selling vehicles for the last few years.
Alo,
Even if they want to own a house again, how many will have a 10% cash down payment?
Or 20 percent lama, if things get that tight. God knows. In our mad pursuit to make people homeowners, we have done just the opposite.
It would seem to me that those who are 50 + and debt free don't understand that the market is leveraging their "equity" for them. The benefits of being debt free have become largely psychological, while totally irrational. You're money is being leveraged and debased for you, whether you like it or not. Morality and debt long ago de-coupled.
Five years ago I bought well within 3.0 x hh income. Broker and mortgage lender both "advised" that I could afford much more house: go for it. Fortunately, at that time, stodgy, old-fashioned parent teachings about frugality, modesty and the work involved in maintaining a home prevailed. Feels so good to live within means, not over stretched; dare it be said, it feels like wealth.
Wouldnt that be some f'd up $#!+ if all us responsible people who lived within our means turned out to be the suckers for not living up the high life meanwhile our savings is inflated away?
Some months ago, Jim Cramer advised (in his usual energetic manner) homeowners who had negative equity to "just walk away" from their houses.
You can find the clip on YouTube somewhere if you look.
Good points Andrew.
On that Boston report Merkel,
Unless they actually talk to a bunch of people walking away from homes who admit to defaulting on loans they can pay, how in the world would they know the default resulted from people, who otherwise could afford to stay in the house, choosing to default due to an upsidedown loan?
That report doesn't say what it purports to say.
Hedge fund managers are applauded and considered heros for registering their companies in the Caymen Islands to avoid taxes and law suits, and manipulating the system for their gain. And I am supposed to feel guilty for using the same "business judgement" that paying my mortgage on my underwater house. As I said before, I am apposed to a moral system that only benefits the rich. Either we all have obligations to each other, or none of us do and it is all "business". Surprising how upset the bankers feel now that the average jane and joe have decided to play by the same rules.
What is the absolute percentage of US homeowners who have moved and/or refinanced since 2000? I have a hard time thinking it is more than 20%, meaning that 80% are sitting with the same mortgage they had (and could afford) in 2000. Or is the absolute number that much higher? Even the transient suburbs where I have lived it is only a certain percentage of the houses that turn over regularly; a lot of people just stay put at least from 6th grade through high school.
Has everyone (except me) refinanced with bad instruments since 2000? I again find that hard to believe. Who has reliable stats on that?
Cranky
I once lost some money when a business declared bankruptcy. It was locally owned; the owners kept their nice houses and apparently got jobs in the same industry earning about the same amount (more than me, judging by their cars) within a few months. The estate paid off a few cents on the dollar to the debtors including me. Lucky for me the amount was modest and didn't hurt. A lawyer in my family explained the whole "bankruptcy workouts are best for society" speech and my rational brain accepts that, but the personal side still hurt. So why are businesses surprised when individuals treat them with the same cold calculating eye with which businesses and bankruptcy courts treat individuals?
The obligation to repay a debt is influenced by what is the right thing to do and what is legally required to do. There was a time when many people would do the right thing even if it was not legally required. They lived by a higher standard.
There was a time that the bank held the moral high ground. (In image, if not reality.) Since in the eyes of society an "honest man" paid his debts, the bank benefited from that ethical standard. Filing bankruptcy or having a foreclosure was shameful. There was also a time when collecting public assistance was shameful. Shame and social stigma is largely gone for the boomers and unheard of for the Gen X-ers/
That time is no more and all of these scams perpetrated by financial community has and will destroy any moral argument as to why a borrower should pay his debt to them because it is morally the right thing to do.
That leaves them with only the legal remedies and that is what is scaring some of them witless because they know that the legal remedies offer them little protection if the masses catch on.
Most of the concerns I read here are laughable. Landlords who won't rent to someone whose FICO is low because he walked? Please. LOL! Some will even pat the tenant on the back, but with all the homes that are going to be available, finding a rental will be easy. Likewise, calling in a credit card on a paying creditor when you have a shrinking and increasingly delinquent portfolio? I don't believe that one either.
Recourse? I will just speak for California. Non-recourse for purchase money. Practical non-recourse for refis (legal fees are hard cash and the prospect of recouping a deficiency from a defaulted borrower who had no down to begin with is a poor investment.)
So now the borrower is left looking purely at his legal risk vs. his personal self interest. Some have (and I suspect many will) purchase another home at the reduced price before defaulting on their upside down residence. Those who cannot figure this out for themselves will have no shortage of realtors and loan officers eager to coach them. This happened before in the 90's. This time I believe it will be epidemic. If the banks and lenders ever deserved trust and the moral high ground, they have surely squandered it away now and they are going to get it handed to them. As Michael Lewis wrote, "these poor people are sharks."
It's the same double-standard as when a company lays off workers with no notice. But it's expected that workers give a 2-week notice. It's also expected that workers feel loyalty to the company.
Morality is a one-way street in business, beginning and ending with the individual. Corporate or collective morality doesn't fit in a business model.
...had the capacity to pay, but have basically just decided not to because they feel like they've lost equity
If a large portion of these loans are stated income IOs or POAs and the borrower made minimum or IO payments and then walked, how did the measure the capacity to pay?
"As I said before, I am apposed to a moral system that only benefits the rich."
Somebody once said that the law applies to rich and poor alike: the rich, as well as the poor, are forbidden to beg on the streets and sleep under bridges.
Class warfare theory predicts that they will make it as hard or harder to walk away form negative equity as it is to do a decent bankruptcy. They are already sowing the seeds with their talk of the morality of "jingle mail".
Suze Orman recently had a home owner ask her what to do given the situation of owning a home with negative equity that didn't seem sellable. Orman said there were three choices for the home owner:
(1) home owner takes the equity loss;
(2) home owner bankruptcy;
(3) home owner default and go into foreclosure. So more than one of the CNBC gurus are implicitly suggesting default and foreclosure as a valid option.
Also, this guy called in to her "Can I afford it segment" last year asking if he could afford to buy this $950,000 house in CA. She advised him not to, that he couldn't afford it. She re-contacted him recently and learned he had bought it anyway. He was able to buy it for about $100-$150K less (it had dropped in value) and seemed to feel quite clever about the windfall discount, but she still said he made a mistake and was going to have to deal with a situation he couldn't afford.
Has everyone (except me) refinanced with bad instruments since 2000?
'bad instruments' is rather subjective, Cranky, but yes -- the 'absolute' number is waaaaaayyyy over 20%. Among all outstanding mortgages, those originated sometime after Y2K outnumber those originated before Y2K by 10-to-1. By $, it's more than $30 to $1.
But...I'm not sure why you would even find that remarkable, given the fact that rates bottomed out in '03.
I hope we all find it odd that BofA is expressing SHOCK that normal people are doing precisely with homes what BofA is attempting with CFC. Keep the good, ditch the bad.
All this talk about what a foreclosure will do to one's credit rating...aren't we looking backwards instead of ahead? In the years ahead, there will simply be less credit available. Less money to lend, because so much of the available capital has been consumed instead of invested and paid back. Lenders won't be cajoling us to borrow because they won't be awash in funds as they have been.
All I'm doing is summarizing the education you guys have given me on this blog.
If you bought a house at the peak of the market and it is now worth substantially less, so much so that you are unlikely to ever recover that loss, you would be foolish to keep paying the mortgage. Unless you can get the mortgage holder to go along with a short sale you should walk. The whole thing has to be considered as a sunk cost. To keep pumping money into it that you can never recover is not in your best interest even with a big foreclosure on your credit report.
"big, bulbous housing inventory question is, will they ever in their lives be able to own a home again?"
Who cares? They never did own one, the got a great rental deal for a while and they moved on. It is more common in CRE to walk away. And, tell me, what happened to those two hedge funds Goldman shut down last summer? Who walked away there?
The confusion here is that two things are being intermixed: business and a perception of 'morality'. All the big bankers will tell you in a heartbeat: business is business. Except now the shoe pinches.
Many employers, and most health insurance companies, pull credit reports and use them for hiring and insurability decisions respectively.
Cranky
If the banks and lenders ever deserved trust and the moral high ground, they have surely squandered it away now and they are going to get it handed to them. As Michael Lewis wrote, "these poor people are sharks."
Well, that's what you get when you break the backs of unions. The little fishies who traveled in schools now swim alone and hunt by tooth and claw.
How does the inventory overhang just "disappear" if only "good" borrowers have access to credit? Time? Sorry, there isn't enough. Don't forget the wave of downsizing boomers.
Short answer, it doesn't.
Multiply that formula across autos & everything else and it spells a screeching halt to the economy.
After enough people have walked FICO will mean squat.
A double digit FICO will be good enough to buy a house in 3 years.
I always found it ironic that underwriting guidelines treated Chapter 7 and 13 bankruptcies the same. Both were required to have reestablished their credit for 2 years after DISCHARGE of the BK. The difference is the Chptr 7 discharge came almost immediately whereas the Chptr 13 schmuck may have labored for years paying everyone off, but then found he got no benefit. I have spoken to many of these who thought they would be rewarded for doing the right thing, but found out that their Chptr 7 neighbor had bought another house years before.
This has been a one-way morality street for a long time.
I know many people who ran into financial trouble and tried to work things out with lenders and credit card companies and got nowhere. Then they went to the BK attorney and wanted to file Ch. 13. The Bk attorneys always say file Ch. 7 if at all possible.
Oh, and lenders ARE handing out mortgages to recently BK fools.
See for yourself at Bankruptcy Forum
Lenders have no choice. Lend or perish.
After enough people have walked FICO will mean squat.
I may not be the smartest guy in the room, but I'm good at drawing parallels.
What would a random American have said if you had asked them in, say, 1997, what they would call logging onto the Internet and obtaining perfect digital copies of any popular artist's music without having to buy the CD or, indeed, pay a dime to anyone?
Almost anybody would have called it stealing.
Ten years on, we now have an entire generation of Americans toting around iPods stuffed with 40GB of music who have never paid for a piece of music in their lives.
It doesn't matter what you're talking about; once a few million people start doing it, whatever stigma it might have had vanishes. As long as the supply of houses (or mortgage bankers, or credit card issuers) exceeds demand, there will always be someone willing to take the chance on these folks sooner than rational people would ever think possible.
It's disheartening, but that doesn't make it untrue.
Sucks for the first couple million though.
Cranky
I understand your point, but absent the threat of red revolution as in the 1880s I think that the structure of money extraction is not much concerned about mass movements. They would be perfectly happy to classify 50 million people as bad credit risks and charge them more for everything for the next 30 years. And we seem to be into the age of mauve apathy rather than red revolution.
Let's see, a $250 40 GB Ipod can hold 10,000 songs at a buck each if purchased singly or by CD. So all of these kids are walking around with $10,000 worth of music in their pockets? Holy cow! Somebody should tell Apple these kids are stealing.
Where did the term "ripping" come from? Ripping off?
The "ability to pay" is determined by the "stated" income on the application at 55% DTI.In sonoma county if you had purchased a median priced home in the summer of '05 for $619k,it was worth 466.5k in december,and you are paying more than 3x more than the renter next door,if the neighbors aren't squatting.Even if you have a "recourse" loan and pursue it a 2% recovery on a large pool would be a good return,based on my experience (I was licensed to run collection agencies in Ca for more than a decade).
Wally, if you don't care about housing inventory, you shouldn't care. That's what my comment was about, not "moral" issues.
I also am fairly certain that ever tightening lending standards will catch up to most bankrupt homeowners wanting to buy again. There will also be a point - if it isn't here now- at which lenders, if not the govt, will stop lending themselves into insolvency by throwing money at bad buyers.
Ah, but the trick is that people who walk because their houses are deep underwater and will never be worth the cost of their loans are generally not "bad buyers". If they're in an affordable home with a 20% down payment they'll be very good buyers, and the banks know that. So when they go hunting for houses in a few years the bank will loan them money. It will just demand a decent down payment. The banks will figure ways to diddle their rules to make the loans.
Expat in UK, Cranky Observer & GP...
While I have great empathy & agree with your social argument that ethics must be a 2-way street & that it makes economic sense to do what's best for you & your family, I shudder at the consequences for society as a whole. I'm reminded of a college course in which we discussed "lifeboat ethics", and now here we are.
Andrew: Nomadic investors who buy, sell & move according to economic gain is not new. They live in big houses devoid of furniture & personal effects, where voices echo from room to room. Twenty-five years ago in Phoenix, I was a flipper -- part of a group of investors who bought & sold fix-ups & houses not yet built, which we later flipped. That, too, came to a bad end. Most of them crashed & burned and never made it back up the economic ladder again. There can be moral hazard -- in the soul.
There was a time when having a baby out of wedlock was ...
BK is the new "live in" boyfiend ...
It's nauseating to see so many people defending the moral dignity of the banking industry. What a joke. They deserve a lot worse than a bad year.
Paradigm Lost: Consider my comments to be a lament, not advocation.
Dang it, I really screwed up on my S&P 500 valuation yesterday: S&P 500 Fair Value for Tuesday = 1294
We hit 1310.50
Where I screwed up and what I always forget to do, is factor in the actual dividend yield on top of the E/P, so sorry!
The more realistic forward valuation for fair value is:
1,310.50/ EPS: 78.74 = P/E of 16.64
Inversion of P/E is E/P yield of 6.00%
However, you really need to add in the div yield from the holdings in the index, thus you add in 2.11% (Div Yield) to get the new improved Total S&P 500 earnings yield of 8.11%
10 year Treasury @ 3.484%
That leaves us sadly 4.626% overvalued as of today, thus the dog and pony show today will need to sustain itself, so if your cost averaging, prepare for more opportunities!
GP:
Ahhh, then we are reading off the same sheet of music. I lived in Europe for many years & recently moved back. When did we become a nation of sharks?
Mook,
I can't disagree with you more. Sharing, trading and copying tapes and later CD's as well as making mix tapes and CD's was pretty common when I was in high school and college. I don't think anyone thought of it as theft if you weren't doing it to make a profit. Besides, I can't really see anything wrong with going around a government granted commercial monopoly if you're goal isn't commerce but maybe that's just me.
GP,
I actually have about 40 GB of legally purchased (ripped from CD) music on my music server and my wife has about 80 GB on there. These are just rips from CD's that we actually own. It's pretty easy to accumulate a big music library over time. Especially if you shop at used record stores.
Most loans made in the past 7 years were fraudulent anyway, so turnabout is fair play. If the lender gets nasty, sue 'em for inflated appraisals, false GFEs, and on and on.
I dunno. About the time I lost 1/3 of my 401(k) plan when Enron/WorldCom skrewed over the country and got to keep the money, I stopped feeling like there was some kind of national standard to keep. When the FERC let Reliant keep Grandma Millie's money, while people on the west coast paid out the ass for electricity, a certain amount of my faith in fair dealing was spent as well.
If I get caught in a predatory lending scheme, or all my neighbors do and I am out all my savings and equity, the bank can kiss my lilly white butt.
Moral decay starts at the top.
What is the absolute percentage of US homeowners who have moved and/or refinanced since 2000? I have a hard time thinking it is more than 20%, meaning that 80% are sitting with the same mortgage they had (and could afford) in 2000. Or is the absolute number that much higher?
Cranky
I seem to recall a figure of something like 6-7% of Americans move each year, assuming some people move more than 1x, over 7 years that probably translates to 30%. Then add in the re-fi's which were going gangbusters for most of the period, and it is easy to see how about 60% of mortgages were written post 2000.
Liberal...
Couldn't agree with you more. Had friends who lost most of their retirement savings on Enron & World Com. They were in their 50s & have to start all over. Another lost most of her pension in the Pan-Am mess. Another relative, who's dead now, lost her retirement fixed-income in the Texas S&L scandals. They keep picking us off, one by one. Soon there won't be a middle-class pocket to pick.
I wonder of people ever realize what the total amount of their loans are, when they are said and done. I mean even a 30 year fixed after it's amortized over 30 years, you're paying a lot of money on. Just a thought.
Why in God's name would someone so close to retirement have their money in stocks...or anything else that wasn't not principal guaranteed?
Why do people view the stock market as such a sure thing???
Oh yeah....The Fed. My bad.
I keep hearing about buyers paying 3x more than renters. I have a hard time understanding that. Why would anyone own rental property then? Let's say rent was $ 2,000/month. Thaa would mean payments to but would be $ 6,000/month, which would easily buy an $ 800,000 house at 6 % including taxes and insurance. So why would I hold onto that $ 800,000 house and collect $ 2,000/month in rent, rather than sell and stick the money in the bank. How much longer are landlord going to subsidize tenants?
By the way, that number is not true in most markets. Many places, renting is onloy mariginally cheaper than buying before tax and about the same after tax.
Homeowners apparently decide to act like business people. Banks could easily keep people from walking away if they rewrote their customers' mortgages by either forgiving some principle or giving them a great, great deal with dramatically lowered interest rates and making them 40-year fixed.
But no.
They want every goddamn cent in the original contract even though the value of the agreement to the other party has dropped dramatically.
Ahead,you get a neg-am loan,get the 15% appreciation per year that Gary Watts said was in the bag,and sell after 2 years...My ex and I leased a custom home in '05 for 1800 a month that had a market value of $1.2MM,conservatively.The owner had it built in the mid '80's as his retirement place,and still intends to retire there,he is OK.I know people who are shelling out $3k a month to experience the joys of being a landlord (with neg-am loans) because "Real Estate always goes up" which is what they learned at a Trump seminar.
People are walking away from homes and then just buying the same home for substantially less! There is no mystery at all here.
Well, if the owner plans to retire there and it would otherwise be empty, then I could see it perhaps. My one experience in being a landlord was when I was an expat for a few years and we rented out our house at break-even after taxes, just so it wouldn't sit empty. We were planning to return to it, though ended up elsewhere and sold it. I couldn't see doing it for 20 years at neagtive cash flow though.
Other than in special circumstances like yours, I suspect landlords will sell out if the selling price is worth more than the rental income.
What People With Good Credit Dont Often Realize About Having Bad Credit
Having a bad credit score is a headache, but it is nothing akin to the mind-bending problem of hemorrhaging money on a depreciating asset coupled with a deteriorating capacity to pay. Low income workers, minorities, immigrants, elderly, the self-employed, the underemployed, the young and the migrant have always managed American life with bad credit scores and are probably noticing the decreasing penalties of maintaining a low FICO.
IMHO, in 2008, a truly F***ed Borrower in California that walks away from a mortgage not a refi - doesnt have much to worry about:
Car loans: Car financing is still notoriously easy: Since Henry Ford, car companies knows that their business depends on getting (working class) people into more car than they need.
The cost of car insurance: most car insurance is based on DMV driving and criminal records.
Deposit for utilities: They are renters now, right? Landlords usually pay gas and/or water. Electric companies and other utilities are regulated by strict laws that make allowances based on customers ability to pay.
Credit checks by potential employers, health insurances, etc: I guess even with A+ credit, this is an arbitrary part of life that just sucks anyway.
Cost of Credit (credit cards): While this may be uncomfortable for some, its not actually punitive. Using cash for purchaser for seven years could also be the best thing for someone in this predicament.
You may also be able to save and live rent-free for anywhere from 3 months to a year.
Where the H*ll did all this money (that funded the loans) come from? I realize there are plenty of other issues involved, but how were investors found so easily? It's not like there haven't been other systemic real estate lending problems (and fairly recent at that).
OT: "... wrecklessness and complacency ..."
When you think about it, that's a wonderful way to say "moral hazard."
Google still nags Did you mean: recklessness, but the W-word is at about 5 percent on the internet already.
Low income workers, minorities, immigrants, elderly, the self-employed, the underemployed, the young and the migrant have always managed American life with bad credit scores and are probably noticing the decreasing penalties of maintaining a low FICO.
thank you. this thread amuses me, because it's clear that a lot of people here don't have a great deal of experience in the "alternative" economy (you may know it as the 'black market') and still cling to certain ideas as if they were shared by a majority. the paradigm shift has already occured; it's merely a matter of time before all the Big Brains in finance figure that out. and they should panic- the end of an illusion is coming, and all the suits up there are going to take at least one bite of that shit sandwich.
i can easily list groups of all kinds which have chucked the notion that as rubes, they must be honorable, while it's more than clear the elites are not. la plus ca, oui- but please understand, deciding to give up on the idea that "credit is important to me" is like popping your cherry. it may hurt initially or embarrass you for a time, but after that you never go back to the virgin state again, and a whole new world of possibility awaits you. if you're brave, some of it is even better and more fun, than you ever imagined as a Good Girl/Boi 'timely payment consumer.' but i digress...
some folks walking are failed flippers. some are people who got suckered into taking on 'if you can rent, you can own' mortgatges despite no proof that they understood the idea of "regular payment until note is met" or even "keep a job for more than a year." some are people like those who are going to populate a lot of media stories in the next two years: poor little old ladies and uneducated migrants, approved for $700,000 mortgages despite 8$/hr wages. and some are going to be Good (White, Exurban, Republican) Americans who would Never Do That, but somehow will, because as people describe, how stupid do you have to be to pay an interest-accumulating loan on a property now worth half what you paid for it initially? duh, of course you walk away and hope that by the time your kids are ready for college, you've cleared the BK hurdles and can get a loan again.
best line of this thread: being in debt up to your eyeballs doesn't make you an "ownership" society. consider that stolen. the Big Shitpile affirms my faith in the idea that it's silly to think that in the end, these little green pieces of paper mean anything at all, other than how it is we enslave ourselves to the unscrupulous.
I could easily see my neighbor doing that - bought at 560K, has put over 125 K into the house and it's probably worth about 500K now, maybe, if he could even sell it.
I can't imagine what they are thinking, but they just keep doing more and more work to the house - now they are paying their contractor's son $20 an hour to do the landscaping. They're basically spending another $200 a day on the house, if you count materials. I don't know what the hell they are thinking.
chicago dyke - fine summation.
"First? Where is everyone. Is everyone else watching their portfolios shrink?"
Heh, maybe they are avoiding the internet to avoid thinking about it.
"The Capitalist system (particularly any version of 'pure' capitalism) has always depended for it's functioning on an assymetry in morality.
Lenders want ethical/moral borrowers whose motivations and actions are based in what they 'should do', while themselves demanding an environment (regulatory environment) in which they are free to 'maximize personal gain'."
Indeed. These bankers in particular have spent the last 30 years moving to more and more extremely unethical business models to maximize their own profits. Are there any banks who aren't making most of their retail banking money from gotcha fees for relatively minor mistakes on the part of customers? Are any banks not part of a credit card industry who's explicit goal is to maximize interest rates and fees by hook or by crook? Not to mention the immediate deceit involved in the mortgage industry.
If they really want to know who destroyed business ethics in relation to consumer banking they need only invest in the cheapest of mirrors.
But really isn't this the way of all inegalitarian societies? One set of rules for the elite another for the rabble.
Be it banking, military service, abortion, drug use... The story is always the same.
"I keep hearing about buyers paying 3x more than renters. I have a hard time understanding that. Why would anyone own rental property then?"
I believe that many rental property owners were either speculating on home values or see it as a very safe long term investment.
The first type were willing to own property and rent it even at a short term loss because they thought they could sell the property later for more. Thus their profit expectation was not based on rents, it was the greater sucker theory common to all bubbles. In the end the last wave of these people will loose a bunch of money.
The second type are likely not paying mortgages, and were simply accepting low returns on capitol for the last few years. They, however, have a super long term perspective and don't mind that. These are the source of and owners of those well built high end apartment buildings that can be expected to last more than 100 years.
I believe there was a major shift away from renting toward selling as the boom reached its height. This would represent rental owners deciding the profits from selling were too big to ignore. The condo conversion is the most direct expression of this.
"Let's say rent was $ 2,000/month. Thaa would mean payments to but would be $ 6,000/month, which would easily buy an $ 800,000 house at 6 % including taxes and insurance."
BTW cut those numbers in half and you have almost exactly the situation I saw early last year in Seattle.
I was renting a nice one bedroom apartment in a 1921 building. Across the street was an almost exactly matching 1920 building which was condo converted. My rent was $950 including a garage parking space, heat, and water. They were selling a kitchen renovated unit nearly identical to mine (1 br, ground floor, right across the street, mine had morning sun which I prefer, can't remember if the unit came with a parking space) for $400k. I went over to look at it and the total cost per month was very near $3000. They were selling studio's for $300k.
They pretty quickly sold every unit in the building.
In San Francisco, where I now live I am renting a 1br for just over $2k. Such units seem to sell for very nearly 800k in my neighborhood as I type. I haven't looked inside to see if they are the same (and I would be very lucky to find such an identical place as in Seattle), but again cost to buy is around 3x rent.
So I can say from personal experience that it is true. Such situations existed last year in Seattle and last month in San Francisco. I think it is likely that this is near the upper limit, but what is the break even point over the long term? Is it even 1.5x?
Dear Wachovia,
Why the surprise? After all, the reason these borrowers (okay, some of them, not all of them) are called "subprime" is because they're more likely to be behind on payments and just generally not CARE about the moral rightousness of paying their loan on time every month.
I sense we are reaping what we sowed. =(
We're all paying for for anarchy in the mortgage/real estate industry. Will it be fixed? Was it fixed after the S&L debacle? No.
Fair E., I think your argument wafer thin, but show me how many mortgage banks are handing out loans now to the leveraged-to-the-hilt buyers who walked away from their homes and I will chomp my words.
You also assume today's "good" bad buyer will be just as appealing to a strapped bank (and assume such a buyer will have 20 percent down - a very unrealistic assumption these days). You also assume the banks are going to clamor for debt-junkie customers because they'll be able to do biz as usual -that is, bundle and pass off the loans to investors, who will be able to insure them, and get high bond ratings for them. That's a mortgage-pig sized assumption. But pls, let me know how you think this can still work..
Why shouldn't people walk away from their homes? They have no equity! Stupid bankers.
This is what happens, when the middle class have no recourse. The banks pushed the bk reform, make it harder to default. Now, you have a situation when you decide, what can I afford. I honestly don't believe ppl are just walking for the hell of it. Its pay the cards and you know we cant live without them,or pay your house. Frankly with very little money for living expenses. The factor is which has more breathing space. I personally cant believe walking away from my house, but if you cant afford it.
Kim I think hits on an important idea. Bankruptcy law previous to the "reform" generally led to to people getting rid of their credit card debt and protecting their home. Now that Credit card debt cannot be gotten rid of, the perverse nature of that is to incentivize walking away from your home. I think there are good reasons not to do that in many cases, but to a desperate borrower, it seems like the better choice. One thing I think this problem suggests is to reexamine the bankruptcy laws, our regulation of financial markets, and the ideology of unrestrained capitalism.
The problem that the free-wheeling high times are now being realized.
When one goes for 'pre-approval' prior to buying a house, the calculations are based on the high-end of what a person qualifies for. Combine this with the 'housing boom' of recent years, a person when inflation borders on recession tends to become overwhelmed by what they want versus what they need.
The unemployment rate is going up so maybe some find their jobs in peril. The sub-prime and all the other 80-20, 70-30 % options were available to allow people to buy a house with a second mortgage hanging over their head.
This is the demise of the those that have homes that are losing value or those that can not sell theirs for as much as the tax value says. Are there going to be mandates to adjust the percentage rate since the Feds have lowered it again this week, will those on the verge of foreclosure be able to re-negotiate there loan rate without having to pay so much out-of-pocket? Probably not!
Let's look at this as a business transaction on both sides. Lenders have always kicked people to the curb if they stopped paying, and said "It's just business. You signed a contract. Nothing personal."
It seems to me that for the first time in a while borrowers have the opportunity to say the same thing to lenders. "Hey faceless hedge fund that bought my mortgage, we both signed contracts. I agreed to pay off this loan, and if I didn't make payments I would be kicked out. I am upside-down, I am not going to make any more payments. Here are my keys. Nothing personal. Just business."
Just stopped by to say the LA Times has linked this story.
Good to see great analysis get noticed, and no one deserves it more than you two.
Renting is now a smart option.
The glut of empty homes offers a hugh selection of rentals from which to choose, and many of us want the change and variety that comes with renting, and don't want to stay planted in the same old neighborhood forever, anyway.
Come on now! Times have changed, the banks and Wall Street made this mess and IMHO they can eat it. When they realize that we'll be better off. I have a prime loan, not a sub-prime loan and I have to move, but I'm upside down by more that 150,000 Grand.
I called HOPE now and they recommend I don't pay my credit card (or unsecured debts) because those don't matter. Maybe in the past (and if I wasn't moving) that may make sense. But come on, get a grip MORONS! You're upside down 150 grand in your home so you're going to quit paying $150 on your platinum card and that's gonna make everything perfect.
What idiots -
Dear Mr. Banker,
Thanks to the lax lending standards in your industry, I had to overpay for an asset that is the collateral for this loan. As I no longer intend upon living here and don't wish to donate 3 grand per month to offset the costs of becoming a landlord because in CA the cost of renting hasn't increased in years - Who would you like me to send the keys to?
Oh,
If you're upset about the auction price - let me send you the appraisal that I finally got a copy of that has fraud all over it and shows how much of a great deal your getting. Bankers are idiots, you made the bed - you lie in it. Consumers are getting smart! Surprise, surprise. I hope the shoe on the other foot fits well for a change.
My feeling is legions will not, and that will be a very big factor in how veeeeery slowly this market will recover.
Tactical Flashlights
r c helicopter
video game
I am sure that everyone waited their free six months and then sprinted away in the non-recourse.Tactical Flashlights
r c helicopter
video game
Hello. I find your blog very interesting. Recently, my friend had to deal with Wachovia company. It is not that he was dissatisfied with the services, but the charges are too high. I think that if the bank charges high fees then the customer service should be on the appropriate level. People, who commented on the bank on this great site Pissed Consumer - Consumer Reports, Complaints and Company reviews also think so.
Sweat post chicago dyke
"will they ever in their lives be able to own a home again?
My feeling is legions will not"
You're high. My ex in laws have walked away from more homes than I care to count over the years. And they STILL get home loans.
I'm about to walk on my home. Not because its under, not because I don't want to pay. Because I've lost my job. What really sucks, is now my job has been outsourced to India. And everyone expects me to work for
$5 an hr cause "that's what I pay the Indians". So now I'm done. fck the system. I did everything right. I went to school, got a good degree. Always came to work on time and left late. Both my cars are paid for, they're old but they're mine. I don't have a Cadillac with 24s and spinners. I don't have a big screen plasma tv. I have a simple, modest life, and I still got fcked.
Chicago dyke is right. It hurts at first, but now, the system is a joke. A house of cards crumbling under the weight of its greed. The funny thing is, they've killed the one thing that would pick up the pieces... the middle class. Good luck with that one corporate America.