bubbleinfo.com

"I believe my real life example illustrates the individual vs corporations and government. I'm simply applying the same standards they apply when making a "business" decision. I guarantee I'm not the only one looking at this situation the same way."

Wonderful rationalization.

When the bank made the business decision to give the author the loan, was it for the benefit of both? The bank, after all, gets the business, and the borrower get the house. Sounds fair.

If the decision is to walk away, who benefits? Not the bank - they will own a house of lesser value than the money lent out - they lose. Not the neighbors - the foreclosure will reduce the value of their homes, and if a neighbor has to sell a house (let's say for reasons other than not being able to afford it), they can potentially lose much. Lastly, not the taxpayers who may have to flip the bill for this pending buyout that the Federal government is considering.

Nope, no one benefits but the neglegent homedebtor who walks away - spare us how the homedebtor is a victim, such a person's poor decision making got prices to where they were in the first place, and cutting one's deserved losses can be viewed as a benefit.

Sounds fair? I think not.

FWIW, there is no tax to the borrower on the foreclosed or forgiven loans up to the first $2 million on primary residence. Thank Congress and the Mortgage Foreclosure Prevention Act of...2007.

When governments try to help, they almost always make things worse in the long run. That tax provision of the 2007 law is a perfect example.

Don't expect the next bailout to be a long term positive on the housing market as it will probably just scare investors (the people who loan the money) who will in turn demand higher rates of return on mortgage loans.

I just listened to this same story on KPBS the other day.

The real estate commentators basically replied "you bought the house with those mtg packages" which are only good short term and risky but potentially more rewarding had your investment continued to act like dotcom stock. I heard some blogger say when houses act like investments they go up and down like investments. The radio guy literally said "We are learning there is no free lunch" The radio commentor might have been from the UT. I was suprised with his candor.

No skin in the game, is a sweet deal to walk away from. Plus, from the comments on many blogs you'll get to live there for free for maybe a year! You could bank >30k. Or buy the house across the street for 300k and then walk from your house.

Soon!! Frank/Dodd will reimburse Wall Street with tax payer money and try to artificially keep prices high and above income levels to really kill the market.

You wrote yourself that you can afford the payments but no longer want to pay because of the drop in value. That's hardly a financial hardship and I wouldn't expect the bank to budge. And Jim please don't try to shoehorn this story into the overplayed "evil bank vs. victimized borrower" thing with the title you chose for this post. It doesn't fly.

The point is that the banks made reckless loans without thinking of the consequences. They thought they were making what is essentially free money and didn't stop to think that upset homeowners might just stop paying their loans.

In this case, both parties are the bad guys.

It makes sense, author is looking out for the wellbeing of his family, there's nothing wrong with that. He's making a business decision to walk away, save his family from financial hardship which is the leading cause of divorce etc. He makes enough money to rent pretty much anything he wants and keeps himself mobile and hoarding cash during these tough times. I'd do it if I was in his shoes.
A good friend of mine is going through the same thing right now, makes about 150K a year and is walking away from a property that dropped about 250K in value from the peak.I think he's cashing out what's left in the Heloc and preparing for the disaster to come.

Sorry no sympathy, taking the risk was the author's business decision.

Walking away will neither be illegal or immoral, just another business decision.

So what should this guy do other than the douche bag thing of walking away?

Sell now at a loss of ~60K (I am guessing), rent, and buy later?
Shut up and deal with not moving and owning a house that is not worth what he paid? Tell the story to his kids to teach them the lesson that he learned from this...
Pretend to prepare for walking away by not paying (presumably by faking hardship) and hope the bank shares in the loss by decreasing his principle next summer, then not walk away?

I am wondering what I should be telling those with whom I engage in this conversation. What is it that this guy "ought" to do? What he is planning is definitely rational; it is logical; it definitely is not just nor moral; it is both prudent and not prudent. It is understandable and it is definitely crappy behavior.

$20 bucks says the credit line is closed.Call them tomorrow morning then come back here and post a reply.

These stories build an excellent case that the bottom is here or near. The weakest hands getting shaken out points to capitulation. That is exactly what the market needs. There are a lot of buyers on the sidelines waiting for "the final flood" of bargain foreclosures. Not to say we can't go down another 10%. Easily. But my guess is we are in the 7th inning stretch.

You paid money and got a house. Three years later you owe the same money on the same terms you signed up for and you still have the same house. What upsets you is that you based your purchase not on a desire to provide a house and home for your family, but to cash in on a bottomless ATM disguised as a house, and the only "hit" you stand to take is the loss of the big payoff on resale.

If all you see in your house is a failed business investment and it doesn't bother you to tear your family out of a home they may have come to love, then you probably should just walk away. It doesn't particularly bother me that your REO might contribute to a "devaluation" of my home, because it's the previous runaway "valuation" that was insane and obviously unsustainable all along. Maybe when your home's value falls back to realistic levels it will be purchased by a family that will see it at the end of the day as a place to live and make memories in rather than as their get-rich-quick jackpot. I think my family and I will be better off with them as neighbors even if the resale value of our house is lower.

"..and it doesn't bother you to tear your family out of a home they may have come to love .."

They'll get over it .. a rectangular stucco box with a bunch of drywall. Plenty more little boxes on the hillside where that came from.

Yeah, that's true. I keep forgetting what most of the houses we toured before we bought ours looked like.

Bravo, no sympathy from here either. It's a paper loss and would have been a paper gain.

If the value stayed flat, he still would have made those family threatening payments, so the loss to the family has always been a mortgage that was too expensive.

There are many more stories in this world about immigrants that worked 4 jobs in order to put a roof over his families head and provide food at on the table. He obviously is not of the character that made this country what it is, but more of the type that thinks he entitled to success and a bail out.

Words fail. I got burned bad in the tech bubble, as did many, and big daddy government never bailed me out, nor would I have wanted that. This guy has 6th grade spelling skills and a $175k job, and now he wants taxpayers to pay for his poor judgement so he can walk away from a house he fully admits he can afford. Unbelievable.

Becoming a deadbeat used to be something to be embarressed about. Now it's just another option on the list of "good business decisions."

It is interesting the level of vitriol that is often directed at people who are choosing to walk away.

The banks and the government are making it easy as can be to walk away. In fact, they are offering incentives for borrowers to walk away. Banks are refusing to short sell (and for good reason as they want to collect from their insurance carrier if possible on a foreclosure - and they want you to foreclose quickly before the insurance carrier goes belly up.

And the government just gave the mother of all tax breaks for forgiven mortgage debt whether it is voluntary or involuntary. But you have to act soon before the tax break is terminated.

You would kind of be a fool not to act now if you are deep underwater. The banks knew the loans were non recourse and they handed them out with little or no money down anyway.

When Donald Trump could not afford the $800k insurance on his leveraged yacht back in the 80s, he sent the bill to his lender. The lender, of course, paid it in full. Donald was also known to use bankruptcy filings on several occasions to force his banks to alter loan terms in his favor.

Now Donald Trump is a billionaire and one the most respected real estate developers in the world. Plenty of banks are more than happy to loan him all the money he wants to develop more real estate today. The lesson is that it really is just business.

I'm learning more and more everyday in here. I'm beginning to wonder if "acceptance" is based on the majority or a minority perception of what should be.

When I took out my loan I assumed prices were too high. I figured that if I was going to go under that all hell would break loose.

All hell isn't breaking loose.............yet. Nobody wants to hear anyone whining yet everyone is whining.

Still hoping the bottom is near.

Oh by the way, banks in the past had no morals, it was all business. Go to OCrenters blog and there are a couple of great comments to soak in.

awesome blog.

Some of us predicted this exact scenario years ago. People will not continue stretching to pay for something that is losing value and that they have NO stake in (um...HELLO zero-down!). It's perfectly rational and predictable.

If I could predict this, the "geniuses" who run the banks certainly should have seen this coming, yet they still chose to continue lending 100% LTV. This is precisely why lenders **used to** require 20% down payments. Not so easy to walk away from that, and it usually created a buffer so the loans would remain fully collateralized (not underwater), and that was for the lenders' benefit.

So the brilliant execs at the financial firms thought they'd get rich by lending to people who were not inclined to pay off their loans (for a number of reasons). They are now getting what they asked for.

Taxpayers should not have to waste one red cent on either the borrowers or the lenders. They deserve each other.

Before you walk, turn your family into a hedge fund. That way you can pull the money out and say it's your management fee. Also you don't have to pay income taxes on it because it's the result of an investment..capital gains baby.

Or better yet, you can call yourself the CEO of a failed business venture, take the HELOC bonus and run, apologizing to your employees as you get hired by the competition.

Or have a neigbhor buy (bail) you out, have them get your debt insured by the Fed, screw your investors and employees, because frankly your too big to fail in this neighborhood.

Or, name your house "countrywide" and consider the HELOC money like selling shares for your retirement at the peak. If your mortgage is held by B of A, then just think of the defaulted loan like a buy out....

I for one can't blame walkaways who do so not for profit, but just so they don't put their family in financial ruin.

We don't expect of the professionals, the system, or from those who know better.

Easy Rico, I think you're reading into that title.

If you were the banks, did you think/worry about these borrowers?

1. People that couldn't afford initial payment and walked?
2. People who couldn't afford payment after reset, and walked?
3. People who didn't read the paperwork, and got ticked once they did, and walked?

If the banks thought about those scenarios, and priced in those losses, then they made a business decision too.

But I doubt they had the foresight to think about a guy who could have gone full-doc, can afford the payments, who read the paperwork and can afford the worst-case payments, and STILL WALKS because he thinks he will be taking a big hit.

He says "I simply can't afford to take that kind of hit." Where's the hit? It was financed 100%, there is no actual money lost here.

He says he thought about declining value, but not this much? Where do borrowers draw the line on perceived losses?

If you can't afford the payments before or after the reset and walk, fine, what else can you do but take the free rent?

I'm guessing that banks may have thought of those who can't afford it, but they never considered that people would walk just because they're underwater more than they thought was possible.

I'll read into his message - I think he's ticked that the bank won't work with him, and in the end, that's where banks will have deep regrets.

If banks want to hold the line on negotiating these loans, then fine - they can suffer the consequences when people who are able to pay, but won't. They have failed miserably on short sales, and it doesn't sound like the loan modifications are going that well either - will the banks cave, or just go out of business?

At this point, they are daring him to walk, and he's going to do it. There isn't enough stopping him.

Does anyone here believe prices won't substantially decrease over the next 3 to 5 years?

I believe you've seen the worst of it. You paid $550,000 in 2005, which means if you're in a town like Oceanside you have a 2,200 to 2,500sf house,now worth low-$400,000s. You forecast a total loss of $200,000 over the next 3-5 years, are you seeing it like me - $150,000 already, and another $50,000 to go?

I think you should hang in there, at least through the fourth quarter of this year. The market has been hot lately, and we want to see if it's a temporary blip, or something that might sustain itself.

If buyers keep coming back into the market, you might dodge that last $50,000 bullet.

Why do I say that? Because the current sales activity below you price-wise is red hot right now, and the subprime pipeline has worked through the bulk of the loans.

Yes, there will be more foreclosures, but that's where the buying is happening. This happened last time - people buying foreclosures just because they want a 'bank deal'.

We saw in Hermosa the other day that there were sales from $140,000 to $170,000 in the last 60 days. Some will call that sticky on the way down, but it looked like to me like bounces.

The neg-ams resetting should hit the higher-end market harder, but if the banks consider suspending the reset caps, they might survive for now.

If the new president comes in with a new tone, it will inspire some to buy. Maybe not anyone reading this, but others will 'feel better' and decide 2009 is the time.

Well done! It's about time somebody makes the banks face the consequences of lending with no down payment in a bubble.

This is not immoral or unethical. It's a business transaction, and a rational one at that.

At the end of the day a home purchase and mortgage agreement is a business transaction.

No, you are mistaking a home for a real estate investment. Only the latter is a business transaction. If this were about your home then fine, walk. We make all kinds of accommodations for homeowners in the generally correct belief that there are greater social benefits to homeownership. You are attempting to wriggle out from under your bad investment under the guise of it having been a home.

There is a special circle in hell reserved for "That's OK, everybody else was doing it." By welching on your promises you are hurting retirees and savers and charitable organizations that share the bank profits and taxpayers and future generations.

I think it makes sense for someone to walk away if they're in a situation where they're hopelessly doomed to foreclosure no matter what they try to do. People in that state due to their mistakes need to be weeded out of the homeowner pool until they learn how to do it rationally for their sake as well as ours, and those who fell into it because of unexpected life events (death, disease, divorce, unemployment, etc.) need to stop torturing themselves and move on with rebuilding their lives. But for those who could afford to meet their obligations but simply choose to walk, the vitriol is well deserved. There should be some sort of means test applied to foreclosures, and a borrower who walks away from a debt he/she could repay but simply refuses to should be fully taxed on the writeoff and have their credit ratings branded with a huge scarlet "D" for deadbeat that follows them around for life. Nobody should ever have to consider such a person for a loan without knowing what they've done in the past.

Please correct me if I am wrong, but isn't the HELOC of $110,000 a recourse loan which allows the lender to sue and pursue other avenues to attempt to recover their money? Thus, this potential deadbeat with an income of $175K could have his wages garnished or other assets repo'ed. For the few borrowers who are gainfully employed, why not go after their earnings?

On the other hand, the 1st mortgage would be a non-recourse loan.

I hear that banks are starting to go after walkaways' 401Ks. Anyone else hear about that and have more information? Most people who are walking away from their home did not buy the home through a LLC or some other corporate shell, so their personal assets are fair game, I think.

This guy should stop paying his mortgage immediately.

Worst case: he gets several months of free rent while the bank processes the foreclosure.

Best case: he qualifies for the Dodd-Frank-Mozilo housing bailout, and gets to keep his house with the loan principal written down to 85% of current market value.

Is it me, or is "walking away" the "two wrongs make a right" type of a situation?

One person said that walking away wasn't unethical or immoral. Maybe that person is right; the unethical thing was buying an unaffordable house in the first place, walking away is just further consequences...

Why do you care about the resale value of a home in which you have no equity? You have "no skin" in the game; you're 100% financed. Any decrease in the value of the home comes out of the bank's money, not your money.

So, you're just "renting" the cash paid to purchase the home. Is your "rent" so much higher than what you'd actually pay to rent another home? Probably not.

As I see it, your post is really just a rationalization for you to get a better deal by dumping one house to get into another house that has a better chance of having a capital gain within some time frame. But don't count on it. No one is going to offer you 100% financing ever again. And by the time you can qualify for 80% financing (after your default), you'll have missed the bottom-of-market buying opportunity you think you can catch.

Both parties took a risk. The bank took the risk of financing 100% of the property. Watuppp took the risk of purchasing a home (at fair market value).

Is it legal for the banks to not work with watuppp? Yes.
Is it sleazy for the banks to not work with this guy? Yes.
Is it legal for watuppp to walk away? Yes.
Is it sleazy for him to walk away? Yes.

There are no winners in this game.
Maybe if the value of the dollar drops low enough some Europeans can come and buy California.

Lots of folks on high horses in here. The guy walking is exercising his bargained for contractual right to walk. Lenders were well aware of the risks of 100% LTV when they agreed to these terms, so this isn't entirely unexpected.

Sounds great to bash the guy walking for not acting "morally", but the guy's obligation is to his family first, not the bank or his neighbors who are only pissed b/c their homes will lose value. If I were advising this homeowner, I'd tell him to stop making payments, bank the savings, and wait until being evicted to move.

It's a no brainer.

They can't go after 401k's or pensions, but they go after almost anything else.

Walking away is no different than a business doing a strategic Chapter 11 bankruptcy (vs straight to 7). Companies regularly take actions that are determental to the interest of its creditors. I have no sympathy for the banks, investors and their agents that looked the other way and wrote subprime and Alt-A loans designed to fail. The banks and the mortgage orginators should be held to a higher standard. Furthermore, in the process of the boom those buyers that qualified under no-doc or neg ARM loans drove up the prices for everyone else - I never see anything commenting about that. I bought my house when there was tight supply in 2005 in a nice area with 20% CASH equity and thanks to several distressed sales this year I am technically upside down on the property. That money which took years to save is gone forever. Looking back I should have done 100% financing and just played with the banks money like everyone else. I can afford the payment and the reset amount in 2015, I could have qualified for a $1 to $2 million property, I could even empty my bank account and pay off the $ 1/2 million debt outstanding if I so choose and be mortgage free but what is the motivation when others may get bailed out through subsidized interest rates or loan modifications so Congress looks like it is doing something? Why should I pay down principal when the bank will refuse to mark down its investment? Why should I pay down principal at the risk of additional loss in home value due to more short sales and foreclosures? Why can't I buy back my mortgage at an impaired value like companies can buy back their own debt? Why do my neighbors that overextended themselves and speculators get to just walk away without consequences? Those are the rules and I intend to use those same rules, those spelled out in my contract against them too. What I have bought is a very, very expensive call option on the market and I am effectively a renter. IF the market turns positive by 2015 and I am ahead then I will go 'long' the house, otherwise its time to move on, take a slight hit to the FICO score, mail the keys to the bank and then purchase my ideal property for CASH. Think others will do the same? You bet.

I read the blog and am rather disturbed by the nonchalant attitude towards investments. Certainly what you write, can and will happen, moralistically, I am rather disappointed with your take. If things went fine and dandy with your 550K investment and you were knocking back 10% a year, would you still be returning the property, probably not. Yet when losses are abound you want to give it back and let some one else handle the dirty work.

As an investor in all asset classes you win and you lose. If you have the cash to cover the loss, then sell the property, cover the loss and move on, if not, cover as much as you can and then short sale the balance.

There are no guarantees in this world. No one is going to guarantee you find the right mate, have the perfect job and that every asset you invest in will yield you the proper return on your time schedule.

This is shear greed and weakness and I feel this asset disposal should be handled like any other. You bought it, now either live with it or sell it. Stocks, real estate, bonds, metals etc..., are all risks, now suck it up and handle the disposal of this asset in a responsible business like manor and move on.

"I believe you've seen the worst of it."

This may sound strange coming from someone whose home is going down in value with everyone else's, but I'm not sure that would be a good thing. I think I'd like to see things be bad enough, long enough, for the majority of investors - especially the short term flippers - to be scared away for at least the next decade and be replaced by new homeowners who actually intend to use their houses to live in, raise children, putter in their gardens, plant a new fruit tree they actually expect to be there to harvest fruit from, etc., instead of constantly checking their comps trying to guess the right time to cash in. I think in the long run we'd all be better off for it.

ML - I agree with you in prinicpal but the playing field is not level. Some homeowners because of their own stupidity, fraud or misdirection or greed will get bailed out as Congress attempts to put in a floor. Second, the bank was compensated for the risk with their interest payments. Third, leverage is involved here. If I have a brokerage account and I use leverage to buy a stock and the trade goes the wrong way, I will get a margin call to shore up the collateral. How can a borrower be held to a higher standard than the banks who they themselves are using disneyland accounting as to when the mark an investment down to serve their own interest???

Wow, lots of folks seem to very moralistic about the issue and lots of metaphors tend to be thrown out there like one's house is an atm, one's loan is toxic waste, "just walk away", etc.

While there may be societal implications for what happened during the runnup, ultimately, the decision of what to do about an overleveraged situation is an individual one. The California laws regarding a lender's right, if any, to seek recourse on a real property loan have their origins in depression era legislation and place a certain amount of risk on the lender for falling real estate prices or failure to properly assess the value of a property they take a security interest in. Since English common law, our legal system has recognized that one has the right to breach a legal contract if one chooses. They just suffer the legal consequences of that breach, and it is up to the non-breaching party to attempt to enforce that breach if they can. Much as some would wish, there is no debtors prison. I don't see the decision of whether to walk away as some sort of broader societal issue or circle of hell judgment and it shouldn't be.

Hmmm, Anyone know how many "Bubble" states are "non-recourse" states for mtgs. AND how many full-recourse states are Bubble states?

It's curious to me that no one on r.e. Blogs addresses the impact "non-recourse" mtgs. had on creating this gargantuan R.E. Bubble. How much of the obscenely leveraged buying (debt) we've seen from r.e. "investors" would we have avoided had these speculators been contractually required to pay off the debt they took on? (I promise you, I wish I'd been accorded the same "walk-away" priveledge with a leveraged stock market purchase I'd made long ago!)

Surprise, folks, greed kills!

The question we're hearing now, ad nauseum from buyers, sellers and fence-sitting taxpayers is, what do we do now? My suggestion is, instead of imploring Congress to be reasonable in an election year (think of the odds of that?), why not ask our elected representatives how it's in our best interest to demand that taxpayers' guarantee non-recourse mtgs.?

>>> Sounds fair? I think not.

Business ain't fair, Mike. Never was. Never will be.

ML - He is "stepping up and handling the disposal" of the investment in a way that is expressly written into his contract.

Why do you feel that exercising a contractual right that the lender was well aware of when the contract was agreed to isn't fair to the lender?

Yes, the law is very specific about what we can do. But there's no law that says other people can't see us as something slimy that belongs under a rock even if what we do is completely legal and tell us so, is there?

In university settings, it seems that many students copy textbooks and download videos and music without realising or undestanding that many consider this immoral and certainly illegal.

Similarly, it would be just about impossible to persuade those youngsters that it's immoral for this guy to walk away. The perception exists that the brokers, banks and indeed 'everyone' used every dubious trick to get rich quick.

My guess is that walking will soon become generally acceptable, helped by a few celebrities doing some walking. I feel a little sorry for those banks and employees who acted responsibly, but there seem to have been few of them. Zero down loans never made sense, and plenty of people were saying that years ago.

We bought a home in South Pasadena in '91 - classic "knife catchers", and put 20% down (20% down was less than it is now). We sold in '95, lost the entire downpayment, plus I had to show up with a check to close escrow. But, we took no credit hit, and got into another home in Saratoga that same year (that had also come down in price), and reaped a big payoff when we sold in '04. You win some, you lose some, and not always in that order.

Also, we converted the South Pas house to a rental for a year before we sold, so that we could write off the loss. Being self-employed, the state and feds will share half your loss, so keeping your credit only costs you half.

(Plus, I learned to never be a landlord again).

Are banks in the practice of returning money to borrowers when borrowers pay off loans in a timely fashion according to the terms of the contract? When individuals take out loans, lending institutions attach a default risk premium to the loan depending on that particular borrower's credit risk. The risk premium is included in one's interest rate, so borrowers are effectively paying to cover the lender's risk every month in the form of higher interest.

If a borrower takes out a 30 yr mortgage, makes every payment on time for 30 years, and pays off the loan in its entirety, do lending institutions refund the default risk premium that the borrower paid every month, since the borrower did not in fact default?

I too would like to know if the 2nd loan is recourse. That will make a HUGE difference in number of walkaways.

If not, THOUSANDS of people will start walking. Exercising their free put option. The poor chumps who actually used a 20% down payment are the biggest losers here.

>>> (Plus, I learned to never be a landlord again).

Amen Smithers. Been there. Done that. Not going back.

Here is something to contemplate..Our government has overpromised benefits that were never properly funded to an entire generation of boomers. As a result, these actions will encumber and degrade the standard of living of yet to be born American generations for years and years. Does anyone therefore suggest those individuals drawing social security or other unpaid benefits are committing an immoral act? Collectively I might say 'yes' but for the individual I would answer "no", the beneficiaries are just exercising the rights within their contract (ex the risk the guarantor or future generations may collectively determine the contract and terms were fradulent or improper to begin with). How is an individual walking away and exercising their rights within a mortgage contract any different?

The difference is that the borrowers voluntarily choose to enter into the mortgage contract. There's no opt-out in SS, and most of us have known since the 70's that we would have been better off if we could have deposited both our share and our employers' share of SS taxes into a plain old passbook IRA.

GeneK - Very good point. But the lender also voluntarily entered into the contract under the terms granted to both the lender and borrower.