Wednesday, July 2, 2008 at 09:21PM
Did Banks Think About This?
This was left today on the previous thread started last week:
watuppp (Unregistered) commented on Data on Subprime and Alt-A:
I feel compelled to this string. I bought my home in 2005. My FICO score was over 750. I could document my income. I purchased my home financing 100% with 80% mtg. in the amount of 440,000 and a HELOC of 110,000. My household income is $175,000. My loan resets in 2010. As I sit here today I'm contemplating walking away from the home. I have no car payments. I have no credit card dept.
I can afford the payments at the ceiling of the mtg. amount. When I took out the loan I looked at historical data for the vehicles my mtg. and HELOC's were tied to. My Mtg. has a max. ceiling. Using a worse case scenario I determined I could afford the payment. I would be living really tight, but could make the payments. The one thing I didn't take into consideration is the insane devaluation of the home. Given the current circumstances I believe when things level out in 3 to 5 years my home will be worth in the neighborhood of 200,000 less than the purchase price. Once things level out, appreciation will be about 1 to 3% a year. I simply can't afford to take that kind of hit. It could conceivably take 10 to 15 years to break even.
I'm not the only one looking at these numbers. I pay my bills. I always have. I consider myself responsible in that regard and my credit score reflects this. Regardless I have to protect myself and my family from financial ruin. I will be deciding this weekend if I'm going to walk away from my home. I'm meeting with a real estate lawyer and a tax accountant to make sure I have all the correct info. My research, which I will confirm, indicates that the bank cannot and will not come after me if the home goes into foreclosure. I'm pretty sure I will be taxed on the difference between the amount owned less the amount the home is appraised at when the bank takes possession. In other words the longer I wait the larger the tax burden will be if prices continue to decline. Does anyone here believe prices won't substantially decrease over the next 3 to 5 years?
Things are going to get much worse. People basically have to walk away. The government will set up programs to bail out the banks and they know that. I contacted my bank hoping to work something out but they aren't receptive. I have money in the bank I would be willing to put towards the principle if they were willing to refinance at a fixed rate for a lower principle amount. I wouldn't expect them to reduce the principle to the market price. I would be willing to take a hit in that regard, but I would expect them to take a hit also. They won't budge. What possible reason would I have to stay in the home. I understood the terms of my loan. I understood the ramifications of the reset.I even was aware the value of my home may decrease. What I didn't understand and anticipate was the amount of the decrease in the value. It was my first home and admittedly made a mistake. Evidently it was the same mistake made by banks and Wall street who were much more educated and experienced than myself.
At the end of the day a home purchase and mortgage agreement is a business transaction. The bank who loaned me the money did so in a non recourse state. They understood the terms of the contract and believed the risk of no down payment interest only was a good business decision. At this point it looks like I'll have to give the home back to them. I also have a credit line that is still available to me. I'm considering using it to compensate for the amount I'll lose when the government knocks on my door for what they consider "phantom" income for the difference between the amount owed on my loan the the value of he home. I consider the equity line phantom cash at my deposal.
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.
Things are going to get much worse. Home prices will fall to 2000/2001 amounts. Anyone who bought a home from 2004/2007 should get out now or risk losing their ass.
Jim the Realtor
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our legal system has recognized that one has the right to breach a legal contract if one chooses.
...and pay the consequences.
I agree, Kingside. Most on here seem to forget that half of the people who get married eventually renege on the "til death do us part" commitment. There doesn't seem to be an uproar about that.
Come on people. Going back on commitments isn't a new thing...it's been here all along. People screw up. Always have and always will.
But they inevitably will pay the consequences.
I see nothing wrong with your logic; I think walking away is the right thing for you to do. The banks certainly should have understood the risk of loaning you 100% LTV during a bubble market in a non-recourse state; unlike buyers, they cannot credibly claim they didn't understand the loan terms, and they are demonstrably not willing to do you any favors, so I don't see why you should feel compelled to hurt yourself to help them either.
In reality, it could be considered your civic duty to walk away. As Paulson recently said, banks need to be allowed to fail so that they take risk into account and the free market can function properly. In the same way, buyers need to walk away so that banks will take that risk into account when making loans, and perhaps not be as momentously stupid as they were during the bubble.
That's my opinion.
"But the lender also voluntarily entered into the contract under the terms granted to both the lender and borrower."
Sure, and as long as this is purely a matter between lender and borrower with no talk of taxpayer-funded bailout, what happens is mostly between them. As spectators, it is our perogative to have and express opinions on the matter but not to try to interfere in any way, and I am content to "write off" the borrower as a slimy deadbeat and see the bank "write off" its investment in the loan and the house stabilize at a sensible price that can be managed by a new owner who hopefully is buying a home rather than another "write off."
"But they inevitably will pay the consequences."
Unless the government bails any of them out, in which case we will.
"Buyers need to walk away so that banks will take that risk into account when making loans, and perhaps not be as momentously stupid as they were during the bubble."
A credible arguement, as long as one of the things the banks learn is not to loan money to those same people again for a long, long time and the government doesn't pass some new law that reduces how long a long, long time can be.
I take issue with the fact that this particular individual has the income to afford this house (even at the max reset rate) but is choosing to walk away without any financial repurcussions. It's one thing to be stupid enough to buy a house without understanding the financing but he clearly knew what the max payment would be if it all hit the fan. Just because he might not ever make back his initial investment shouln't give him the right to pack his bags and walk out the door. I am not sure when people stopped taking responsibility for their actions. Shame on us as a society for knowingly letting these types of events continue to happen.
Idiots like this who paid $550K for a $150K house who "never considered depreciation" are the ones who made it impossible for rationale, sane, fiscally conservative people to buy a house for their families. Therefore I don't have any sympathy for his decision "for his family" when he helped screw it up at the expense of so many others but no expense to himself.
Sure, and as long as this is purely a matter between lender and borrower with no talk of taxpayer-funded bailout, what happens is mostly between them.
And this is where things get fuzzy. Bailouts only make sense if they are to protect the economy (and thereby all of us spectactors) from devastation, a lesson we learned in 1929.
The right point for government intervention is totally unproveable and therefore highly debateable. I myself have no idea where that point is...luckily, I am not a position where I have to decide.
I can just sit back and watch everyone else bust a vein fretting over it. :)
I like that idea Woodrow!
The banks should consider giving a rebate to borrowers who pay on time for the next five years. For those on the edge of walking, it might keep them around.
What if there is no bailout - face it, how can the USA pay for a bailout too, on top of the other debts owed - and all these recourse loans go to collectors?
Those who walked will be paying on those for years.
Gene - they just extended the length of time before walkers can get a new federally-insured loan, from four to five years.
There's another way to gauge the length of the downturn - those who walked will be eligble for a new loan in five years, presuming they fully qualify. If walking began last year, around 2012 there will be a new pool building of hungry buyers. They probably won't mind paying 10% above the bottom, and in anticipation the bottom buyers might get in earlier, say 2011?
Bank charge a premium for absorbing risk. If banks had recourse lending, mortgage rates would be considerably lower (much closer to U.S. Treasury rates). Essentially, banks are charging mortgage rates at a risk free rate plus a premium. That premium is essentially an imbedded put option. The mortgage holder is paying a monthly option premium for the right (or need) to put the asset back to the bank. The major issue is that the banks (en-mass) have grossly mispriced the put option. Now they are left with the consequences...
At the end of the day, the banking industry was corrupt to issue loans to people who really couldn't afford them. Everyone suffers because of it. Yes, we can say people shouldn't have signed them and this is true too, but the banks area of expertise is finance. Thus, I think the weighting of accountability is heavier on the shoulders of the bank.
I'll tell you a little story. We purchased our first home in Canada a few years before moving to San Diego. Our Mortgage broker sent us several types of loans that she felt would work for our life plans at the time. We were provided with an amortization schedule of all loans and she recommended three that she thought we should consider and outlined the pros and cons. We felt she was looking after our best interests and never had a problem.
When we purchased our place in San Diego, we also used a Mortgage broker here who assured us everything was going fine until 3 days before our house needed to close...we got a call...the only loan he could get us for the 300K loan was an 80/20 loan with First Franklin Financial at an outrageous interest rate (we have excellent credit and our household income was around 125K). Hmmmmmm...meanwhile, our real estate agent who had recommended this guy, was already getting other interested people back in to look at the property just in case we wouldn't close.
I'm not sure why there is such a disconnect here. The banks lookout for themselves, and the mortgage brokers look out for their commission. (Not once did our broker in San Diego ask us about our future plans for a family etc or anything). I guess we just thought with all the fees etc here that we were paying someone to look out for us. We were wrong and extremely naive. We were railroaded into a crappy loan that we later refinanced by paying huge penalties. Yes this is our home and we love it...but we hate it at the same time.
I am quite surprised to find the majority's moral tone in this thread. If there is nothing illegal involved, I would just act in the way that best fits my interests. In the author's case, if he is very confident that he will lose more money by staying, he should simply walk away.
The real question should be whether that confidence is well justified by facts, not whether that action is immoral or fits somebody else's (often double) standards.
T-Dub's post is spot on.
Additionally, the borrower who is walking away is not walking away free. He will take a severe hit to his credit which will cost him money if/when he needs a loan for the next 4-7 years. Obviously, it's in his best interest financially to absorb this impact on his credit for the ~ 200k savings he'll realize by getting out from under his home, but let's not skew the facts and make assertions that aren't true. There are real life financial repercussions to his actions.
Sounds like an opportunity for a new lending institution to start a new loan type. "No Credit Score Used" loan program. The feds will probably back it and guarantee it!
If I were in this guy's shoes I'd do the same. I'd know it's a slime-dog move, but hey, I'm a greedy pig. There is no tax penalty so that's the govt's fault. Too bad the rest of us are paying for this....
BTW: Does anybody know if banks who are sitting on foreclosed houses have to pay property taxes?
We purchase a new home in 8/2003 for 254k on my income of 90k a year. I work hard have a high school education and will never be rich or make more than I do now. I put down 51k we made on the sale of our old house. Now house across the street is REO for 199k so we have lost paper and real money. Now the business decision ought to be walk away,and buy the same house across the street. My wife says no she loves her house. This was to be our last home we never assume it was a stock. My father purchased his first home in 1960 he was 40 years old he paid $5500 cost him $50 a month. It was a controversial purchase at that time in a neighborhood of mostly whites. A black man buying a white man house in Memphis Tennesse was a little unusual at that time. We only got it because it was the owner who finance that property . I went with my dad every first of the month when he paid the owner. I also was there the day he paid it off and that pride in his face for what he had done I still remember. I guess it is a business decision to stay or leave a house for most, but I still have my pride and this is my home. So if you stay or go make the choice based on what you think is the right thing for you and yours.
The recourse issue isn't a big deal at all in California, have you seen what it takes to go through and get a judicial foreclosure?
While loans are technically recourse, effectively speaking when banks are loaded down with REOs, overwhelmed by defaults and the market is rapidly declining they are non-recourse.
I think it would be an eye opener to a lot of people to see what the bank would have to go through to come after you for the money. Once they've done the trustee sale they have given up the option to come after you, they must pursue judicial foreclosure to preserve that right.
"The recourse issue isn't a big deal at all in California, have you seen what it takes to go through and get a judicial foreclosure?"
Not necessarily. Wiped out non-purchase money seconds and Helocs behind firsts who foreclose can generally pursue the debtor on the unsecured note without any need to pursue judicial foreclosure. Generalizations will not apply to every situation. That is why anyone considering walking away should get competant professional advice in advance.
I hope he sticks it to the bank, and I hope that tens of thousands like him also stick it to the bank.
Eventually, the bankers will figure it out and start charging interest on mortgages that have some correlation with the amount of risk they are taking on.
When they finally figure that out, the world will be better for everyone.
Investigating further, Kingside does appear to be correct. My mistake and thanks for setting me straight.
I've read several places regarding what I was saying is correct, but I now see how complicated it is (who is foreclosing, One action rule, purchase/non-purchase, etc) and where I went wrong.
Heck, here is a bankrate article from an attorney saying they have to go through judicial foreclosure to get a deficiency judgement:
http://www.bankrate.com/brm/news/bankruptcy/20070227_mortgage_foreclosure_deficiency_a1.asp
Thanks again Kingside, I always enjoy being wrong because I get to learn something new. Luckily for me, I am wrong a lot!
The solution is to not allow banks to take losses unless they document that they pursued borrowers. Right now people are considering walking away in the context that there will be no repercussions.
Whatupp is treating the bank like an equity holder rather than a lender. Assuming that case, one wonders if Whatupp planned to share the gains on sale of this house in an up market?
That was a clear post. The guy deserves credit for explaining the situation. I'm clanishly drawn to sticking through thick and very thin but even ignoring the author's situation, staying with the game is most likely counter to good economics for the rest of us.
People produce poorly for the community when they're not reconpensed for effort. Prisons aren't kicking our butts with their productivity. Unworkable situations should be escaped from. Jump off sinking lava.
He talks about a loss--Well, since he doesn't need to sell now, or in the near future, then he won't have a loss. I fell that if he likes the house and can afford the payment he should just stay put. As his adjustment period nears, he should contact his bank discuss an extention. If he stays put, he will continue getting the interest deduction (plus property taxes) and at $175K in income, that should be considered.
I agree with Inland Emipre (great story about your Dad), we should all have some pride in our home and work toward eventually paying it off--it feels good!
Many states are “single-recourse” states. This means the bank can only take a single action against you for walking away. They can take back the house or they can sue you. They can sue you together and they can sue you separately.
Traditionally, banks take back the house. It should be worth more than suing you.
But they can do either.
If you live in a state that is not a single recourse state (if there still are any), the bank can do the whole list. They can take back the house, sue you, sue your wife, and sue you as a couple.
I remember this from College Business Law, and I am an Engineer, not a Lawyer.
Talk to a Real Estate Lawyer.
Good luck. And DO walk away if you can.
"He will take a severe hit to his credit which will cost him money if/when he needs a loan for the next 4-7 years"
So what? He knows this and I think he should still walk away. I had to foreclose on a property about 12 years ago, rented for several years, eventually got back into real estate and sold at the peak. I now have excellent credit and a bundle of cash. Don't let people scare you with the whole "Your credit will be ruined" bit.
excellent post from inland empire. There is a bigger issue at stake than this jerk welching on his obligation. Home is where you raised a family. Remember the American dream, anyone? Investors took risks on American homeowners because we were not deadbeats (most of us anyway). We made good on our obligations. Now you have this entitled class which treats obligations as optional. Soon investors will refuse to lend to us (it is happening already). They will turn to borrowers in Rio, Beijing, Moscow or Bangalore. Those borrowers maybe more honest than whattup and his ilk. That is the larger implication of whattup's decision. Eventually it affects us all. I wonder if whattup is also considering welching on his school loans, credit card debt etc. The value of assets purchased with those loans is probably down to zero. Where does this eventually lead to? Very, very sad.
Good, I think lenders should pull out and loan to Beijing and Moscow. Make loans hard to get so real estate prices drop like a rock. This is exactly what needs to happen.
Dude,
You are smart to walk away. Screw those who say those with "means" should not walk away. Walking away should be reserved for those who "truly can't afford it". B.S. In many cases, the difference between him and those who "truly can't afford" it is not his income level, but the fact that he balances his budget and plays by the rules. Why should all the idiots get the breaks and not the guy that tries to live within his means. His neighbor that "truly can't afford it" will be free of debt, free of worries, and prepared to start at low price levels in 5-7 years. This poor slob will be stuck "barely making ends meet", according to his post, once his rates rest in 2010.
Don't let their "morals" get to you. If Joe Blow can do it, so can you.
As a side note, I was in your shoes in a dropping market (Hawaii in the 90's....lost half my value) and hung on for the turn around (12 years). It was a huge financial drag of over a decade. I couldn't leave the Island when I wanted to. I paid a big price, only to sell my home with no equity and only enough to pay off the loan balance. It was the wrong move (holding on).
If you don't want people like myself and Jim taking a walk, then don't make it so damn easy for every dead beat out there that never had a financial plan in their life.