A couple of Seattle Bubble readers sent news stories to me last week on a new company called You Walk Away (hat tip to Alan and synthetik.) This company, which is headquartered in California, is selling a how-to kit for $1,195 to help homeowners make the process of walking away from their home and the mortgage, as painless as possible. Even the promotional pictures on the site display happy people who look like regular, ordinary homeowners….except they’re moving OUT of their homes and they look like they’re really, really having some good quality HAPPY family time.
[photopress:brighteyes.jpg,thumb,alignright]A long time ago, in a galaxy far, far away, most all mortgage lenders use to require a downpayment. The reasons now seem obvious but even in a relatively stable housing market, when a person is putting some of their own money into the home purchase, that personal investment was seen as a good reason that could compensate for other reasons on why the lender said “yes” to the American dream for this particular borrower. People use to think two, three and four times before walking away from a home when they would be walking away from their own hard-earned, after-tax dollar investment into the real property. Those days went away with zero down, seller-paid closing cost loans. One of the cards left that the lender is holding is a person’s credit history. You Walk Away claims to connect you with their affiliated credit repair service so the borrowers can start repairing their credit immediately.
Then we had the 60 Minutes episode, “House of Cards” this past week interviewing a couple who had been advised to just walk away, which comes very close to legitimizing the practice: just stop making the payments, save the money, and live in your home until you absolutely have to move out. Lender use to rely on the social stigma of foreclosure and the shame of walking away from one’s obligations. Now the logic of putting one foot in front of the other and walking away is starting to trump shame.
So, what should homeowners do who are trying to make this decision? I recommend finding a lawyer in your city that specializes in consumer protection or real estate law and paying for a face-to-face meeting to discuss all your options. I will bet that in most cases, the cost of an attorney will be less expensive than the kit. Google your state’s bar association to get started.
Mortgage loan originators routinely give advice on how to repair your credit, and loan originators in most all states are only able to earn a fee when a loan is made, therefore this advice is given free of charge, as part of their ongoing relationship with you. State laws on the foreclosure process such as your state’s Deed of Trust Act will also be available for you to read free of charge. To get started, just google it: “_Your State_ Deed of Trust Act.” Also, non-profit housing associations provide FREE counseling to homeowners in default. We all pay for this service by way of our tax dollars. As a tax-paying person, I personally invite you to use these services if you need them and not to feel like this is only an option for someone unlike yourself. To get started, visit Hud.gov and click on the phrase talk to a housing counselor located in the section “at your service.” You’ll need to scroll through the list, and select an agency that offers “default counseling.” What I would like you to avoid, because I care about you, reader-who-is-thinking-about-walking-away, is avoid the signs by the side of the road or any other person who appears to present themselves as an angel here on earth to rescue you, and promises something that sounds too good to be true. It is. You are better off hiring an attorney. Don’t have money for an attorney? See if you qualify for your state bar association’s free legal aid program.
Great post, Jillayne.
For those who like to delve deep, our good friend Tanta wrote a long related piece today over at Calculated Risk (Fear of ending up in the garbage stays my link-finger). Options Theory and Mortgage Pricing.
She introduces the term “Ruthless Borrower” to those of us unaware of the fancier underwriting lingo, and gives you the issue from the perspective of the lender of investor.
I’ll give you an excerpt, but recommend the post in-full.
“The “implied put
Also, you almost jumped an order of magnitude on the hipness scale in my mind. I thought at first you were linking to Landlocked Blues by Bright Eyes.
Hey! The pic! There you go! I’m blind.
Dang, Jillayne. You never fail to amaze.
Hi biliruben,
I have a couple of kids who are totally into music so I’m exposed to cool new bands on a daily basis now. Yesterday my daughter spent several hours playing Guitar Hero at the neighbor’s house. Now I want an X-box.
Landlocked Blues would have also worked. I also like the new one by Rogue Wave.
Nice post, Jillayne, and a timely one at that for those people that are looking hard at these options.
Here is the link to Tanta’s long article this morning over on the cr blog that biliruben refers to. It is very good, though I must admit I read it at 5AM while waiting to see if we were going to have another snow day. It deserves a re-read.
http://calculatedrisk.blogspot.com/2008/01/options-theory-and-mortgage-pricing.html
Tanta recommends that if we want to move away from an environment (like the one we’re moving INto) where borrowers feel no shame in walking away, is to stop under-pricing the risk of zero down loans, and loans to folks with poor credit. This would mean re-thinking increasing our FHA loan limits as well as 100% LTV FHA loans. If we can’t thwart “walking away” with tighter underwriting guidelines and loan limits then the cost will come to ALL OF US by way of higher interest rates for everyone.
Hi Reba,
The 60 Minutes piece shows the couple debating what to do. They come to a rational decision that staying in the home as long as possible and saving the money that would normally go to the mortgage company, would be the most logical decision based on everything they had heard. I am not sure who had ‘advised’ them to do this, which is why I honestly believe homeowners are better off getting an attorney in their own city to do the logical thinking for them before they consider parting with $1,195 for this kit.
Jillayne,
When I was on my way home tonight, I heard a piece from Ted Koppel on NPR about a company called Tradelinesolutions. This company offers the “piggyback” loan. People with poor credit can “piggyback” on loans that are closing to improve their credit. Unbelievable!
Here is a link to the article I wrote and the podcast:
http://eastsiderealestatebuzz.com/2008/01/29/ted-koppel-speaks-on-americas-economic-woes-spending-lending-and-the-piggyback-loan/
What will they think of next?
I cannot believe that someone would be able to go through a foreclosure unscathed with their credit. And if it’s a gov loan (fha/va) the homeowner will be black-listed from other gov. loans.
I hope that if a home owner takes this company up on their package, and they discover that woops…their credit sucks and the mortgage company keeps calling them…they sue Walk Away.
The only thing worse to be in a situation where you need to “walk away” would be to fork over a grand to company like this.
I agree with Jillayne that people faced with this should contact an attorney who specializes in foreclosure.
Step 1: Quit paying.
Step 2: Wait.
Step 3: Move.
Biliruben:
You need to write more! No slight to Jillayne either, who consistently writes so good, I can hardly wait for the next post.
We can affect culture, and should at least attempt to do so.
Thankfully, I have never had to to discuss these options with a homeowner yet. I could see circumstances coming where it could a be a rational, if less than socially acceptable, decision.
In order for people to make socially conscious decisions, they must be made aware of the social costs. Obviously, the vendor of this program is not expressing the social cost, and it sounds as if the media is not either.
The victimizer gets to play the victim card all too often, in this case the “ruthless” borrower.
Great call, biliruben!
You know Kary, your advice is so succinct and direct. Wow, how do you do it? Should I just go ahead and mail my $1,195 check to you now?
😉
Biliruben:
Whoops, I should have said great except. You did credit it, and I missed it. I started reading Tanta’s post and thought I was seeing double.
My bad. No blood no foul.
Rhonda says: “I cannot believe that someone would be able to go through a foreclosure unscathed with their credit.”
On their FAQ page, the company does make an attempt to advise the consumer that foreclosures stay on a person’s credit record for 7 years “but the effects will diminish each year.” Rhonda, is this accurate?
What gets me is that the pictures of the families present such a strong display of happiness.
When emotion is used to sell me something, I always feel somewhat manipulated, unless the stakes are low. Beer commercial: Hotties drinking the brand. Low stakes. Walking away from a several hundred thousand dollar obligation….Aren’t the stakes higher?
Let’s not forget that the mortgage finance industry has destroyed the economic and moral principals of home ownership with the massive issuance of exotic loans (100% finance, no-doc, option-ARM, negative amortization, etc) that no one could reasonably expected to have repaid.
There is no point in getting indignant about the immorality of home-owners deciding to “walk-away” from their house since morality (and prudence) has long since been abandoned in the finance industry. As this credit bubble implosion continues to progress I expect to see most people who find themselves in homes worth significantly less than the mortgage just “walk away”.
Getting a trashed credit record is a very small price to pay if it can get you out from a massive debt that you have no reasonable prospect to repay. If your mortgage is $200K or so more than the resale value of your property, and you have a modest income (say $80K), then it is well worth a besmirched credit score to eliminate that debt burden.
Yeah, Roger. Tanta should write more! I recommend her to anyone who will listen. She’s fantastic.
Yes, Tanta is one of the better bloggers out there and I learn a LOT from her articles. My only nit is her moral streak, going on about what is “right” or “wrong”. I think that leads her to sometimes mis-interpret what is going to happen with the credit bubble implosion since her own moral compass is so strong that she would never do the types of things that many others would never bat an eye at.
Hi Debra,
FICO 08 promises to eliminate credit score piggybacking.
http://online.wsj.com/article/SB119802346920538029-email.html
If the borrower is going to be responsible for the shortfall at some point in the future, isn’t that borrower better off doing their best to get as much for the house as possible?
I remember someone who walked away and brought the keys to the bank. They didn’t winterize the house first and it became severely damaged when the pipes froze. Water was still on. My client bought it at a drastically reduced price, which made the owners shortfall substantially higher than if they had stayed in the property. Maybe I’m missing something, but how does walking away help the borrower?
I think I’m with Kary on his three simple steps. Save your money by living for free. Keep the place up as much as possible. Stay living for free for as long as possible. I think those are the same steps for “spouse left and you can’t afford the house on your own”, aren’t they Kary? 🙂
Hi Sniglet,
“Getting a trashed credit record is a very small price to pay if it can get you out from a massive debt that you have no reasonable prospect to repay.”
In the past, for many facing foreclosure, there was no light at the end of the tunnel in the near future. Geting a trashed credit record weighed in pretty low on the priority scale.
What about people who can afford to repay their loan (or their resetting ARM) who are not in financial distress and don’t really have to move or want to move any time soon? If it is true that real estate prices go up AND down, then many years from now, the prices will invariably go up again.
Not every subprime (or prime for that matter) pay option ARM, 100%, no doc, stated income, negative am loan is in default.
Sure we can throw the corporate banks under the bus for creating the loan products, but do we want to then use that for justification of mass moral hazard? I’m not so sure.
Hi Ardell,
The word now is that there are so many homeowners going in to foreclosure that there is very little chance that banks and lenders will have the manpower and systems already set into place to “go after” the borrower for the difference, if they even can. State deed of trust laws vary.
Short sale is different: the homeowner is TRYING to sell the home in lieu of default, and wants to pay back the difference.
In the case of this company, the borrower is sold a kit that helps the borrower walk away from the mortgage, the house, and any other obligation to the lender.
Sniglet brings up a point: why would a borrower agree to pay back the difference (like with a short sale) when they can just walk away and owe nothing?
First American Core Logic did a now historic prediction on default rates last year. They predicted they would go up every time home values fell. Home values are still falling in many cities. Even in Washington state, our default rates are going UP not down according to today’s Seattle Times.
http://seattletimes.nwsource.com/html/businesstechnology/2004150609_foreclosure29.html
In King County our default rates are up 26% YOY.
Odd: This news story was on the front page of seattletimes.com today and now I can’t even find it; it’s been buried.
Ardell said: “If the borrower is going to be responsible for the shortfall at some point in the future, isn’t that borrower better off doing their best to get as much for the house as possible?”
Unfortunately, I don’t think the assumption that borrowers will be made “responsible” for shortfalls on their mortgage when they “walk-away”. In the majority of cases these days it seems as if lenders just aren’t willing to pursue the borrowers for deficiency judgements. It can be very costly (and time consuming) to pursue a delinquent borrower’s assets.
Worse, many servicers of mortgages have negative financial incentives to pursue deficiencies. The fee structure for most mortgage servicers doesn’t provide much extra cash for recovering money from defaulted customers. It might be good for the owners of the mortgage securities to recover some of their loss, but the servicer doesn’t reap any of that. The profit margins are already so small for these servicers that it just doesn’t make sense to add to the costs by going after delinquent home-owners.
Lastly, the legal ownership of mortgages is often so dubious these days that lenders would rather not even deal with the legal system, and have all the sloppy paperwork and breaks in the chain of ownership (of the mortgage) exposed.
The end result, is that for the vast majority of mortgage holders there is no negative consequence for defaulting other than a tarnished credit rating.
By the way, the statutes in some states (i.e. California) make it particularly easy for borrowers to walk-away without severe consequences.
I think we will see a lot more of this as people realize that a bad credit report ding is the only thing keeping them from walking away. No skin in the game makes it so much easier. The main reason people want good credit is to buy a house, so if they are losing it and can live rent free for 6+ months in foreclosure they are fine. They probably will not want to buy another house for several years anyway, so the temporary credit report hit is of pretty minor consequence if they aren’t planning on buying a new Escalade.
Kary I don’t buy your list.
1) Stop paying.
2) Hand over the keys immediately.
3) Move into what you can afford.
Lenders have made bad loans and buyers have overextended themselves in certain markets. While the social stigma of foreclosure has been muted, I would hope that decent individuals accept their role. Give back what you don’t own so the underlying leinholder can move forward. I don’t blame a homeowner for not wanting to burn $3000 a month in a losing propostion. In a house they can’t envision getting current on or being able to afford. Extracting free rent because the law allows it, is where the foreclosee falls down morally for me. Their failure to pay is something they’ll have to live with forever and hopefully never forget.
Jillayne said: “If it is true that real estate prices go up AND down, then many years from now, the prices will invariably go up again.”
Yes, it is possible that if someone who’s home is under water (i.e. worth less than the value of the mortgage) stays there long enough they might be made whole through future appreciation. However, that can be a LONG time. I’ve read stories about people in Hong Kong and Japan who bought homes in property booms of the ’90s or ’80s that are STILL worth much less than the mortgage.
If you can easily see that you could have a better standard of living by buying or renting a better (but cheaper) home then it becomes difficult to just tough it out and keep making your mortgage payments. As you know from our discussions over at Seattle Bubble there are plenty of examples today of home-owners who go and buy a cheaper house (while they still have good credit) with the explicit intent of then defaulting on their current (over-priced) abode.
Unfortunately, I just don’t think that the morality of defaulting is going to matter to most home-owners these days. The concept of debt has been so basterdized by the finance industry (and society in general) that most people just don’t care any more. Further, as defaults continue to increase whatever stigmas remain will go right out the window. Eventually financial morality will come back into play, once the credit implosion has fully played itself out, and credit once again becomes so difficult to attain that people view it as an honour and privilege.
doug in seattle said: “Their failure to pay is something they’ll have to live with forever and hopefully never forget.”
This is a nice sentiment, but I fear it is rather naive. Yes, we would like to think that serial killers will be haunted by the ghosts of those they murdered, but sadly most of these murderers feel quite untroubled by their actions.
Also, keep in mind that the whole moral basis of debt has been terminally undermined by our financial industry that was so willing to lend money under circumstances that default was almost a certainty. If the lenders so obviously don’t seem to care about the risks of the money they lend out, then why should the borrowers feel any responsibility for repayment?
Thanks, Jillayne for the link.
You’re welcome Debra.
Hey Sniglet, serial killers are by definition sociopaths. Most homebuyers would not fall into the classic definition of a sociopath.
Yet what concerns me a great deal is that we will see the politicians jump in to try and fix things and what will end up happening is that you and I and every other taxpayer is going to end up bailing out the whole mess and the corporations that you mentioned back in comment number 15 will glide away largely unscathed.
So….as I type this I realize that it’s already been done, hasn’t it?
No matter how it shakes out, the taxpayers will end up paying for the whole mortgage meltdown. It hasn’t really even started yet, has it?
Jillayne,
Thanks for being the one shining star in the REIC.
Even with all my dire predictions, I am not at ease with the short-term financial future of our nation.
Think about this. Just over a year ago, it was considered unthinkable that real estate would have any meaningful depreciation. If it did, it would not spill over to the rest of the economy.
Today, we have destroyed the “real estate always goes up” paradigm, and have breezed past property devaluation into wholesale default.
Scary part? We are 18 months into this mess. We still have several years before we hit bottom, and the so-called “prime” borrowers have yet to panic. They are next, and that is a 200 megaton grenade rolling around on the floor with the pin missing.
Oh yeah, one more thing…77,000,000 Boomers are all going to be selling the same 600 stocks in the very near future.
This is going to suck.
Doug,
I don’t think lenders want the owner to leave. More opportunity for vandalism. I was told banks want you to stay and keep the property up until they are “ready” to deal with it. I think you are under an obligation to preserve their asset. I think the owner should stage it and get top dollar for it. It’s the least they can do under the circumstances.
Hi Eleua,
Can you please put me on your mailing list for your crash con-1 alert? I missed it on Jan 21 although I was up late into the night watching the financials tank in India.
Jillayne (or shall I say “Darth Jillayne),
Two things to watch:
Bond insurance
Bank Commercial Paper roll
Stock crashes always start in the credit markets. Either one of those will set one off. Both have a high liklihood of occurring in Feb.
I have us at CRASH-CON 2B, which is where you want to seriously look at getting positioned for “the big one.” The problem with these kinds of markets, is they are very violent in both directions. So, don’t go “all in,” unless you really know what you are doing. Go back to 2000-01 and see how those markets shot in both directions.
For me, I’m moving to cash and US treasurys. Banks are going to get creamed and I think a bank-run is not out of the question. Even if I do get FDIC, I’m not going to sit around and wait 9 months for them to pay off.
Doug Wrote:
“Kary I don’t buy your list.
1) Stop paying.
2) Hand over the keys immediately.
3) Move into what you can afford”
My list is better for someone in financial trouble, but in any case it was a joke. (But those using my list, please send your money order or cashier’s check–no personal checks please–direct to my office–undoubtedly my brokerage is going to want a cut of the action).
This thing reminds me a bit of the letter I got from a company offering to get me a certified copy of my deed for only $69.50. According to their letter: “The U.S. Government Federal Citizen Information Center website recommends that property owners should have an official or certified copy of their deed.” I’m going to hop right on that!
BTW, over on the P-I blog, Synthetik (who I believe posts here) claims that Rain City covering this gives it some legitimacy!
Ardell wrote: “I don’t think lenders want the owner to leave. More opportunity for vandalism. I was told banks want you to stay and keep the property up until they are “ready
This is not a simple moral issue, and borrowers need to get good impartial advice. HUD counselors are a good start, and people in broad financial trouble should probably see a BK attorney.
I’m a little tired of hearing from folks that they should ‘contact their lender’ immediately if they’re in trouble. That can be good advice for people who want to maintain their credit, or want to stay in the home, but it’s a mistake to assume the lender’s incentives are perfectly aligned with your own.
Let’s say you’ve got a CA owner with some other assets to protect who ‘owns’ a rapidly depreciating asset that’s already underwater. Under his purchase loan, he can walk away from the house with a major ding on his credit, but no threat of a deficiency judgment.
If he instead contacts his lender, get refinanced into a new (recourse) loan that he might be able to afford temporarily, the game has now changed. Deficiency judgments are now in, and he could continue to burn through whatever assets he did have (ex. loans from retirement accounts) and even rack up consumer debts. One year later he might still own the house but be much worse off.
Sometimes walking away is the only logical choice.
Jillayne, I’ve seen credit reports with foreclosures and it’s pretty damaging. Consumers can rebuild their credit and it takes some elbow grease and time. A foreclosure with a fha or va loan can have a borrower banned from fha/va loans in the future.
I’m wondering how easy is it to find a rental after you walk away from your mortgage payment.
M/M Landloard does a credit check and sees the potential renter has not been making their mortgage payment…why would they rent to them when they have just demonstrated that they have not been making their housing payment (unless they’re super understanding)?
In Washington State the holder of a second deed of trust loses the property as collateral if the first deed forecloses and the second dose nothing to protect it self. They are wiped out after the trustee sale as far as clam to title. If I understand correctly they can then sue for repayment of the debt and get a deficiency judgment and are doing so. Am I right?
Bobr, yes that is typically the answer in Washington. As Lax alluded to, however, the laws are different in other states. California has some sort of purchase money rule, where the original loan(s) used to purchase the house are basically non-recourse loans.
But here in Washington you might have an exception to the rule. Most DOT’s have a “dragnet” clause saying that the DOT secures not only the note, but future debt. If the same bank made the second loan, you might argue it was foreclosed too. I think that’s a weak argument if the loans were simultaneous, but some court might buy it.
Anyway, it’s for this reason I’ve been telling people for a long time they’re better off paying for PMI than go with an 80/20 loan. I always like to plan for the worst case scenario, and the worst case scenario when you buy a house is you won’t be able to pay at some point in the future. Single loans are better in that situation than a first and a second. You can think of the extra monthly payment as being a type of insurance–insurance against being liable on a mortgage.
If they already have an 80/20, and they’re in trouble, quit paying the 20 and hope they foreclose! The problem is, they might not.
Rhonda said: “I’m wondering how easy is it to find a rental after you walk away from your mortgage payment.”
I don’t think a ding for foreclosure will be all that big of an obstacle to renting. There may be some landlords who would turn you down, but most are willing to listen to explanations for items in the credit report. Further, as foreclosures become more common, it is no longer viewed as that big of a deal. When the whole housing market goes bust it provides a convenient excuse for anyone who defaults on their mortgage.
For example, I’ve heard from friends in Florida that it is very common to have tenants who have mortgage defaults on their credit reports these days. It may still be viewed with suspicion in the Seattle area, but give us another couple years of ballooning foreclosures and the stigma will start to wear thin here too.
By the way, as far as renting goes, consider that the markets where there are lots of defaults also have large surpluses of rental properties. Landlords in such environments can’t afford to be too picky.
1) Buy real estate
2) Hold
3) Raise Rents
4) Retire
🙂
So, were any of you around in 1980 to 1986? There were a lot of bankruptcys, lots of foreclosures and in my experience back then, FHA and VA were quite forgiving of both situations. A borrower needed to have a good/logical explanation of their bankruptcy and/or foreclosure, and have stellar credit for at least 2 years afterwards, and then they could buy.
I’ve been told that that is still the case today.
And, what better reason to be in either position than because the real estate market dropped in value on your property, and/or you were laid off and could not work? Health reasons also factor in here as well.
It strikes me that if millions of debtors get burdened with not being able to own again in the near-term future (ie, 5 years or less), then this mess will exponentially get messier. Might be cheaper to grant all these troubled loans a fresh, new specialized deal: no qualifying needed, but giving them a 4%, fixed rate new mortgage, backed by we the taxpayers (heavy sigh), with all the arrears added to the back end of the note. Make these loans be due within 5 years, so the borrower must qualify for a refinance, and/or sell the property. Maybe even have a staggered balloon, to 5 yrs, 7 yrs, 10yrs and 12 yrs, depending on certain criteria. Maybe even allow these loans to be fully assumable with a new buyer who meets credit standards, but allowing the 4% to be assumed.
Maybe … lots of maybes out there, eh?
Which came first, the chicken or the egg?
Comm1Sense said: “Might be cheaper to grant all these troubled loans a fresh, new specialized deal”
So I suppose people just shouldn’t suffer consequences for poor financial decisions? This plan would not only bail out the home-owners who over-extended themselves, but the financial institutions and investors who threw due dilligence out the window. Unfortunately, I fear that big bail-outs will just re-enforce risky behaviours and wind up leading to an even bigger bubble down the road.
No, I think we just need to live through the bitter medicine of several years of declining prices in real-estate, and see a lot of equity go up in smoke. That is the only way to properly re-educate all market participants about the need to take debt seriously.
Sniglet, I suspect you want the ridedown/smackdown to occur so the damage causes severity in price reductions, so you can buy and feel better about bagging that bargain? But in the meantime, what if no one has a job since this scenario speaks to a depression, not a recession …
Sure, I would like prices to fall so that I can buy a reasonably priced home. However, I sincerely believe that painful losses are the ONLY way we can reset the real-estate industry on a firm footing for the long-term. Any bail out that stems the losses and gets things cooking again will just lead to an even bigger disaster sometime in the future.
You don’t just send an athlete with a knee injury back on the field after administering localized pain medication. Yes, the athlete might be able to play for the rest of the game but they might suffer permanent injuries that will take them out of sport forever. Sometimes it is better just to suffer the short-term consequences rather than try and paper over the problems in an attempt to keep on going.
Common1, I think the difference might be defaulting on a VA and then trying to get a VA, as opposed to defaulting on something else, and then trying to get a VA. I hear credit unions are quite strict on not lending again if you’ve ever walked from a debt owed to the particular credit union.
Sniglet wrote: “That is the only way to properly re-educate all market participants about the need to take debt seriously.”
Somehow, I don’t see that happening.
Sniglet,
Everyone will be affected, including you, if we have neighborhoods that become decrepit or semi-ghost towns because nothing is done to help people who have gotten into trouble. You are looking for a reasonably priced home, but would you buy in a neighborhood where there were a gazillion for sale signs or unkempt yards? I doubt it. You would run for the hills. I doubt we will see it this bad in the Seattle area, but for some people in the hinterlands, this will be the case.
At Inman Real Estate Connect, John Vogel, of Dartmouth’sTuck School of Management talked about the “Last Chance Loan”. Dr. Vogel stated research had been done which shows not everyone in danger of defaulting or obtained a subprime loan is evil, stupid or greedy (although some people may fit that category). Here is a link to my summary of his talk at Inman News Real Estate Connect:
http://blog.seattlepi.nwsource.com/admin/post_edit.asp?blogID=51&entryID=129238
His answer may not be the only one or the right one, but he has put a lot of thought into a resolution. We may all have to give a little bit to make things work for the greater good.
Papering over problems to me would be initiating tax cuts. This would only be a temporary solution, encouraging more people to spend, rather than save. What would be the answer for those going into foreclosure, a $600 tax cut? Give me a break. So the key here is what the bailout plan will be, not whether there should be a bailout or not.
Common1sense:
At least you are putting some thought into a plan, a little different than Dr. Vogel’s, but still one to think about.
Debra –
Several years of McMansion and condo developments looking like shit is a lot better than constant and repeated asset bubbles and paying taxes for bail outs so folks like Mozillo can cruise around in their yachts. The current financial structure is hopelessly corrupt and it got there because Wall Street counted on cowards to make the government pay for the mess in the end. The only proper way to clean this mess up so that we can have a long run of actual prosperity, and not bubble cycles, is market pain.
Debra,
I certainly don’t believe that everyone getting subprime loans are stupid or evil. Neither do I believe that the prime borrowers who have saddled themselves with unmanageable debt loads or option ARM loans are necessarily bad.
However, I do stand by the belief that bailing people out, no matter what the “greater” good, will only lead to bigger problems later on. Yes, we might see a lot of pain and economic hardship without a significant bail-out, but I think this is the only way we can re-educate everyone (from home-owners to lenders and mortgage security investors) the value of financial prudence again. Any kind of bail-out will send exactly the wrong message: that it is ok to engage in risky financial behaviour because big-brother will also take care of you if things go wrong.
As far as “plans” go to improve the American real-estate market, I would suggest 1) removing the mortgage tax deduction and 2) eliminating all the GSEs (e.g. Fannie Mae, Freddie Mac, FHA, etc).
Without the government skewing the economic value of home ownership people might FINALLY stop thinking of homes as investments, and consider them just places to live. All this government intervention has led to a MASSIVE over-investment in real-estate to the detriment of the rest of the economy. We would be far better off having a sounder economic engine and fewer McMansions in the suburbs.
Sniglet, you’re just full of ideas I don’t see happening. Maybe if we have term limits and every member of Congress is prohibited from running for office ever again, then we might see the end of the mortgage interest deduction. I don’t think the second idea (Fredie, Fannie) would happen even in that scenario.
BTW, you do recall that all interest used to be deductable, right?
BTW, Sniglet, I’m not saying they are bad ideas (well, maybe the Freddie/Fannie thing), but that they won’t happen.
My won’t happen idea is get rid of the income exception for employer paid medical plans. It’s lead to inflation in the health care area. But it’s not going to happen either.
Kary,
I am behind you 100% on the elimination of employer paid medical medical deductions! Making individuals responsible for covering their own medical costs would have a hugely beneficial impact on the health-care industry.
But, back to real-estate. I understand that my suggestions for bringing rationality back to the real-estate market may be politically untenable. My fall-back, however, is to at least not to increase the moral hazard, and encourage even more risky financial behaviour, by engineering some kind of bail-out.
So, my default position is “no bail-out”. But, if someone really wants to examine how to reform the real-estate market, I have plenty of ideas. 🙂
Way back in comment 36, Laxtosnoco says: “If he instead contacts his lender, get refinanced into a new (recourse) loan that he might be able to afford temporarily, the game has now changed.”
This is an excellent point. Homeowners in default need to hire their own attorney, someone who understands real estate and deed of trust law that can take all this information and help the homeowner make a rational decision.
Hi Eleua,
Did you see what happened with the bond insurers today?
From CNBC
“William Ackman, a hedge fund manager and short-seller of MBIA, is submitting data to the Securities and Exchange Commission and insurance regulators in New York State alleging that bond insurers MBIA and Ambac Financial Group are understating their losses.”
http://www.cnbc.com/id/22916460
And from bloomberg:
“Jan. 30 (Bloomberg) — Financial Guaranty Insurance Co., the world’s fourth-largest bond insurer, lost its AAA credit rating at Fitch Ratings after missing a deadline to raise capital.”
http://www.bloomberg.com/apps/news?pid=20601087&sid=agMrfswILLw4
Debra, If I recall correctly, Dr. Vogle said there were something like 2 million foreclosures happening. We’re pretty insulated from that here, at least right now – but in many other states, there are entire neighborhoods of boarded up homes. Picture how that might look in your neighborhood … or picture the condo building across the street from you totally boarded up.
The example given of helping to put an image to those 2 million homes in foreclosure was that this 2 million foreclosures equals 5 states … if every homeowner in Vermont, Maine, New Hampshire, Connecticut and Rhode Island went into foreclosure, it is that many properties. Likely I have named the 5 states wrong, but you get the image. 5 States??!! Wowie.
Now tell me that if 2 million households do foreclose, and let’s say there are 3 people in each of those households, then that means 6 million people now are renters, and maybe permanent renters.
And, maybe just maybe, 1 million of them worked in construction, which is starting massive layoffs due to builders not building new houses, and that 1 million of them worked in the real estate, mortgage, title, or banking business and they are now being laid off, and 1 million of them worked for appliance stores, carpet stores, car dealers and the like, and 1 million of them are children so don’t have to work, and that 1 million of them work as teachers, or firefighters or as nurses or other stable employment … and the other 1 million should never have gotten a mortgage anyway but they did ….
All I’m saying is that we have a huge problem, and without some stabilization program, we’re going to see massive layoffs hitting our economies.
And, the theory that lenders will raise rates higher and higher makes little sense either. All that will do is make buyers hesitate and not do anything. As they say “a confused mind takes no action”.
Lenders can raise rates all they want to make things seem/actually be/possibly be less risky, but if they have no supply of buyers ready to buy, those funds to lend won’t earn them any profits either.
And, the credit card issues need to be addressed too. Since when is it normal or affordable for people to be carrying so much debt — and how can they get out of that debt when the fees and rates just
keep going up? Do you realize there are many cards out there where the rates are in the 22 – 30% interest rate range? No wonder people can’t make their mortgage payments. They are tied together.
Ok, back to work. This is far too addicting!
Jillayne,
Yes, I was all over that like a Realtor on a new Lexus. This is the big issue.
FED drops 125bps in a week, and today they get a selloff. Nice. If they don’t rally on a huge rate drop, and tank on an obscure insurer getting downgraded, then that spells trouble. Picture what happens when PMI/ABK/MTG get clipped?
BOOM! (chain reaction) BOOM! BOOM! BOOM! BOOM!
I interperet the FED action as thier way of saying the credit markets are totally screwed. Look at the bond insurers and you see confirmation of this. This is just subprime getting hit. Wait for the A paper to get pounded.
Also, SnP just downgraded a bunch of RMBS. Somewhere north of $500B. That’s half a trillion for those playing the home edition.
CRASH-CON 1 is just around the corner. Seriously, I doubt we get through FEB OPEX. Someone needs to float a huge rumor that the gov’t is going to bail out these insurers.
leanne finlay –
Rates will rise because mortgages are riskier in a recessionary and deflating bubble environment and this does not even take into account the fear of mortgage securities that will persist for years. The Fed lowering rates just means the banks do not have to raise them yet, they can get 3% from Fed and loan at 6%. This is why the Fed lowering rates has not really impacted mortgage rates, the Fed is cutting in pace with how fast the risk premium is increasing. What happens when the Fed gets to 1% or 0% (With Bernanke this will probably be by next week) and mortgages are still at 6%? The risk spread increase can only come from one source at that point…
That’s the spirit, leanne! Stay positive!
Here’s another happy thought:
Right now, on average the 51 million homeowners with a mortgage have about 32% equity in their homes, iirc. If Krugman and some of the IBs forecasts are correct, and we see housing fall 30%, on average, homeowners with mortgages will have NO equity in their homes. None.
Sing it loud: “If you walk away, I’ll…”
—-
“Yes, I was all over that like a Realtor on a new Lexus.”
He He! Love it, Eleua.
Oh yeah, this is all “contained.” I’m sure several more rate cuts will do the trick. Not.
“NEW YORK (Reuters) – Standard & Poor’s on Wednesday said total losses for financial institutions from continuing mortgage market problems will eventually reach more than $265 billion.”
http://www.reuters.com/article/ousiv/idUSN3024368820080130
Who’s ready to bet that we’ll top a trillion by the time all is said and done?
Topping a trillion is probably closer than we think!
b- Did you read my post regarding Dr. Vogel’s proposal? Helping people with a solid plan has nothing to do with McMansions. The majority of people who are suffering own modest homes in modest areas. Leanne is right, with 2 million foreclosures on the horizon, it could be pretty ugly out there in a lot of places. We here in the Seattle area will probably be somewhat exempt, unlike places like Detroit, Cincinnati, Buffalo. But to flat out say, “let ’em suffer” is not the answer either.
George Bernard Shaw said in his play, Major Barbara, “money is not evil, it is how you spend it”. I apply the same thing to taxes. Taxes are not evil, it’s how they are spent. Since the government wastes a gazillion (or is it a trillion dollars?) on all kinds of things,(but we won’t go there today) is there something that can help people stay in their homes? Is there something that can be done to preserve neighborhoods and cities?
I, too, do not believe in people getting off scott-free. This is why Dr. Vogel’s ideas have some merit. Let homeowners going into foreclosure refinance at a lower rate and, in turn, the home’s value will never appreciate.
b- you are right, there should be some consequences and some pain, but locking the value of homes at a set price is a great solution, I think.
By the way, I agree about Mozilo, and his other buddies, Prince, and O’Neal. However, bailing out individuals in their homes is different from bailing them out. Mozilo, etc have been invited to stop by Congressman Henry Waxman’s “House” to talk next week. The Mozilo problem is the problem of CEO compensation. It’s out of hand and is a large part of why we are here now. Trust me, I will be talking about it!
Actually the Mozilo problem is potentially an issue of insider trading. He pumped up his stock on rosy, false news, all the while sold a half a billion of it himself.
I’m a socialist at heart, but creating a massive percentage of home subsidized seems like a convoluted solution with unknown long-range effects. I would just send 10 grand to everyone who has lost 50 points on their FICO in the last year. Not fair, but effective. Those who are just in a temporary jam and can be saved with a minor reprieve, will. Those who can’t will spend the money and stimulate the economy.
Helicopter biliruben.
Biliruben, if you’d care to actually read the point, you’d see there was no predicting rates would fall, simply a discussion of what could happen if rates rise. Don’t be so quick to bring your 2 x 4 to the fight … it’s more about common sense than bashing.
Here is the point one more time:
All I’m saying is that we have a huge problem, and without some stabilization program, we’re going to see massive layoffs hitting our economies.
And, the theory that lenders will raise rates higher and higher makes little sense either. All that will do is make buyers hesitate and not do anything. As they say “a confused mind takes no action
Bili, how on earth can you possibly say you’re a socialist at heart?
Jillayne,
You want CRASH-CON 1?
Read this.
We are in the ignition sequence. This is almost over.
Short the phonebook. If we make it through February without a crash, I’ll be very impressed.
Because I am. Or maybe a little left of socialist. I play the cards I’m dealt, however, and though I find capitalism terribly flawed, it’s the only game in town.
I think you misunderstood me. I don’t really think I was bashing. I mainly agree with you and was actually cheering you on.
A story on Youwalkaway will be on ABC tonight at 1130 on Dateline or one of those similarly named shows.
Hey, very cool Alan. Thanks for the heads-up. Channel 4 KOMO in Seattle; Nightline.
Eleua,
I read the report. The regulators want the bond insurance companies to come clean, right? This means downgrades and transparency for investors.
Will this start the slow death of residential mortgage backed securities or will this change force banks to make more write downs? Maybe it’s not an either/or question.
The way RMBS are going to be sold in the future will be radically different. No more stated income loans, no more slam dunk underwriting. All that underpriced risk is all coming back at us now. We’re all going to feel it, aren’t we?
…and why did MBIA release their earnings report at midnight? That seems kind of odd.
Jillayne,
Bonds (MBS) will have to be repriced to account for their intrinsic risk, without the benefit of insurance. This will drive the interest rates of bonds to the moon. It will be much harder, if not impossible, to securitize these things as we go forward. They were crap, but they were insured crap. They were rated crap.
Now they are uninsured crap, and downgraded crap (or soon will be).
That’s why there will be no reflation. The money will not be there, but the risk will be. As this goes, the amount of bonds it touches will grow with each round of repricing and defaults.
No money-market is going to be allowed to hold this stuff.
This letter I linked to is landing on the NY Times tomorrow. It is front page of the biz section (or so I am told).
Yeah…CRASH-CON 1. I just hope the Lumps give me another day or two to get in a better position.
Leanne wrote (a while ago):And, the credit card issues need to be addressed too. Since when is it normal or affordable for people to be carrying so much debt — and how can they get out of that debt when the fees and rates just
keep going up? Do you realize there are many cards out there where the rates are in the 22 – 30% interest rate range? No wonder people can’t make their mortgage payments. They are tied together.”
I’d like to see some numbers on this, because I suspect it’s a greater risk to the banks than the home mortgage situation.
Also, am I the only one that thinks that mortgage rates are determined by supply and demand, and part of the reason the rates are so low is the demand for housing is down? That’s probably a good thing.
“I’d like to see some numbers on this, because I suspect it’s a greater risk to the banks than the home mortgage situation.”
About 2.5 trillion consumer credit outstanding, of which it looks like less than a trillion is revolving debt (mainly CCs I think). Car loans look to be the majority of the 1.5 trillion in non-revolving debt.
http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf
It’s a problem, but it’s dwarfed by the more than 10 trillion or so in mortgage debt.
Not to mention the deficit….
Macklowe walks away:
“Troubled New York real estate titan Harry Macklowe has reached a tentative agreement with his lender to turn over effective control of seven Manhattan office buildings he triumphantly acquired less than a year ago for $7.2 billion …”
Well I wonder which bank will be adding this building to their list of non-performing assets?
Deutsche Bank.
bili, thanks for the numbers, but I wouldn’t agree with your assessment as to the relative risk.
First, credit card debt is entirely unsecured.
Second, the people carrying credit card debt month to month are practically by definition a risk. You can’t say the same thing for people with mortgage debt.
Third, I was addressing risk to the banks. How much of the $10 trillion are banks still holding (as opposed to have been packaged and sold)? If your link answered that, I’m sorry, but that was actually the main point I was getting at.
Good point, Kary.
The confessions are still coming in regarding who holds all these mortgage derivatives. Of course, anyone holding garbage and currently marking to model instead of market is going to have a negative effect on the global economy. It just may effect things in different ways.
CALPERS, for instance, sounds like it holds some. Not good for teacher’s pensions and their current and future consumer spending habits.
King County holds a chunk. Not good for investment in roads, public safety and schools, and the jobs that they represent.
None if this garbage is going to be harmless, and simply float away as a line on a balance sheet.
Right, but spreading it across industries is better than having one industry take the entire hit, especially if that industry is banking. Banking, as well as insurance, are two key industries for keeping the economy functioning. I bring up the latter because they may be holding a bunch of those securities.
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Hi Kary, re this post: Leanne wrote (a while ago):And, the credit card issues need to be addressed too. Since when is it normal or affordable for people to be carrying so much debt — and how can they get out of that debt when the fees and rates just
keep going up? Do you realize there are many cards out there where the rates are in the 22 – 30% interest rate range? No wonder people can’t make their mortgage payments. They are tied together.
I think missing payments is likely to trigger the interest rate on a lot of your debt to rise, not just the one(s) you miss the payments on. I wouldn’t count on them reducing the rate just because someone else was able to get a better rate. No one really knows what they’re looking at when they’re making those decisions.
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I think the whole situation is sad, not only for the homeowner walking away, but also for the homeowner living in their neighborhood. Now their home value goes down due to the fact that their neighbor gets to walk away from their responsibilities.
I can see it from both sides. You have a homeowner that can’t afford the home they are in, they can’t sell the home because prices have declined or they owe more than it’s worth, they have to “survive” so they save their money and walk away. They feel like they aren’t losing anything because they don’t have equity anyway, and thinking “short term” walking is a relief.
Mila wrote: “I think the whole situation is sad, not only for the homeowner walking away, but also for the homeowner living in their neighborhood. Now their home value goes down due to the fact that their neighbor gets to walk away from their responsibilities.”
This isn’t necessarily true either. It very well might be that the neighborhood is better off without the person. Not all neighbors are good neighbors.
It’s sort of the upswing/downswing thing Ardell and I have been talking about. Sometimes a foreclosure (or walk away or forced sale) is a good thing.
To Kary,
You are absolutley correct that the neighborhood may be better off without that neighbor as a person. However what happens when their home is sold for less than appraised? It causes everyone elses homes to go down as well. So now neighbor #2 needs to refi before their ARM adjusts and can’t because their home value has decreased and they are now upside down in their loan. This puts them in the same situation as neighbor #1. This is why I think it sucks for everyone. Not saying that one person is right or wrong just a sad situation for everyone.
I think appraisers can spot distress sale situations, and that in any case one low sale isn’t going to impact values any more than one high sale. The problem with foreclosures is when you get too many of them in an area.
To look at it slightly differently, when an agent is pricing a listing, they aren’t going to knock the sale price down because of one low sale, or knock it up because of one high sale. Sometimes there are sales that are just out of the range of the other sales that you can’t explain.
Very informative article. It’s a tough issue but I agree with a few of the posters that it’s wrong for the people to keep living in these homes when they stopped paying for them months ago.
If I need to move/and can’t make the payment I need to be out. anything else is wrong.
Matt, absent a deed in lieu you’d not be doing the bank a favor, and sometimes (often) they can’t do deeds in lieu. So moving out early would be pointless. If anything it would hurt the neighbors because the house would be abandoned (unless the person who moved out was one of those neighbor from hell types).
If it were true that only the irresponsible lenders and idiotic borrowers get hurt when people walk away from their mortgage obligations, then I wouldn’t have a problem with it. However, any fair-minded observer knows that that’s simply not the case. Everyone gets hurt.
Let me give you an analogy:
My car insurance premiums are pretty high, or at least I think they are. They’re high despite the fact that I’ve never been involved in an accident. They’re high despite the fact that I have a spotless driving record without so much as a parking ticket to speak of. In fact, I don’t recall ever having filed a single claim with my insurance company. I also drive a pretty modest and inexpensive vehicle – or at least its modest compared to most of the cars I see parked in driveways in my area.
So why is my car insurance so costly? It’s because I’m paying for the all the driving indiscretions and mistakes of everyone else. I’m paying for all you bad drivers out there. All you lead-footed fools traveling 20 miles-per-hour above the posted speed limit with a cell phone in one hand and a cheeseburger in the other, smacking the kids in the back seat while flying much too fast through a dangerous intersection because you’re one of the many people on the road who thinks that a yellow light means “floor it!”
I’m even paying insurance premiums for people that don’t have car insurance at all (uninsured motorist insurance)!
All you bad drivers out there are the reason my car insurance costs so damn much and will only continue to go up in price, despite the fact that I’m a careful driver.
Similarly, because so many of you mortgage bailers are walking away from your obligations, then the cost of borrowing money will rise for everyone else. Credit will become tighter for everyone, even those that pay their bills on time and have always been a good credit risk.
Also, because the house you’re walking away from will be foreclosed on, then the value of the other properties in your neighborhood will drop even further. This means that those responsible, informed consumers that are still making their payments will take yet another hit while you run off, relatively unscathed, to go move in with mom.
Basically, the same pattern plays out over and over again in almost every situation where everyone is “in it together”. The responsible few pay for the indiscretions of the idiotic masses.
Why? Because, in order to keep the process going, somebody has to pay the bill. It won’t be the idiotic masses (you mortgage bailers) footing the bill because you have neither the inclination nor the money. That leaves the responsible few (me) picking up the tab for all of us.
Merry Christmas – yet again.
Thank-You Wally!!!!
That is the exact point I was trying to get across in my blog yesterday! One person may not cause a lot of harm, hoewever it’s not just one person walking away from their mortgage…. So why make it easier for people to walk away? We will really see a decline in the market by incouraging people to walk away from their responsibilities.
I agree, the messages that are being sent to these stessed out homeowners is that “there’s any easy way out”. If FHA can come up with some good solid programs with higher LTVs and a higher loan amount I think we will see some good things come out of it.
Yes, I think that talking to a realestate attorney first to out weigh the good and bad of just “walking away” from your home. I would like to see evidence that paying $1195 and no blemish on yor credit report!
Walk Away is just another example of those companies that are just trying to make a buck in a time of crisis. It’s pretty sad that our society allows a company like that to exist. There used to be a company in CA that was run by two felons that would show borrowers that they are not legally responsible to pay their mortgage payments. They are now back in jail.
To me, this is a form of theft. Because, guess who takes the financial brunt of their advice. Tax payers and the surrounding homeowners take the pounding. We can not let this happen.
I find it disturbing that accountability for one’s actions or choices has become less important. Getting something for nothing and getting away with it is now a higher priority worth paying over $1000.00 to learn how to do it. We, as a society, seem to have forgotten that our actions are what our children observe and learn from, not our intentions. What is this teaching the youth? What does this mean to credit in 20 years?
Great reference tips in this article. I will definitely use this to reference for clients if necessary. About 6 months ago I had some elderly clients come to me to inquire about refinancing or selling their home to their youngest son. They had been absolutely screwed by a similar company as “walk away”. They were still making payments however had signed the title over to them on their property. They were too ashamed to tell thier grown kids. After working with their youngest son to determine what they were to do. Of course they had to hire an attorney. Its held up in court currently and I am anticipating the outcome. These types of companies are grossly misleading.
This is how the housing market is today. I think most reasonable people would walk away from their home if it had lost so much value and you owed more money on the home than it is worth. And you could rent a place for a lot less than your mortgage payments. It is unfortunate but housing prices became too inflated in most parts of the country and as prices fall throughout the country it will become more and more common.
I can’t imagine that the financial industry can’t come up with a solution the fix the mortgage crisis we are now experiencing. People really don’t want to move out of their comfort zone and destroy credit. Why not try re-financing on a sliding scale and refresh it every year. Sounds crazy but we need to build the confidence up in the housing market with some positive news so people aren’t so scared to look. Walking away is not a solution but always a time in crisis the wolves come out in all different forms.
It sickens me to know that people are profiting from foreclosures. A “Walk away” guide? Redicilous! A crying shame for the “American dream.” I hope that people start teaching their children, as you mentioned previously, to understand debt and homeownership, and the pride you get out of being financialy responsible.
Just what we need, another shark in the sea of mortgage despair. I don’t even know if this is legal. Don’t banks/lenders have a right to sue the company who offer this program, making money to take advantage of a fragile situatuion. We should add a new law to HUD laws, predatory solutions.
The consequences of this type of program will be more detrimental to what we are experiencing right now.
Great article Jillayne
Well a “niche market” an entrepeneur? Opportunist? A guide to…walk torward (RIGHT) has got to be out there too ,right? I agree people would love to find a more dignified honorable way to stay in their home especially with a family. All probably due to not enuf prliminary planning on the buyers part.
A very disappointing realism.
The entrepreneurial spirit alive and well.
I just hope that this program actually helps individuals that fork up the money for the system.
Our indusrty must continue to provide information to help consumers make better decisions that find themselves in foreclousure.
The times we live in people are looking for the easy way out instead of bucking up. There will always be those out there waiting to misinform and get paid to do it. Your article is sound and it is a good idea to get legal advise.
It’s sad to think that there are those who profit at the expense of someone else’s misfortune. We in the industry have it in us to make sure that we do not put our clients in a position that would hurt them eventually.
Great article Jillayne! It does seem as though people now a days give up too quickly. What ever happened to dedication, hard work, commitment? For some, yes, foreclosure is the only option, but like you pointed out seek legal advise, get free counseling, try something before just giving up.
That is crazy that there is actually a company out there selling a how to kit on how to walk away from your home. Amazing.
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I actually laughed out loud when I read the bit on the ad from You Walk Away portraying homeowners moving out and looking REALLY, REALLY, happy and having a happy family time. What a joke. It never ceases to amaze me how quickly homeowners are willing to throw in the towel and let their credit fall by the wayside. With all the free advice out there you’d think they’d give it a little more of an effort? I’m still a fan of no money down programs, but with these still around, I’m a little unsure how to create more of a sense of loss for those homeowners who decide to walk away.
Rebecca-
Forget about trying to make them feel bad, how about we just legally and financially penalize them? Remember the bankruptcy law?
Talk about a predator first the change is missing of your dresser then your paying someone to tell you how to move out of you home. Its called capitalism. Someone is always there to capitalize on the desperate. As far as social acceptability I don’t think people really care, unless we come up with a new disclosure that states during the default of your loan the bank can paint your house pink with purple poke-a-dots it wont matter. It seems people do give up rather quickly but If you purchased your home and a year later you owe 100k more than its worth wouldn’t it cross your mind?
The ads for the “You Walk Away” program are pretty funny. Those people look so happy! They should make one of the ads say, “Move back in with your mom and then force her into a retirement home,” and show kids, parents and a smiling grandma.
I never really thought of zero percent financing as a bad thing, but I guess it does have a lot of ties into how invested someone feels they are in their home. I think that this will differ based on the person. I was contemplating buying a home with zero down, just so I could get into a place, but I would never consider just walking away from my home if I got into financial trouble.
To those of you who think walking away is immoral/ unethical/ irresponsibile/etc, try living in the shoes of someone in my situation. We bought a house 8 months ago and now have to move to another state, because the job we moved here for was not as advertised. Our house is worth about 90k less than what we paid for it (we’ve had it listed in hopes of selling it). We had great credit and got a 30yr fixed rate loan and put down 10%. It’s bad enough that we are losing the 10% downpayment….would you pay 90k plus the broker’s fees & closing costs on top of the loss of our downpayment? In CA, home loans are non-recourse (i.e., the lender can’t issue a deficiency judgement…the only collateral is the house). We are demoralized by the situation and the damage to our credit, but at least we can preserve our savings. We consulted a lawyer who said very clearly that foreclosure is the best option financially. Short sales only benefit the lender. I don’t have any issue with what “you walk away” is doing. It’s not a scam. They are advising people about their options….lawyer is only costing us about $500, so seems to be a better way to go.
Hi Foreclosing,
Thanks for stopping by and sharing your story. I am thrilled to hear that you hired an attorney and received legal counsel. There are many reasons why people might decide to chose foreclosure over a short sale. As you move through this tough time in your lives, be sure to reach out and seek other forms of counseling if needed such as help getting settled into new housing. Financial stress can take its toll on relationships as well as individuals. Please stop by and let us know how you are doing as you move to your new destination. I care.
In my neighborhood in Sacramento, California, I am seeing a chain of people buying a foreclosed upon or short sale home while they still have good credit, then allowing their former home (which is in the same neighborhood with the same floor plan) to go into foreclosure or otherwise disposed of. Then a second person with good credit buys that newly foreclosed upon home and – guess what – let’s their old house go to the bank! With no down payment and (often) no tax consequences, one is effectively reducing his debt from $300K to $200K for the same home. They feel they have won the lottery! The only disadvantage is a bad credit rating, which doesn’t seem like such a big deal (they may regret this later). Still, $100K makes up for a lot of pain from poor credit.. I actually have my own home up for sale and I have had four offers, mostly from our own neighbors that want to have the same house for less money. Maybe the banks should just write off some of the principal and save themselves the trouble.. But not me – I am going to be a renter. I bought in 2006 for $300K ($15K down) and can only get $210K for the house now. As a military member, I’ll have to move in summer 2009, prices won’t go up, and rents won’t cover the mortgage – too many people renting right now. I already have one upside-down rental in West Virginia from my last move draining my time and money. Anyway, I have to sell. I’ll lose my $15K and the bank will lose about almost $100K. I thought I’d get a modest 2%-3% increase each year 2006-2009 and be able to sell for what I owed plus closing costs, but there’s no way. I wasn’t greedy; I just wanted a decent place to live with a yard and peace/quiet. I don’t worry about the $15K – that’s the past – but I hate having my good credit get trashed and being unable to buy a new home, but what can I do? Cash out my entire 401K? Maybe I should buy another house now? 🙂 My bank refuses to consider four good offers or talk with me at all until I miss three payments, so I am now saving up all of those monthly payments and will move into an apartment whenever the bank wants me to go. Apartments here seem willing to rent to me even when I tell them I am in a short sale; I am just one of many people with bad credit filling a lot of unwanted apartment vacancies. But, for now, I am staying put and at least the yard gets watered and the trash gets picked-up while the bank comes to grips with the fact they are getting their house back. I feel that my trying to preserve the home’s value until I go is the very least I could do to be “ethical” in this case. My neighbors – my friends – also greatly prefer what I am doing to an abandoned house; we all actually take turns moving the yards of the empty ones and running our hoses over to water the lawns.. Is moving into a cheaper home knowing you will abandon your other home any worse? To me it is, but the economics sure seem to say otherwise.
Jillayne,
One enjoys walking, but rather back and forth, not away.
Chris
I definately don’t advocate walking away from your home if at all possible, but if you absolutely MUST walk away, then I definately agree with Jillayne that you should consult an attorney first. My son is an attorney, and he has assured me that spending $1000 to speak with someone with specialized knowledge of real estate law is a much better use of your money than buying a “kit” on how to walk away from your mortgage. The fact that they will link you with their affiliated credit repair service is even more of a tip off to consumers to avoid them.
Gina, your son is right, except that it probably would cost less to get real legal advice from an attorney than $1,000. Often attorneys have free or reduced price consultations, and that might be 90% of what someone would need in a walk away situation.
Back when I was practicing law I think I had one or two clients where I put them through an entire Chapter 13 saving their house for $1,000.00. Most were more than that because over a 3 year period of a Chapter 13 other issues would come up, but the point is if all you’re going to get is advice on how to walk away from your house, the cost of the most expensive debtor/creditor attorney in Seattle would probably be less than $1,000.00. There isn’t that much too it. Absent tax issues they’d have to really pad their bill to get to $1,000 (unless perhaps the client was really talkative and drove up the cost with a lot of phone calls or something).
I don’t know what the bankruptcy form preparation firms are charging now, but it used to be about $300. That’s far more complicated than advising someone how to walk away from a house (without providing legal advice, which they shouldn’t be doing).
Kary,
Maybe you can answer this one for me. I thought that on the East Coast you had “mortgages” vs. West Coast “Deeds of Trust”. I thought the Trustee Sale method vs. Foreclosure Method was easier for the lender, but came with the tradeoff that the lender had to walk away with whatever he received, and not pursue the homeowner for the shortfall.
Isn’t there a difference between “Foreclosure” and “Trustee Sale”? Doesn’t filing bankruptcy protect you more in a foreclosure than a Trustee Sale? And aren’t the lender’s rights beyond proceeds from the sale different for one than the other?
Deeds of trust are simply the more modern document. They give the lender the option of proceeding “non-judicially” with the trustee conducting the foreclosure, rather than a court/sheriff. The process is faster, which is better for the lender, but typically doesn’t allow the creditor to collect a deficiency if the property doesn’t sell for what’s owed.
But, the creditor still can proceed judicially, although there still may be limitations on the ability to collect the deficiency. For example, in Washington, if it’s homestead property, the creditor has to waive the deficiency or allow the debtor to stay in the property for free for the redemption period (12 months). Thus, you seldom see judicial foreclosures on residential owner-occupied houses.
Foreclosure is just a broader term than Trustee’s sale. The bankruptcy implications are about the same, as long as there is no redemption period.
So why are people doing short sales if they are automatically forgiven the debt on a non-judicial and faster process which absolves them of that? While I’m not saying people should walk away, it doesn’t seem fair for the lender to get the non-judicial option without the negative tradeoff.
Hi Ardell,
People who are looking at all their options when faced with financial distress consider consider the consequences of foreclosure, which has been thought of a stigma, against all their other options.
Many, many home sellers decide to just let the lender foreclose especially if the homeowner cannot get the short fall “forgiven” by the bank and they have no way of ever paying back the shortfall in the nearly forseable future.
IF the shortfall is not all that much and they do not want the stigma of a foreclosure, and their financial distress is not permanent, many homeowners will consider paying back the shortfall in order to try to salvage their credit.
But we are living through a historic time. If our economic conditions worsen, walking away will become less of a stigma.
In CA, one would be nuts to do a short sale, because first loans are non-recourse. There really is no financial advantage to the homeowner, but it’s great for the lenders. In fact, this route has serious negative tax implications while foreclosure does not. I’ve spoken with countless experts (lawyers, mortgage brokers, accountants) and they all say the same thing on this matter. As far as credit rating goes, nobody seems to know for sure how much better off one would be going with a short sale over a foreclosure. Some say it’s a little better, while others say it’s basically the same hit. On the issue of hiring a lawyer, ours estimates that his fees for going through foreclosure (or deed in lieu, if we go that route) will be $500. It’s true that a free consultation gives most the needed info, but we would rather he communicate with our lender, real estate broker, etc. It’s been helpful, as issues have come up (e.g., responsibility for the home should we walk away and it is vandalized before it foreclosures). IMO, it’s money well spent.
Hi Foreclosing,
Thanks for stopping by. I wonder if this is why foreclosure rates have gone through the roof in Cali. Now I’m wondering if the deed of trust laws will be changed in the future to deter walk-aways.
Buying a kit to walk away from your home is like buying a kit to get a divorce or write a will for yourself. Something will always be wrong. If someone were considering the drastic move of walking away from their home, they would be much better off hiring an attorney.
A few points.
First, lenders don’t always require borrowers to pay the difference on the short sale. So by doing the short sale you can keep the foreclosure off your record. A written off debt will eventually disappear from your credit report, but the answer to: “Have you ever had a property foreclosed?” will always be yes.
Second, I’m not sure the tax implications are different with a short sale now with the new legislation that deals with taxes on housing, but I haven’t looked at that carefully (if at all).
Third, Jillayne, I think the non-recourse nature of many deeds of trust in California is part of the reason that housing prices are more volatile in California. I know someone that over 20 years go bought a house in CA that he couldn’t afford, knowing that it was non-recourse. The more volatile market leads non-sustainable prices and to more foreclosures.
Just Walk Away sounds like an idea focusing on making money and not helping us or the housing market as a whole. Selling someone on the idea that it’s ok to live in the house until you have to move out isn’t ok. The above mentioned are all great ways to look into what you should do in your own situation. I know from experience that credit repair can get a little greyt area as well depending on who runs the company. I hope there really making the people they serve happy!
Kenneth Harney has a piece in today’s Seattle Times on the future effects of people that due this, and how it will affect all their credit going forward, not just their ability to buy a house. The most notable thing claimed is that if you do this you’ll forever be given manual underwriting on a home loan transaction (because the forms ask if you’ve ever been foreclosed).
Kary, you beat me to the punch…I’ll add a link to the article. 🙂 Anyone who thinks they are going to walk away without damage to their credit is crazy. Fannie and Freddie are putting 5-7 year limits on people who have had a home foreclosed. FHA/HUD all ready has a “black list” that home owners can wind up on if they’ve had a foreclosure on an FHA loan.
Leanne wrote: “Anyone who thinks they are going to walk away without damage to their credit is crazy.”
Well, I’m sure it’s been said above, but anyone who pays these entities money for their advice is naive, at best (to put it politely).
No accountability anymore it seems. The reality is, walking away is easier and makes sense more often then not unfortunately. At least from what i have seen, thats been the case. Whether it is justified by a homeowner got put into a loan they cant afford or if the customer came across unexepcted hardships, or if the customer simply overextended themselves, whatever the case may be, the bottom line is can they afford to keep throwing money into something they cant afford and keep falling further and further behind in all their other bills, with not much hope of recovering and salvaging their credit anyway? walking away sounds like the obvious answer. I truly feel, although it may be getting easier to walk away, no one wants or intends too when it comes down to it. We are going through harsh lessons on life and the affects on the market have been brutal unfortunately. Mtg qualifications, were getting too easy and now is the reality check. lenders have closed doors, brokers closed shops, consumers lost/losing homes, credit being ruined, and moral being comprised due to unavoidable circumstances and as a result walking away. Who would have know a few yrs ago, we would we would have blogs on this topic today. .
#134, Kary, Rhoda said that, but I agree!
Here is my theory on part of the reason ‘why’ this current credit mess happened, comment as you will, this is just a discussion of ‘hmmm, that’s possible’.
We’re a very affluent society, more extremely so in the past 20 – 25 years. The birth of the computer industry has made many, many young people wealthy, far beyond what would have been normal had they started working in the 50’s, 60’s, 70’s or early 80’s. (Obviously the same applies to the decades prior to the 50’s), but let’s just use these years, since it’s not unrealistic to have someone who started working in the 50’s to be an older, but still very productive member of our business communities and corporations.
And, it’s not just the computer industry that has done well, we all have, beyond reasonableness perhaps? And, of course, it is our culture: THE AMERICAN DREAM. I’m not saying any of this is wrong, so just bear with me, I’m sort of thinking aloud here …
As society wealth grew, individual affluence allowed many market and financial managers and experts to retire early – and retire they did, at relatively young ages, many retiring between 1998 – 2005.
To replace them, we saw people in their 30’s & 40’s rapidly moving into positions at younger ages than typical for previous generations.
Maybe this unbalanced set of youth wasn’t such a great thing – the balance of experience vs. new ideas and energy just wasn’t there. Perhaps what was missing was the collective older, voices of reason.
The last few years have been stressful for me as an agent. Not stressful due to lack of clients – but stressful to see the insane price increases, the intense multiple-offers (the last ten years, really), and to hear advice being given by some agents to their clients that I just didn’t agree with. The words ‘prices never go down’ are a foreign language to me.
As a sellers agent, I worked to my sellers advantage, and saw agents representing buyers literally tell their buyers “don’t put a price cap on your escalation clause, it’s the only way we’ll get the house”. Well, naturally, they often did get the house — but as I told my buyers “You didn’t WIN if you paid too much for it.”
As a buyers agent, I would never recommend anything like that, and had many situations where my buyers did not get the house we were bidding on, because I was firm in helping them decide on a solid price that they would not go over, not for any reason. Prices most certainly do not go up forever.
So, do any of the rest of you feel that we lost an awful lot of talented and wise voices of experience due to the many early retirements our societal wealth created??
Walking away is not the answer if you want to buy a home again any time soon. It sounds simple and some may justify it as a way to “get back at the bank” but the one who walks away will wind up paying….literally. The “walker” might be smiling to begin with but I’ll bet after years of damaged credit, they won’t be smiling for long.
There is no easy solution.
Excellent article. Amazing to me how some individuals are so sharp to figure out ways to get money. Charge someone to show them how to walk away from a mortgage payment!! Brilliant!! Well, I love the last part of the article where it names many ways and places to get advise about mortgages. A point of interest to me the other day, I heard on the radio that out illustrious Governor signed a bill to spend a million dollars to educate people on home buying, yet the article I just read lists several ways to get information about home buying??
I have helped people obtain Home Buying information for years and they don’t pay anything. There is lots of information available that can help people avoid foreclosure, if they just look for it.
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It is amazing how someone will quickly capitalize on another’s misfortune! That is the American way!!!
Rather than give this bozo any attention, I would rather shift the attention to the stupidity of how the rescue package is being handled! The notion that you need to default on your loan before you can receive a rate reduction is a joke!!! Why didn’t we just take this 700 trillion dollars, split it up to all the tax payers and get out and jump start this economy!!! That certainly is just as effective of the remedies that have been put in place!!! It is amazing we do not have a brilliant mind out there somewhere that can develop a better alternative to this global economic crisis!!!