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10 Million Homeowners Have Incentives to WalkUser Forum Topic
Submitted by patientlywaiting on October 1, 2008 - 12:43am
I believe that Martin Feldstein is on to something. He believes that individuals will have their own self-interest in mind and walk as prices decline, unless the government arrests the decline in prices. A long recession is coming according to Felsdtein. 5 years? 10 years? He would not answer. * http://www.ft.com/cms/s/0/29e69ebc-736f-... Because of the decline in house prices that has already occurred, more than 10m home owners now have mortgages that exceed the values of their house. This is 20 per cent of all homeowners with mortgages. For half of that negative equity group, the debt exceeds the house value by more than 20 per cent. If house prices fall another 15 per cent, negative equity mortgages will rise to 20m. Negative equity mortgages are a big source of instability because US home mortgages are generally “no recourse” loans, implying that if an individual defaults on his mortgage the creditor can take the property but cannot claim other assets or income to pay the remaining loan balance. The large and growing number of homeowners with negative equity will increase the rate of defaults and foreclosures and therefore drive the downward spiral of prices. Defaults are likely to accelerate as the ratio of the debt to the home value rises. While a homeowner who owes 10 per cent more than the value of a house may continue to service the mortgage, when the excess debt reaches 30 per cent he is much more likely to default. Each such default puts downward pressure on existing prices, increasing the likelihood of further defaults. It is this spiral that threatens the American economy and the global financial system. * Very interesting interview on Charlie Rose. * http://www.charlierose.com/shows/2008/09...
Walk aways will be the real killer. Unemployed, have to relocate or just plain pissed-off that Wall street was bailed out by Washington and they werent. Who wouldnt walk away. If nothing more than a political statement...Let's all get ours!! Wall Street bought Washington and got theirs! Set the market free. Bring the pain!! Has anyone ever read the fine print on principal write downs for current reworks, fdic run banks like indymac and the proposals floating in the legislature. They aren't what you think, they don't forgive the loan, they "write down" the loan for purposes of determining the payment but they don't actually forgive it, when you sell, transfer or refi, they get that back. It's a modified way to contnue a teaser rate or having a silent partner. The FHA sponsored stuff actually gives the forgiver their original money back and a cut of any profit. They also prohibit helocs, forever.
It will keep a roof over your head but that is about it. Let's see, you pay someone a mortgage payment and when you leave, you get nothing, that smells a lot like renting except you get a tax deduction yet pay a higher payment over rent. Here is a scenario, FB pays 600k zero down, neg am, balance is 625 and enter some write down program. Their mort should have gone from 2800 to 5000 but the rework bases the loan on the current value of 350k and they pay about 2500 piti, usually .38 of their income in typical reworks. Then after ten years, they have paid down about 50k, price comes back to 650, after realtor fees and closing they clear 600, principal is 300k and rework holdback is 275k, lender gets the 575k in it's entirety and they walk with 25k for ten years of paying too much for rent and all the maintenance. That is if it gets back to 650k. If it goes to 750k, bank gets half of the 100k profit, which offsets ten years of no interest on the 275k and the borrower walks with 75k but houses cost 750k. It would actually be better to walk away or buy a place for 350k, walk away from the old and when and if things return just like the previous scenario, you are up 250-350k after fees. Or just walk away, rent for a year or two, buy a 350k house with fha 3 1/2 down and reap the actual rewards. Reworks are debtors prisons, much better for the lender than the fb, and that is why it wont work. So don't get your panties in a bunch about all this forgiveness. Thank you for posting this! I am okay with this type of mod. as it does not reward poor decision making or fraudulent behavior. It will motivate a distressed owners to sell, or walk.... I agree with these kinds of modifications (actually wrote a series of letters to legislators, Federal Reserve, Treasury, Barney Frank, etc. about a year ago with this recommendation). Why? Because the borrowers should not be able to STEAL hundreds of thousands of dollars from the lenders without any repercussions. Additionally, lenders will be FAR more prudent in the future if they are expected to take the risk of these losses in the event the FB sells at a price that is lower than the original loan. Lending standards would rightly be tighter, and prices (which are determined by future buyers, not current sellers) will drop to affordable levels. My only concern is that the lenders have been hesitant to go along with this principal reduction program, and I believe this is the REAL reason behind the bailout. According to the bailout bill, Treasury is allowed to modify mortgages -- including principal reductions -- and I fear it will be the taxpayer, not the lender, who will end up eating the losses. Both lenders and borrowers were at fault for their current situation, and both should have to suffer the consequences of their actions. This is ultimately why I am opposed to the bailout. They will try to make both borrowers and lenders whole at our (responsible taxpayers') expense. I heard on CNBC this morning that ten different industry groups got together and signed a letter to Congress stating the urgency to supplement/augment the IndyMac/FDIC home loan rework programs. They are stressing that without additional monies to actually support home prices, the bailout will not accomplish much, as home prices will continue to decline. CNBC commentators actually agreed and stated they believe more home owner bailouts/house price stabilization provisions are on the way. Is anyone hearing the same crap? I guess 700 billion isn't enough of our tax dollars. We are now going to get gouged even more, to support housing prices and dumb ass purchasers. Brilliantly said, CA Renter! You hit the nail on the head. Furthermore, I suspect all these restructuring of loans ideas will fall prey to the same thing that Greenspan's monetary policy did: the dreaded unintended consequences. What cans o' worms will this open? What worse hell will this bring upon us? Perhaps you consider falling asset prices a bad thing, but many of us think it's the best thing that could ever happen to this country. A tip of the hat to you, sir. Whats really going to happen? 100% unemployment? Armageddon? Nope. Those of us that provide valuable products and services will always be able to find employment. And you know what? We will be able to enjoy deflated assets at bargain prices as the fruits of our labor. Sounds like paradise to me, personally. Guys, I really would like to know why the solution is not partly renting en masses. If the banks and MBS service agents, or the government in their stead (after buying up the mortgages) rent out the foreclosed properties (first offer to the foreclosee and then anyone), the downward spiral could be halted before it seriously undershoots and hence prevent more damage to the financial economy/fiscal position (the latter two being the same thing these days!). Banks and MBS agents don't rent in practice so this is something the government can do. In most areas , the rent will cover the cost of carry for the mortgage assets (written down) that the tax payer has acquired because rental yield in the higher foreclosure areas are good (some extreme exurbs exempted perhaps as renters may be scarce). Thanks Graham Btw, temeculaguy is right (at least for the moment). Everyone I know that has gone through a short sale, foreclosure or bankruptcy regrets that they bought. Many are jealous of my happy renting, cash and good credit. Nobody feels like they were "bailed out" and all will face severe hardship down the road. Made all the worse, of course, by the illusion of wealth they once possessed. The only ones that are being bailed out are few wall street types with too many toxic assets on their books. More and more it looks that this has to be done to free up the credit markets. Here's the homeowner "Bailout" for those of you upside down in your property. Stop paying the mortgage and save the money for a new place. I cant be the only one who thought of this. Banks are so hesitant to take action that you could stay in your house for over a year, rent free. Maybe longer. But you'll need to protect your credit rating somehow. Maybe the wife gets arms length from the house and keeps her FICO in good shape? Not sure about this part. Hey, if you have a HELOC, drain it out to a bank account and have that much more to buy with. peter, hopefully your plan was tounge and cheek, that is not a path that a piggy would take. We can all do that, we can also all rob a bank, we can swindle old ladies, but we don't. We are proud economic geeks who enjoy playing and winning the game in a way that we can look at ourselves in the mirror or our children in the eyes and be proud. We consoled each other while we rented or stayed in small homes, refusing the toxic mortgages, knowing affordability would return and in the end, our pride in our home will be greater than the neg am zero down borrower, because anything good requires sacrifice to enjoy. O.K. I'm off my soapbox I did hear today from a lender that fannie/freddie/fha and others are onto the scam of buying a new home at todays prices under the premise that you rent out the current upside down house and then after moving, letting the upside down house go, with a low and protected interest rate on the new house and no need for a good credt score anymore. Supposedly they are denying the loans en masse when it involves renting out the current home unless there is equity in it. Also, there is no way to get the wife "at arms length" even if the house and loan is only in one spouse's name, community property and community credit. You could divorce her on paper then go into default as an individual but my guess is that few women will agree to a paper divorce to preserve credit because they will suspect you are just looking for an easy divorce with no court battle or alimony. Since alimony can never be renegotiated after the ink is dry (child support can but not alimony or asset division) I imagine there will be a few news stories of one spouse duping the other and you won't see this happen very much after that. Come to think of it, it is kinda ingenious. My comments are very much meant to be a joke. But, when the crap really hits the fan for people, they need to protect their families. Full stop. Also, there is no way to get the wife "at arms length" even if the house and loan is only in one spouse's name, community property and community credit. You could divorce her on paper then go into default as an individual but my guess is that few women will agree to a paper divorce to preserve credit because they will suspect you are just looking for an easy divorce with no court battle or alimony. Since alimony can never be renegotiated after the ink is dry (child support can but not alimony or asset division) I imagine there will be a few news stories of one spouse duping the other and you won't see this happen very much after that. Come to think of it, it is kinda ingenious. Come to think of it, that might be good advice for that divorcing couple of the other thread ;) I agree with Peter, it's not what people do at the individual level, it's what upside-down homeowners will do on the aggregate will count. They will create their own bailouts. Temecula guy wrote: TG, what about the following scenario: A person has a primary residence (that has negative equity), he then tries to buy another house as an investment property. He is willing to put down 30% & pay the higher interest rate that comes with investment properties. How do lenders treat these cases ? There's no easy solution but McCain's proposal is garbage. All it does is bail out the lenders. Let/encourage the upside-down homeowners to walk. In this economic environment it's (in my opinion) quite likely that housing prices are going to fall until they reach their intrinsic value, i.e., where they "pencil out" as rental properties. Although the prices may "overshoot" there are still lots of people with money that will, in one way or another, buy these houses and turn them into rentals. This will form the new bottom for houses and where they go from there depends on how incomes increase over time. A better solution would be to sponsor/underwrite lower interest rate loans for qualified buyers, or for refinance, or for investors. One effect of this is that it would increase the price at which the properties "pencil out" and arrest the price fall sooner and at a higher price level. It's also inherently fairer in that it would also reward responsible homewoners that are fiscally responsible (e.g., those with high down payments, that did not cash out refi, pursued 15 year loans, improved the property). I see more foreclosures on the horizon. * About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30 percent in some areas, roughly 12 million households, or 16 percent, owe more than their homes are worth, according to Moody's Economy.com. |
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Um, wouldn't it be good for the economy if everyone spent less on housing and more on consumption?
No kewp, come on. A house is most Americans' biggest investment, therefore they should have to spend way more than they can afford on one, and then that house should appreciate disproportionately so they can feel rich, take out equity and then spend more on consumption.
Afterall, it's not their fault prices are going down, they're innocent victims.
/sarcasm (in case it wasn't blatantly obvious)
Ahh, moral hazard everywhere one looks. I guess if they can do it on Wall Street, they can do it on main street. What about the car loans? Credit cards? Well, may need to live on the cc, so better pay those. Park the car 3 blocks away so the repo man cant find it. Or repo cant find you when you walk away with no forwarding address and a different job, or no job.
It's coming.
I think the only way to stop the walk-aways is to modify the loans into very good fixed rates and write down the principal balances. I understand the moral hazard argument but at this point in time my response is "so what?" Even if a homeowner has the ability to pay the existing mortgage, it's going to come down to WILL he pay, not CAN he pay. If he ruthlessly defaults, the end result is the same. Who cares at this point?
I cannot imagine that it will be more cost-effective to go through the foreclosure process just to end up selling the house as a discounted REO for the same price that you could have written down the balance to and kept the homeowner in the home. It's a bad business decision to forego the mod. I understand the complications due to the securitization of these loans, but the govt's purchase of this paper may resolve the issues. They do give a nod to this in Sections 109 & 110 of the new bill. We'll see I guess.
I cannot imagine that it will be more cost-effective to go through the foreclosure process just to end up selling the house as a discounted REO for the same price that you could have written down the balance to and kept the homeowner in the home. It's a bad business decision to forego the mod. I understand the complications due to the securitization of these loans, but the govt's purchase of this paper may resolve the issues. They do give a nod to this in Sections 109 & 110 of the new bill. We'll see I guess.
Banks would essentially be forced to write down every loan made between 2000 and now for it to be fair, and that still doesn't address the fact that I knew I couldn't afford a house, so I didn't buy. What compensation should I get to make it fair? Should I get $100,000 check from the government?
"Banks would essentially be forced to write down every loan made between 2000 and now for it to be fair, and that still doesn't address the fact that I knew I couldn't afford a house, so I didn't buy. What compensation should I get to make it fair? Should I get $100,000 check from the government?"
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I certainly don't have the numbers at my fingertips but my best guess is that nowhere near every loan made since 2000 is upside down in relation to the home value. Not even close. So there's that.
As for what is fair for you, trust me that is the furthest thing from anyone's mind but your own. Addressing what is fair for you is not going to solve the problem. If you feel like it is unfair that other people are going to get bailed out and you are going to get a big fat 0 my advice is to get used to it because life is just not fair.
What we have here is a truly global economic crisis that has been triggered by defaulting loans. There is plenty of blame to go around but make no mistake, if the powers that be do not address the coming wave of future defaults then things are get to get much much worse. I continue to maintain the mindset that the best solution is to stop the defaults to the greatest extent possible via mods. What's "fair" to everyone is really out the window at this point.
I cannot imagine that it will be more cost-effective to go through the foreclosure process just to end up selling the house as a discounted REO for the same price that you could have written down the balance to and kept the homeowner in the home. It's a bad business decision to forego the mod. I understand the complications due to the securitization of these loans, but the govt's purchase of this paper may resolve the issues. They do give a nod to this in Sections 109 & 110 of the new bill. We'll see I guess.
Banks would essentially be forced to write down every loan made between 2000 and now for it to be fair, and that still doesn't address the fact that I knew I couldn't afford a house, so I didn't buy. What compensation should I get to make it fair? Should I get $100,000 check from the government?
Agreed. All of us that were fiscally responsible should receive some average "model" amount based on what zip code we live in.
Then, for every single person that wants to stay in their house, at a minimum they should pay interest (12%) on the loan write down amount.
And, what about all those people that got loans fraudulently? Should we just let them stay in their homes on our tax dollars? Bad idea...
What we have here is a truly global economic crisis that has been triggered by defaulting loans. There is plenty of blame to go around but make no mistake, if the powers that be do not address the coming wave of future defaults then things are get to get much much worse.
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The "crisis" was not triggered by defaulting loans, but by the origination of those guaranteed-to-fail loans in the first place. Falling housing prices are NOT the problem; falling prices are the solution to too much debt and the resultant artificially-inflated prices.
Perhaps you consider falling asset prices a bad thing, but many of us think it's the best thing that could ever happen to this country.
We've been trying to fake our way through the falling wages/inflated prices stagflation for too long. Best to have debt destruction (via foreclosures and bankruptcies) and deflation so we can get back to REAL growth, not this credit-driven, artificial eCONomy where we just pass paper back and forth.
Jobs will be lost and asset prices will tumble, but that is the pain we deserve for allowing Greenspan to paper over and inflate our way out of every recession that would have kept the economy in check.
How I feel about asset devaluation is irrelevant. Home values are going to drop until they are done dropping. The issue is how to minimize the collateral damage of loan defaults. These properties are going to get marked to market one way or another. The creditors can mark to market asap with the current borrower staying put and get a performing modified loan working, or the creditors can endure zero cash flow on a defaulting loan for 6-9 months, incur foreclosure expenses, and carry the property (mello-roos, taxes, etc) until they eventually dump it in an REO fire sale (probably for less than what they could have re-written the original loan for).
In a free market, it matters very much what the buyers feel is appropriate or fair. As they are the people that make the part of the market that matters. They spend the money. If the govt screws with the loans or makes it so the lenders screw with the loans, they better keep the potential buyers in mind. Because if buyers feel it's a lousy deal, there goes your market. It will hang in limbo. And will still eventually come down.
Lenders are avoiding any changes right now because it's all bad for them to recognize any of it. So delaying tactics are the order of the day. Looking the other way until a bailout or something changes things for the better. Or perhaps until management can leave the positions.But nothing except a market correction will do this. They may somehow inflate out of it, but that's still a correction in real money.
DaCounselor,
I can certainly understand your argument. It's too late at this stage to worry about fairness and moral hazard. But some people are going to fume over this. I'm not even talking about "responsible renters". I'm talking about those homeowners who bought at the top and put sizable downpayments. They will see their neighbors' loans written off, while their downpayments vanish.
In this bizarro world we're living in, zero-down buyers have the upper hand; 30% down buyers are screwed.
______________________________
I certainly don't have the numbers at my fingertips but my best guess is that nowhere near every loan made since 2000 is upside down in relation to the home value. Not even close. So there's that.
As for what is fair for you, trust me that is the furthest thing from anyone's mind but your own. Addressing what is fair for you is not going to solve the problem. If you feel like it is unfair that other people are going to get bailed out and you are going to get a big fat 0 my advice is to get used to it because life is just not fair.
What we have here is a truly global economic crisis that has been triggered by defaulting loans. There is plenty of blame to go around but make no mistake, if the powers that be do not address the coming wave of future defaults then things are get to get much much worse. I continue to maintain the mindset that the best solution is to stop the defaults to the greatest extent possible via mods. What's "fair" to everyone is really out the window at this point.
DA makes a good point in the sense there is a snowball rolling downhill and accelerating. The only way to stop the snowball as DA points out is to stop the defaults via mods now, or at least reduce them. Otherwise, there is no doubt that the snowball rolling downhill will accelerate the downward spiral turning into an avalanche of defaults and foreclosures, with alot of collateral damage. It is too bad that the Senate passed the bailout without addressing this fundamental issue, but then again, wall street rules the senate so no surprise with that.
thanks for your insight, DA.
Has anyone ever read the fine print on principal write downs for current reworks, fdic run banks like indymac and the proposals floating in the legislature. They aren't what you think, they don't forgive the loan, they "write down" the loan for purposes of determining the payment but they don't actually forgive it, when you sell, transfer or refi, they get that back. It's a modified way to contnue a teaser rate or having a silent partner. The FHA sponsored stuff actually gives the forgiver their original money back and a cut of any profit. They also prohibit helocs, forever.
It will keep a roof over your head but that is about it. Let's see, you pay someone a mortgage payment and when you leave, you get nothing, that smells a lot like renting except you get a tax deduction yet pay a higher payment over rent. Here is a scenario, FB pays 600k zero down, neg am, balance is 625 and enter some write down program. Their mort should have gone from 2800 to 5000 but the rework bases the loan on the current value of 350k and they pay about 2500 piti, usually .38 of their income in typical reworks. Then after ten years, they have paid down about 50k, price comes back to 650, after realtor fees and closing they clear 600, principal is 300k and rework holdback is 275k, lender gets the 575k in it's entirety and they walk with 25k for ten years of paying too much for rent and all the maintenance. That is if it gets back to 650k. If it goes to 750k, bank gets half of the 100k profit, which offsets ten years of no interest on the 275k and the borrower walks with 75k but houses cost 750k.
It would actually be better to walk away or buy a place for 350k, walk away from the old and when and if things return just like the previous scenario, you are up 250-350k after fees. Or just walk away, rent for a year or two, buy a 350k house with fha 3 1/2 down and reap the actual rewards. Reworks are debtors prisons, much better for the lender than the fb, and that is why it wont work. So don't get your panties in a bunch about all this forgiveness.
[quote=DaCounselor What's "fair" to everyone is really out the window at this point.
I always loved these quotes. Especially from my old coaches. Basically it is a "FU, I dont care and I have all the power and you will suffer because I am mad/scared/pissed/an asshole."
I spoke to one of the accounting people today at my company. She was terrified. I asked why, and she didnt know other than her 401k has lost alot of money this year. She is an accountant, she should undersand this. But she doesnt and doesnt want to. She is down and pissed and wants it to stop. Welcome to "FU, I dont care!"
God bless fear, it is the best motivator I know.