San Diego Housing Bubble News and Analysis

In 2001 nobody could have guessed the heights to which the market would eventually climb. I don't think it's an exagerration to say that in 2005 there were but few who could guess the depths to which this market could fall.

Zandi has been on fire for a while now. It's too bad that Moody's wasn't warned about this a few years ago so they could have marked all MBS to double junk. Oh wait, Zandi's employer is owned by Moody's, except he works for geek dept, while the the rating agency is run by their fraud dept. Why does Zandi still have a job, wouldn't be surprised if he is arrested for fraud.

The 1.5% drop is very conservative, maybe its per month.

I think he means a flat 1.5% the moment a home in the area goes into foreclosure.

Here's a question though: would you prefer people walk on their mortgages or the government bail them out?

Both have negative moral implications. People walking out will cause banks to make up the loss on new loans, while a bailout will tend to keep prices inflated.

Given that I have to say I'd rather see people walk. As banks raise rates to cover their losses, it should drive down demand even more.

Those people who walk away should be banned from any house purchase and any kind of borrowing including auto loans for 10 years or longer. They were already irresponsible to inflate the housing bubble back then and they should not be allowed to be irresponsible for any kind of financial responsibilities anymore from now on. Let them be renters forever.

While we're at it, can we ban any bank that did the various no-doc loans from being allowed to lend for 10 years or longer? They were equally irresponsible and complicit in the housing bubble inflation and clearly their executives and employees placed short term personal financial gains far above the integrity of their company and the financial sector as a whole, and therefore should not be allowed any kind of fiduciary responsibilities from now on.

It took both sides, equally motivated by greed, for this bubble to occur. Blaming the owners - most of whom aren't expected to be financial experts (unlike, say, the mortgage underwriters, investment bank and portfolio managers, etc) - for excercising a legal (in CA anyway) out of a contract that was written in arcane terms that most laymen would be unlikely to understand is hardly fair.

Yeah, the owners were partially at fault, and certainly they were trying to climb on the greed train. But most of them I doubt did so in bad faith - they were simply guilty of believing what they were told by people that they believed were much more knowledgable about the market than they were. It's the ones who SHOULD have been more knowledgable about the market (ie - the guys above, the realtors, the market analysts, the portfolio managers, etc) that should lose their jobs and their cushy incomes for being so utterly wrong (intentionally or otherwise) about the state of housing in the US. Either malfeasance (if they ignored it due to greed) or incompetence (if they simply didn't see it coming) as a reason for termination will do.

If there is evidence that all no-doc loans are bad loans, then that is a regulatory problem and a gray area for people to walk on. The government should pay attention to it and to correct it.

For owners, buying a house is a big deal. Of course one can always complaint about others not telling them in advance. These people are adults. But if one do not think they can afford a house at certain price yet they still buy it with all sorts of exotic loans, then I think these owners have more to be blamed. Further, once they hook on the financial responsibility, they have the obligation to commit the it until it ends. House price always goes up and down, it is like investment. If these people are buying a house to live in, who really cares about the up and down and the fluctuation of the market should not really affect their lives. But these days, buying houses or walking away from houses becomes a fashion and everybody is just doing what other people are doing without considering the consequences. These are the people to blame.

Besides, this is an issue of morality. If they think that it is easy to get a loan and easy to give up their responsibility, then they can do the same thing to a car loan or any other sorts of loan and they can walk away without further thinking. This attitude will create financial chaos not only to these people but to other people that are more financially responsible, such as tax payers like us.

Is there actually any data that draws out foreclosures of people that walked when they could pay the mortgage? That data would be interesting to see. I believe that some people will do it, but I am not so convinced that the majority of people upside down, but with fixed loans will just walk because they can. It's just not that easy to walk.

It looks very easy, don't pay the mortgage and one can go without even leaving the keys.

Here is the link about walk away:
http://www.marketwatch.com/news/story/no...
story.aspx?guid=%7B2C56C3A5-46BF-4050-A5F8-1442D8A11E31%7D

This sentence from the article really upsets me "It doesn't make sense to make payments on a house that isn't worth as much," one homeowner says. "It makes more financial sense for us to stop paying -- even if that means declaring bankruptcy."

Who the heck told him/her house price won't fluctuate? Are agents required to disclose market fluctuation in the buyers form? This is the morality problem I am talking about. Problem is that these people usually don't have equity in the loan. They walk freely without looking back and they only lose their credit tenure for a few years and that is it. these are the people that should not be allowed to borrow for at least 10 years.

Here's a cleaner link:
http://www.marketwatch.com/news/story/no...

I bet that a-hole bought with 0 down, zero doc too. The gov't and banks really dropped the ball over the last 5 years. THESE PEOPLE WOULD HAVE NEVER GOTTEN A LOAN 10 YEARS AGO. The banks would have laughed at them.

I couldn't imagine being 100k or so in the red. I would walk too, but only under these extreme circumstances. Let the banks take the hit for their crappy loans. If credit hadn't been so loose, the prices would have had a much harder time going up because almost all of us would have been priced out. Let the borrower take the 10 year hit to his/her credit. I knew I couldn't afford a 450,000 house. I don't know why they thought they could.

I'm considering walking away and I can afford the payments when my loan resets. I simply don't see any reason to stay in a home if it's worth 100K less than the original purchase price. Your conclusion that people who walk away are the ones who inflated the price is wrong. This whole mess is simply business. People are going to do what is best for them individually. When I bought the house there were contract terms. I'm simply exercising my options under the terms of the contract. I'll stop making payments and suffer the negative credit ramifications. Making the penalties for walking away more severe after the fact is wrong.

I don't think necessarily the no-doc loan is the problem. I used a no-doc loan when I bought my house in the 90's. But I did put 20% down and I wasn't about to walk away when the market tanked back then. I think if all these people had put money down, they might not walk so quickly.

The simplicity of your argument is hard to counter. You entered a contract with another party. Both parties agreed on the terms and signed off on them. If one party defaults, the other party has agreed that the compensation set out in the contract is acceptable. I have no problem with a person defaulting on a contract if the other party has agreed to and then receives the requisite compensation.

The lack of a required down payment is exactly one of the main reasons more people are walking away. The second, and equally important, is the interest only loans that were available. If either of these were required I doubt I would have bought and would have continued to rent and save. Because these types of loans were available I opted to essentially rent my home for 5 years and continue saving. I've been diligent about saving with the idea that I would pay off the 20% HELOC used as the pseudo down payment. Now I'm faced with a tough decision when my loan resets and I start paying principle on a home worth significantly less. In a typical market I would be able to pay off the second and refinance into a fixed rate. In this market I could potentially be trapped in a variable for the entire length of the contract in a home that could take 10 to 15 years to get back to the price it was originally worth. In other words if something unexpected happens in 15 years, job loss, injury, job transfer etc. I can't sell the home. I also have to take into consideration retirement and compare the value of the money saved by walking away and it's investment potential compared the value of the home once it's paid off. Frankly, as I analyze the situation right now everything points toward walking away.

People like the poster above and Paulsen who believe this type of decision is immoral scare me. I didn't do anything wrong and in fact made sure I could afford the payment based on the ceiling interest rates on the Mtg. with a projected interest rate on prime up to 13 percent for the HELOC if I wasn't able to pay most of it off. I can afford the home, but the inability to sell it or refinance it over a time frame of 10 to 15 years is something I didn't anticipate. It's important that the rules aren't changed after the fact so I can exercise my options.

The fact Paulsen attempts to attach some sort of moral code to real estate transactions is especially offensive considering he, his previous employer, or the banks he's now protecting as a civil servant never took morality into account during the run up. Banks made a ton of money and made choices with lending standards which was a risk. If I walk I'll have to pay the price for the risk I took when the contract was signed. The Banks should also have to pay the price for the risk they took.

Paulsen and the other government cronies are the ones who could make this even worse by bailing out homeowners or banks. Homeowners walking away is a function of market adjustment which will bring prices in line with fundamentals. Listen carefully during the elections. Dems will want to tax the innocent and bail out the individuals. Repubs. won't tax, but they will try to bail out the banks at the expense of the general public. We should be talking about this issue as well as the war instead of what O'bama's preacher or wife said. The fact MSM focuses on petty stuff like that is a reflection of our reality TV society (all about the drama)and one of the major problems with our country as a whole.

watuppp-
If you could go back to before you made your purchase, would you still go through with it?

I can see from your point of view why the decision to walk is basically a no brainer.

Then again, I think that's becoming symptomatic of our society's entitlement mindset, and growing inability to take responsibility for their actions both morally and legally.

As I said above, given the choice of bailout or homeowners walking the less of two evils is the latter. As a renter I want values to drop, but I'd rather see consumers and politicians make fiscally and morally responsible choices. Sadly these days that's far too much to ask.

We can probably all agree on the list of market conditions that helped form the "perfect storm" in inflating the real estate bubble and ultimately leading many to ask themselves the question "to walk or not to walk?" In my mind, however, the decision regarding walking is much more forward-looking than its opposite counterpart.

Certainly I think there are those that may attempt to justify/rationalize a walk-away by more than just chalking it up to a business decision but by also indicting "the system" for creating the environment that precipitated them putting on their walking shoes. So there is some backward-looking analysis by some. Nevertheless, I have little doubt that the primary issue is forward-looking - ie, "what will happen to me if I walk?" Using this rationale, you can make the argument that it is the non-recourse nature of CA purchase money loans and the historical lack of pursuit of judicial foreclosures/deficiency judgments by lenders as to recourse loans that cinches the decision to walk. Bottom line being that if a borrower was facing not only ruined credit but also a strong likelihood of a judgment against them for six figures, they would have to be more inclined to take that second job, rent out that room, etc, to try and salvage the situation. Recourse (or lack thereof) is THE issue with respect to walking away.

"I didn't do anything wrong"

Did you buy at the right time? No.

"Paulsen and the other government cronies are the ones who could make this even worse by bailing out homeowners or banks."

You really are screwed, you will walk away, lose your credit and later down the road have to bailout other losers like you.

Desmond,

When I said I didn't do anything wrong I was speaking legally and ethically. As I said if the politicians don't screw things up you and I won't have to bail anyone out.

As far as the personal attack you're obviously not a very mature person who spends a lot of time blaming others for whatever doesn't work out for you.

I believe it is unethical to walk - not holding your end of a legal and binding contract. The fact that banks typically don't do anything about it doesn't make it okay, but from my perspective people walking will end up benefitting me more than bailouts.

Again though, I think the fact that this is such a prevalent issue is indicative of our country as whole unwilling to accept responsibility for their own choices. If you can afford your home, even if you're upside down, why would you walk out? I think it proves you were a speculator, not just looking for a home.

But I am curious, if you could go back watuppp, would you still buy? Or would you wait.

There may be a good business opportunity in helping banks track down people who bail. Starting this fall on HGTV... The ARM Bounty Hunter.

0% down was one of the biggest reasons the housing market is in this mess. Prices would NOT have done up through the roof if the borrowers had to pay 10-20% down. 0% down meant they could afford a larger home...ie more expensive home. Developers and agents were all too ready to meet their demand.

"you're obviously not a very mature person who spends a lot of time blaming others for whatever doesn't work out for you."

I have been called worse, but I don't blame anybody for what dosen't work out for me. I have never walked away from any obligation that I have agreed to, nor will I. btw just to show how imature I am, did I tell you I walked away with over $500K when I sold my house in 2005 and started renting!

People walk away from contracts everyday. Have you ever heard of a "divorce"? It's a contract and typically people swear in front of their family,friends and god they will never break the contact, but they do. I doubt you call everyone who has divorced a "loser". Leases are broken every day. Athletes break or renegotiate their contracts every year. Business contracts are broken everyday. In fact Bear Stearns broke contracts when they couldn't meet their obligations. I don't understand why a mtg. is any different. Congrats on "never" breaking on contract, but that doesn't really mean a damn thing. You're not a better person or somehow superior because of this fact. You're just a sad little man who is angry because things didn't go the way you wanted.

Actually, stopping payment isnt actually 'breaking the contract'. The contract has terms and conditions to allow for such eventualities. Breaking the contract would be to stop payment and not give up the house. This is the reason banks can have the sheriff evict people for non payment.

If it were a signature/hand-shake loan with no recourse then I would say refusing to pay is immoral; but banks dont make those loans.

As long as no one lied on the documents which reportedly happened quite a bit, and as long as the bank receives the house in fair conditions which also reportedly doesnt happen sometimes.....then it is a legal contract. If it were not legal to walk away banks could prosecute. As it is, they cant. Banks can prosecute for fraud or destruction of property because that is illegal.

Granted morality isnt legislated. People have slightly different twists to the same general moral code. The law does provide an outline to our society's moral code.

I sold in 2003, have rented ever since and didnt specu-vest. This blog bashes the Casey Serin types, and i do too because he admited fraud....but for those who didnt the banks effectively and legally allowed people to bet on housing futures with free money. It's as stupid as someone giving away free chips to a casino and saying "anything you win, we'll split 50/50 but if you lose...don't worry about it"

Personally, i didnt do it, but i think some people who did are quite clever, especially those who cashed out and weren't caught with their hand in the cookie jar. What would be terribly immoral would be to change the rules midway through the game and penalize those people, and in effect help the bank, by raising the barrier to walking away. Now THAT would be drastically unfair to specu-vestors regardless of how stupid, crooked, slimy or other negative opinion people might have of them......

It is just as unfair to change the tax law and allow walk-aways to avoid tax on the loss. That is grossly unfair to all the other tax payers, and in fact to the banks as the barrier to walk was lowered to absolute zero.

There is no legal reason people can't walk away, and changing the law now would be immoral. Banks and CDO investors should take their medicine while the folks at Moodys, Fitch and S&P who rated paper AAA when a 7 year old could see it was garbage AND collected tens of millions in extra fees for doing it...those folks should go to jail; especially in a system which, as they well know, requires pension funds, fixed income mutual funds etc to invest in only AAA paper. What they did is completely immoral and perhaps illegal. Im still waiting for that elephant in the room to head to prision.............

Jasper

watupp,

only democrats have to honor their contracts. BS execs are moral upstanding repubs, they are moral be default and you are not. got it? And only loser democrats get divorced, divorce rate for dems is at least triple the repubs. loser dems, (that redundant, but I have to explain it to the stupid dems)

desmond,

So, you sold your home at an extremely inflated price and what if the owners are going to BK and getting evicted now? Why did you sell your home to dem, knowing full well they are stupid and poor and not going to honor their contract? Answer: Because you are going to buy it from foreclosure at 35% off. Good job, but if you care about CA, the least you could do is buy that family one-way tickets to new york from your 500K profit.

Duck and coop,

Where were you guys in the early 90's? We had people walking away, S&L's going awash and tax dollars bailed out Texas and CA S&Ls. Its too bad you guys didn't become the CEOs of WAMU, Citi, Chase, WFC, etc. CA had non-recourse loans in the 90s and still does. If these execs weren't stupid dems they would NEVER had made loans in CA with non-recourse and the state would have been forced to change laws. [For Example, the former CEO of Fannie, Franklin Raines is 100% dem and probably a good friend of Obama]

So I ask anyone here, WTF were these banks doing by making any loans in this people republic of CA? Didn't they remember that dems in 90's in CA didn't honor their contracts? If anyone can give a straight answer or really hilarious one, I'll buy em a smooth drink.

I have no problem with watupp walking away. But change the laws to make home loans recourse loans for anyone who walks away once. Increase the time it stays on your credit record from 7 to 10 years. Prevent Fannie Mae from buying loans from people who defaulted.

I think it should serve as a deterrent against defaults and irresponsible borrowing.