How did we get here?

[contraman]

With a little "reverse engineering" we come to what has been the culprit in creating a housing bubble over the past 7 years, that by the way, supercedes any other RE bubble in history.

Between every buyer/speculator of RE and the seller there is the vehicle of mortgage financing.

The financing has been the "holy grail" and the enabler of this bubble. Period. I can prove this point by saying that if the buyer/speculator did not have these tools at their disposal then RE would have appreciated at a more normal rate than what we have seen here.

Here is what happended:

2001 to 2002, The Fed begins lowering rates and enticing the consumer to buy homes, TV's, etc.

At this time, the consumer takes the bait and this in the form of short term loans(ARMS)recommended by Mr.Greenspan, mostly with 10% down, good credit scores, low DTI ratios, FULL DOCUMENTATION OF INCOME, sufficient asset reserves to stave of emergencies, and a fully amortized loan (remember those).

At the same time, a zillion mortgage bankers are popping up everywhere seeing the opportunity in the industry. Affordability has reached an all time low in San Diego so what happens next to keep the bubble blowing….an explosion of new financial vehicles become available to go to the next levels.

These are 100% financing, Interest Only Loans, with marginal credit, and minimal reserves. This affords the market to keep appreciating as the payments are lower for the buyer (not really).

Then the next level in 2003 through 2006 is the availability of LIAR LOANS, No reserve requirements, NEG AM LOANS, higher DTI allowances, etc. This was the icing on the proverbial cake…

I would venture to say if you were required to prove your income, have sufficient reserves, put at least 10% down, carry a fully amortizing loan, and have decent credit, this bubble would have been half of what it has shaped up to be…..even with lower interest rates….

 

 

 

 

 

 

 

 

 

[GoUSC]

And now…the consumer has to continue their debt spending because all their income is going to pay their mortgage. This months consumer revolving credit number is up 9.75% (a new record).

[GoUSC]

And now…the consumer has to continue their debt spending because all their income is going to pay their mortgage. This months consumer revolving credit number is up 9.75% (a new record).

[4runner]

Don’t feel too bad for the borrowers. Everyone who put 0% down has a put option on their home. They only lose 1/3 of the real loss– in the tax on forgiveness of indebtedness income.

At some point, borrowers who are underwater are going to realize that forgiveness of indebtedness income is still income.

What truly amazes me is how legions of penny-ante frauds were able to dupe some of the brightest people on Wall Street…

[4runner]

Don’t feel too bad for the borrowers. Everyone who put 0% down has a put option on their home. They only lose 1/3 of the real loss– in the tax on forgiveness of indebtedness income.

At some point, borrowers who are underwater are going to realize that forgiveness of indebtedness income is still income.

What truly amazes me is how legions of penny-ante frauds were able to dupe some of the brightest people on Wall Street…

[DaCounselor]

“At some point, borrowers who are underwater are going to realize that forgiveness of indebtedness income is still income.”
__________________________

There is an awful lot of misinformation out there on this issue. For instance, with a non-recourse loan in CA, when the lender forecloses there is no debt cancellation income. Therefore there is no tax. And in some situations (like when a borrower files for bankruptcy or is defined as being insolvent) they may not be taxed for debt forgiveness on a recourse loan.

Anyone who is facing this type of situation needs to consult a knowledgeable tax attorney and accountant to get the straight story and prepare the most cost-effective strategy.

[DaCounselor]

“At some point, borrowers who are underwater are going to realize that forgiveness of indebtedness income is still income.”
__________________________

There is an awful lot of misinformation out there on this issue. For instance, with a non-recourse loan in CA, when the lender forecloses there is no debt cancellation income. Therefore there is no tax. And in some situations (like when a borrower files for bankruptcy or is defined as being insolvent) they may not be taxed for debt forgiveness on a recourse loan.

Anyone who is facing this type of situation needs to consult a knowledgeable tax attorney and accountant to get the straight story and prepare the most cost-effective strategy.

[PerryChase]

I’ve yet to hear of anyone getting a 1099-C for cancellation of debt.
Unless borrowers get a tax statement, they won’t be paying any taxes.

I think that homeowners will be walking in droves. Once people hear it’s OK to do so, they’ll be saying bye-bye to the lenders.

[PerryChase]

I’ve yet to hear of anyone getting a 1099-C for cancellation of debt.
Unless borrowers get a tax statement, they won’t be paying any taxes.

I think that homeowners will be walking in droves. Once people hear it’s OK to do so, they’ll be saying bye-bye to the lenders.

[contraman]

Yea. I second that. I have a buddy who bought 8 foreclosures in Michigan before the auto bust, refied them, and stripped all the equity out and then couldn’t sell them. He stopped making payments, short saled them, and walked away with $250,000. He will use his wife’s credit for the next few years. Not a bad little profit. He did not receive any 1099-C’s taxable for the losses…..

Sincerely, Contraman

[contraman]

Yea. I second that. I have a buddy who bought 8 foreclosures in Michigan before the auto bust, refied them, and stripped all the equity out and then couldn’t sell them. He stopped making payments, short saled them, and walked away with $250,000. He will use his wife’s credit for the next few years. Not a bad little profit. He did not receive any 1099-C’s taxable for the losses…..

Sincerely, Contraman

[DaCounselor]

“I think that homeowners will be walking in droves. Once people hear it’s OK to do so, they’ll be saying bye-bye to the lenders.”
_______________________________

This is a real possibility, PC. Especially the folks with non-recourse 100% loans that get way upside-down. And the bagholders will be the servicers/lenders/investors who signed-off on these very risky deals. The 2nds would really get murdered.

For the folks with recourse loans, we may see a trend develop in judicial foreclosures where lenders (particularly those battered HELOCs) go for the deficiency judgment instead of watching a couple hundred grand blow away.

A big red gash on the credit report is not ideal, but at some point I think some folks will just take the hit. They will do their own cost-benefit analysis. Every man has his price.

[DaCounselor]

“I think that homeowners will be walking in droves. Once people hear it’s OK to do so, they’ll be saying bye-bye to the lenders.”
_______________________________

This is a real possibility, PC. Especially the folks with non-recourse 100% loans that get way upside-down. And the bagholders will be the servicers/lenders/investors who signed-off on these very risky deals. The 2nds would really get murdered.

For the folks with recourse loans, we may see a trend develop in judicial foreclosures where lenders (particularly those battered HELOCs) go for the deficiency judgment instead of watching a couple hundred grand blow away.

A big red gash on the credit report is not ideal, but at some point I think some folks will just take the hit. They will do their own cost-benefit analysis. Every man has his price.

[GoUSC]

This sounds a lot like the early nineties when people in California just dropped the keys to their house in an envelope and mailed it to the lender.

[GoUSC]

This sounds a lot like the early nineties when people in California just dropped the keys to their house in an envelope and mailed it to the lender.

[Author]

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