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Guest Post: Why Do The Rich Default on Their Mortgages? Because In California and Arizona, They Can

Tyler Durden's picture




 

Submitted by David Fiderer

Why Do The Rich Default on Their Mortgages? Because In California and Arizona, They Can

Why throw away good money after bad? It’s a frequently-asked question in the five most expensive real estate markets in the mainland United States--San Jose, San Francisco, Orange County, Los Angeles and San Diego--where over a million home mortgages are under water. That’s nine times the number in all of New York State. In fact, that’s more than 30 other states combined.

“If you default, your credit score will take a hit,” advises Jane Bryant Quinn on CBS MoneyWatch. “But as long as you pay all your bills on time, both before and after the default, your walk-away will become less important after a couple of years.”  No one is counting on a strong recovery of home prices any time soon.  Even during normal times, real estate markets go through multi-year cycles. The value of a typical home purchased in Los Angeles in 1990 fell by 25% within five years; by 2000, the cumulative home price appreciation after a decade was exactly zero.

Of America’s 11 million homeowners with negative equity, a majority live in the four sand states where the real estate bubble was concentrated--California, Florida, Arizona and Nevada. Over three million live in California and Arizona, where a borrower can hand over the keys to the lender and walk away. These are two antideficiency states, where the lender has no recourse beyond the collateral property.  So of course it makes sense that wealthy homeowners would default on their mortgage loans. They live where in places home prices were the highest and the fell the steepest, and where the consequences of default are the least onerous. The New York Times overlooked the “where” and “why” of the story.

The wealthy are also less dependent on consumer credit. They can buy cars for cash; and charge expenses on their debit cards. So for them, it’s easy to make a fresh start. But the mortgage debt doesn’t go away. It’s simply pushed off to the banks insured by the Federal government. The rest of us pick up the pieces.

In Phoenix, total home mortgage debt exceeds the market value of all homes with mortgages. The 58% of homeowners with negative equity are seriously under water, while the remaining 42% with positive equity worry about continued deterioration of their home values. (CoreLogic’s disclosures do not include homes with no mortgage.)

"Even if the economy is the, quote, No.1 issue,” said John McCain when he was running for President in January 2008, “the real issue will remain America's security.  And if they choose to say, ‘Look, I do not need this guy, because he's not as good on home loan mortgages,’ or whatever it is, I understand about that, I will accept that verdict,” he told Florida voters. “I am running because of the transcendental challenge of the 21st century, which is radical Islamic extremism." Since then, Phoenix home prices have fallen by 38 percent. No wonder he wants to talk about immigration.

 

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Fri, 07/16/2010 - 08:28 | 473098 God
God's picture

Why Do The Rich Default on Their Mortgages?

There is no shame in playing the game...

Fri, 07/16/2010 - 08:38 | 473113 VK
VK's picture

But God, you told us it is easier for a camel to go through the eye of a needle than for a rich man to go to heaven. Have you been lying to us for 2,010 years?

Fri, 07/16/2010 - 09:04 | 473157 Oh regional Indian
Oh regional Indian's picture

VK,

Bin had bad.

ORI

http://aadivaahan.wordpress.com

Fri, 07/16/2010 - 09:51 | 473222 malek
malek's picture

As they say in Germany:

"Ist der Ruf erst ruiniert, lebt sich's gänzlich ungeniert."

roughly translates to

"Once you ruined your reputation, one can live completely uninhibited."

Fri, 07/16/2010 - 08:29 | 473099 snowball777
snowball777's picture

Ahhh....but their HELOCs...that stink will follow them all the way to Rodeo.

Fri, 07/16/2010 - 08:42 | 473123 aerojet
aerojet's picture

"Rich" and "HELOC" don't jive with me.  

Fri, 07/16/2010 - 08:44 | 473127 snowball777
snowball777's picture

Rich people lose jobs (Hi Fab Fab!!!) and desperately try to continue the affect of wealth all the time, except they call it "a cash flow problem".

Fri, 07/16/2010 - 20:00 | 474688 FEDbuster
FEDbuster's picture

As my brother used to call himself a "low cash flow dude".

Fri, 07/16/2010 - 09:37 | 473208 Eternal Student
Eternal Student's picture

Exactly. Add to this the fact that people who have refi'd also lose their no-recourse status, which is probably most mortgages (given how much activity there's been to grab the lower interest rates).

The article also left out the reason why no-recourse originally came about. There was a time when people thought that it was wiser to let people get back up on their feet, and give them a chance again. With no-recourse and the way the debt-collection agencies are going, the general theme now is to keep people in debt forever as debt-slaves to the Bank.

Fri, 07/16/2010 - 09:53 | 473224 FrankIvy
FrankIvy's picture

This was the whole point behind the 05 bankruptcy revision.  The main change there was that 50% of the population could be forced into chap 13 repayment rather than the fresh start promised by chap 7.

Best financial advice I ever gave was to my neighbor, who "wanted to do the right thing," and was going to file chap 13 even though he qualified for 7.  I earnestly told him to get his head out of his ass.  CCCs charging him 19% and he wanted to "do the right thing" and pay back his bills.

A few months of hell, some public shame, and man they were good as new and happier than ever.

Then they bought a car.

Ayyyy.

Fri, 07/16/2010 - 10:12 | 473257 Calculated_Risk
Calculated_Risk's picture

Thats what bankruptcy is for.

Fri, 07/16/2010 - 12:50 | 473709 bonddude
bonddude's picture

or Pittsburg, yo?

Fri, 07/16/2010 - 08:31 | 473104 TooBearish
TooBearish's picture

AUDJPY cross! holy crap ES  divergence #12

Fri, 07/16/2010 - 09:10 | 473174 Alethiometer
Alethiometer's picture

Hope you were riding the 300 pip EURUSD move this week

;)

Fri, 07/16/2010 - 08:32 | 473106 Kat
Kat's picture

The New York Pravda is only interested in fomenting a class war.  So, of course, they are going to skip the part about incentives.  The antideficiency law is the problem.

Not surprising.  All the government does is pass laws that create more problems than they solve.

 

Fri, 07/16/2010 - 08:39 | 473117 pan-the-ist
pan-the-ist's picture

I'm sorry, why is it a problem to foreclose on a house again?  If the asset is not worth the debt, why would you keep it?  Is it your duty to your fellow man to remain a wage slave?  What's wrong with you?

Fri, 07/16/2010 - 09:43 | 473213 MachoMan
MachoMan's picture

So, what should the mortgage companies have done?  Well, they could have charged higher rates given the lack of recourse...  could have demanded additional collateral...  it's not like their hands were tied.  If certain states want to be less competitive on loans, that's their business.

We always end up back at the same issues...  can companies accurately assess risk?  Do the companies issuing the loans keep any skin in the game?  Can we ensure appraisers are objective?  If an overarching company is going to purchase all the bad loans, can we ensure they are purchased from initial lenders at a fair price and subsequently liquidated/sold at a fair price, upon proper auction terms.

I also fail to understand the stigma associated with defaulting on a loan held by a GSE paid for by your own tax dollars.  Although homes carry sentimental value few other assets hold, their purchase is still a business decision.  A decision that was made in full and complete understanding of the law at the time...  hedge accordingly...  and if not, get the government to bail you out.

Fri, 07/16/2010 - 09:53 | 473225 Kat
Kat's picture

I have no idea what you're talking about. 

I have no problem with foreclosure.  If the borrower can't pay, the lender should foreclose.  The problem is that that antideficiency laws in our system of socialized losses and privatized profit shift the responsibility for debt from the debtor to everyone else.

But, given antideficiency laws, the borrowers are making a perfectly logical decision. 

It is your duty make good on the contracts you entered.  Yes.  It is not the duty of your fellow man to backstop your stupid decisions and unfortunate trades.

Fri, 07/16/2010 - 10:08 | 473247 pan-the-ist
pan-the-ist's picture

When I signed my mortgage I made no agreement with the pension that bought the MBS my loan was bundled into, and wasn't even aware that a CDS existed.  I made an agreement with a bank that I would pay my loan with my house as collateral.  On the face of it, my walking away should be between me and my bank, it is unfortunate that the banksters have setup a system to privatize gains and socialize losses.

Fri, 07/16/2010 - 10:26 | 473279 RockyRacoon
RockyRacoon's picture

You have a good point.  Same could be said of car loans.  What the lender does with them is of no concern to the borrower.  If I want to stop paying on the car, and they come and get it, it's nobody's business.  There is no "moral clause" in any of these contracts.

Fri, 07/16/2010 - 12:57 | 473728 bonddude
bonddude's picture

Problem is corporate America walks from

loan obligations everyday. Illegals walk.

crooks walk. Everyone leaves the balance to be 

picked up by John Q. US Taxpayer. Hence,

"drop off the key, Lee." 

 

By the way, who holds the MBS and how are 

they being priced these days. FNM,FRE ???

Fri, 07/16/2010 - 15:06 | 474146 Kat
Kat's picture

Judging by your reply, you don't seem to understand what an MBS or a CDS is. 

The contract you signed is to repay the mortgage with your house as collateral - to WHOMEVER owns the loan.  If the bank sells itself to another institution, you then owe th money to the institution that bought the bank.  Regardless of who is currently lending you the money, you owe it.

The banks have no power to "set up a system" to socialize losses.  Only your "friendly" government has that power.  As long as the government has that power, banks will try to buy it.  To blame the banks for doing this is as inane as blaming the rich for walking away from upside down mortgages when the banks can't go after them for the deficiency.  And there are still people who want government to be more powerful, which means that there will be more reason to buy government power.

Sat, 07/17/2010 - 09:31 | 475240 pan-the-ist
pan-the-ist's picture

So the people who bought the MBS should have known better?  As you say, the government works on behalf of the banks.  What's your point again?  Oh, that's right, you don't have one.

 

Sat, 07/17/2010 - 11:30 | 475301 Cpl Hicks
Cpl Hicks's picture

Meant to note your changing your avatar from one gangster to another...nice!

Fri, 07/16/2010 - 09:12 | 473107 Paper CRUSHer
Paper CRUSHer's picture

"ROBBING HOOD ROBBING HOOD RIDING THROUGH THE STATES"

"ROBBING HOOD ROBBING HOOD WITH HIS BAND OF MATES"

"FEARED BY THE POOR,LOVED BY THE RICH"

"ROBBING HOOD ROBBING HOOD"

 

Fri, 07/16/2010 - 08:38 | 473115 Sean7k
Sean7k's picture

Why do the rich default? Because they understand wealth preservation, making financial decisions based on facts and not sentiment. In a few words, they are not brainwashed by social conformity.

Good chart on Jesse's cafe americain about this very subject. 

The banks sold this debt to generate fees, without regard for risk assessment- because they knew they would be bailed out. This feigned outrage over defaults is laughable and another attempt to guilt those willing to buy the argument. 

The banks loaned against collateral. They are being given back the collateral. Isn't this how collateral works? Isn't this why banks receive an interest payment and down payment? Their failure to do due diligence is everyone else"s fault? Let them fail!

Fri, 07/16/2010 - 08:40 | 473122 pan-the-ist
pan-the-ist's picture

The rich are rich because they don't spend money when they don't have to.  It really is that easy.

Fri, 07/16/2010 - 09:39 | 473209 John Self
John Self's picture

I agree.  But I'm also not sure how many of the people we're talking about are truly rich.  It's easy for them to look that way from the perspective of a blue-collar worker, especially if the defaulter carries a $1MM+ mortgage.  But in many of the bubble areas, a $1MM mortgage doesn't get you that spectacular of a house.  You could easily be a upper-middle class worker drone, still living paycheck to paycheck, and be in one of those houses.  I'm guessing maybe 3000 sf, 4 or maybe 5 bedrooms in a fairly upscale neighborhood.  (Or potentially a lesser house with a home equity line also playing into the equation.)  Nice?  Sure.  Much of the country, and nearly all of the world, would kill to live there.  But not necessarily the family that can suddenly start buying cars with cash after the default.

I'm sure there are some strategic defaulters, but I suspect that it's far fewer than the NYT wants us to think.

Fri, 07/16/2010 - 09:57 | 473229 pan-the-ist
pan-the-ist's picture

And we agree that those people should never have been in those houses, the reality, as most of us here agree, is that the housing market will deleverage, when that rock rolls off of Atlas's back, it's going to do some damage, there is no avoiding it.

(BTW, i noticed the site's spell check doesn't like the work deleverage - is this it a forbidden word?)

Fri, 07/16/2010 - 10:00 | 473233 The Rock
The Rock's picture

"But in many of the bubble areas, a $1MM mortgage doesn't get you that spectacular of a house.  You could easily be a upper-middle class worker drone, still living paycheck to paycheck"

I agree. I live in the LA area and there are a LOT of people who are in that situation. Yes, the market crashed for the lower end homes but it hasn't hit the "higher end" homes of $800k+ yet. Just like on the way up there was a delayed reaction for the higher end homes to participate in the bubble rally, it's the same thing on the way down. A lot of those homes only went down 20% from its peak. The next leg down will happen when these option ARMs reset this fall.

And just like the article states, I know someone who can actually afford his home of $900k who said that if the value of his home went down to say $600k, that he would walk away.

Fri, 07/16/2010 - 10:43 | 473340 Yes We Can. But...
Yes We Can. But Lets Not.'s picture

Friend of mine's 5 year ARM, based on one-year LIBOR index, resets next month from 5.25% to around 3.25%.  I'd imagine a lot of resets will aid the borrowers...

Fri, 07/16/2010 - 12:07 | 473579 Strom
Strom's picture

The issue on most loans will not be the reset, but the recast. Once they have to start paying amortization, the payment will increase significantly. Especially on Option Arms where they made the minimum payment and are now at something like 125% LTV (that's ORIGINAL appraised value, not current value). 

Fri, 07/16/2010 - 09:56 | 473230 Kat
Kat's picture

That's part of it.  The other part is that they are very much more productive than the average person and therefore create a lot of wealth.  You have to have to first create the thing you are not spending frivolously.

Fri, 07/16/2010 - 10:12 | 473258 pan-the-ist
pan-the-ist's picture

"Rich" is obviously a relative thing.  There are plenty of stories of frugal people who live within their means and manage to save a lot of money over their lifetimes.  Most of us, me included, aren't forced (yet) to live within our means.  Some of us think we do, but we'll be put to the test soon.

Fri, 07/16/2010 - 10:22 | 473280 weinerdog43
weinerdog43's picture

"...they are very much more productive than the average person and therefore create a lot of wealth."

Rubbish.  By this analysis, LeBron James is much more valuable to society than the trash collector, sewer worker or plumber. 

Fri, 07/16/2010 - 11:30 | 473478 RKDS
RKDS's picture

Didn't you get the memo?  Having lots of money irrespective of whether you earned, stole, or inherited it, automatically makes you better and more important than everyone else.  I swear, sure are alot of communists on ZH these days...

Fri, 07/16/2010 - 12:37 | 473676 weinerdog43
weinerdog43's picture

D'oh!  Stupid me.  Never mind!

Fri, 07/16/2010 - 12:44 | 473697 poopdeville
Fri, 07/16/2010 - 13:41 | 473865 contrabandista13
contrabandista13's picture

"... By this analysis, LeBron James is much more valuable to society than the trash collector, sewer worker or plumber....?

He is, however, not because I made him so, because you made him so..... So far as I'm concerned, LeBron can drop dead tomorrow and I wouldn't bat an eyelash..... His agents and PR people would probably have a cow but I wouldn't give a shit... The privilege of being rich is that you don't have to stand in line for anything, not even in the line for the gallows....

As my father used to say... "there are two classes of people in this world, those who are bought and sold and those who do the buying and the selling. Pick one...!" Believe it or not, even with his income, LeBron is a member of the former class. He may know how to play basketball but he ain't no player, in the Biblical sense of the word. Power is a currency in and of itself and the powerful are fearless.

Best regards,

Econolicious

Fri, 07/16/2010 - 13:43 | 473880 Chump
Chump's picture

"Valuable to society" is bullshit collectivist jargon.  Value to whoever is paying the salary is all that matters.  Those sewer workers and trash collectors may have an important job, but anyone with working arms and legs who can left up to approximately 75 pounds can do it.  There are a lot of people who fit those criteria, so the job doesn't pay as much as others.  It's simple supply and demand.  And most plumbers earn a pretty penny.  The job requires a fair amount more skill than collecting trash, and there are fewer people who pursue developing that skill.

LeBron is worth millions to someone(s) because he can dunk a basketball and entertain tens of thousands of people at a time.  Those tens of thousands of people spend money on merchandise, tickets, beer, premium TV, etc., etc.  Right or wrong, it doesn't matter what you think.  You're not paying the bill.

"Value to society."  Don't make me vomit.

Fri, 07/16/2010 - 15:15 | 474179 Kat
Kat's picture

Well, technically, "society" is paying to see LeBron which is what gives him all that money.  So, I guess society thinks he's pretty valuable :)

So, I guess for all those who whine about "value to society" should just first understand what the F**k they're talking about first, eh?

Fri, 07/16/2010 - 15:12 | 474167 Kat
Kat's picture

Yes, LeBron is worth more because people will pay to see him and very few people in the population can do his job.  Anyone can be a sewer worker or a trash collector and plumbers make more than they do because they are more skilled.  You see now?

Most people who have a high income obtain that income by being valuable to their employers - more valuable than the compensation they are being paid.  They produce more than other employees.  Or an entreprenuers creates something so useful that people happily part with their hard earned money to buy it.  They create wealth.  There are exceptions for rent seeking corporations, obviously.  But, generallly speaking.

 

Fri, 07/16/2010 - 08:40 | 473120 aerojet
aerojet's picture

I would file this under don't hate the player, hate the game.

Fri, 07/16/2010 - 08:46 | 473133 snowball777
snowball777's picture

If I was an executioner, I might not be able to resist using that line on a 'customer'.

Fri, 07/16/2010 - 08:52 | 473144 moneymutt
moneymutt's picture

its a lot more complicated than that, this article gives a false, simplified perceptions....HELOCs, refis etc. change rules drastically....and if you were in your house more a few years, with the dropping rates, almost everyone has re-fi'd. There are many ways banks can still come after people after they leave, beyond taking the security, the house and there are starting to. In Florida, banks are starting to come after people several years after they walked away.

Cali legislature has been debating this issue, the Realtors want people to be able to walkaway in all situations, because they want future customers, banks, are fighting it. Tough to choose to side for one or the other of those two. 

Please, zerohedge, get smarter commentary than this, at least get facts right...people in Cali and FL may think they can walk away without further collections but this is often no the case.

Mish and many housing blogs have posted tons of info on the labyrinth of rules around this...it is stupid for someone writing an article not to know more.

Fri, 07/16/2010 - 09:43 | 473211 malek
malek's picture

You're right,
but the article at least mentions things like antideficiency states, compared to the NY Prawda...

So it's a good one for starters.

Fri, 07/16/2010 - 08:55 | 473147 Yardfarmer
Yardfarmer's picture

the American mantra: privatization of profits, socialization of losses...

Fri, 07/16/2010 - 08:59 | 473150 RicardoM from T...
RicardoM from Temecula CA's picture

I have never heard anyone pan antideficiency statutes. They are a holdover from a raunchy period where individuals lost their homes and the big, bad banks would pick on the sissies trying to collect the whole amount they lent. I am a conservative and I am 100%, nay 1,000% all for antideficiency statutes. IN CALIFORNIA, DID THE JOURNALIST NOT KNOW, THAT BANKS CAN FOREGO THE PROCESS OF TRUSTEE FORECLOSURE AND GO TO COURT AND GET THEIR DEFICIENCY JUDGMENT? Antideficiency only applies to the creditor using the out-of-court remedy.

NO, BANKS CHOOSE ANTIDEFICIENCY WHEN THEY ELECT THEIR REMEDY TO STAY OUT OF COURT.

Shet, I have never heard anybody bitch about anti-deficiency legislation. What is the world coming to?

Fri, 07/16/2010 - 09:01 | 473152 dussasr
dussasr's picture

People in nonrecourse states pay higher mortgage rates to compensate for the increased risk to the bank.  Therefore, one could argue that those folks paid in advance for the right to walk away from their mortgage.

Fri, 07/16/2010 - 23:05 | 474933 moneymutt
moneymutt's picture

how much higher...please...if you consider the percentage of people that strategically walk on mortgages, thus could be ripe for collections, and figure how much the banks can get from them after the legal wrangling and chance people simply file bankruptcy etc...the differences in losses in non recourse and recourse states is not that big.

Got evidence otherwise?

...I live in MN, we have pretty decent consumer protections on mortgages...and I refi'd my house last Dec for 4.5 percent interest rate ....I was consistently quoted mortgage rates that were very comparable to national averages at the time...so I was not competitvely hurt by the consumer protections but would be immensely helped by these protections should I lose my job etc....

Banksters train you to worry about them, not yourself...stockholm syndrome

Fri, 07/16/2010 - 09:03 | 473153 curbyourrisk
curbyourrisk's picture

If I could do it here in NY, I would have left months ago.  Instead I continue to blow my saving by paying my mortgage timely.  I constatnly tell people in my area that it will be 20- 30 years before we see peak pricing again, and even then it will only be another bubble frenzy.  Sustainable housing prices are so far out of whack it will take an entire generation to get back to the norm, and another 2 generations to build on it again.....

Fri, 07/16/2010 - 10:51 | 473356 Yes We Can. But...
Yes We Can. But Lets Not.'s picture

I'm in the same sinking boat here in northern Virginia. 

Had an earthquake here this morning, too!  It felt and sounded like a massive bomb had detonated miles away.  For a few minutes, I figured the White House had been blown away.

Fri, 07/16/2010 - 13:00 | 473740 LauraB
LauraB's picture

We heard/felt the earthquake here in MD too at about 3 am.  It woke us up and we were'nt sure what it was till this morning.

Fri, 07/16/2010 - 23:08 | 474938 moneymutt
moneymutt's picture

don't worry, because the banksters can come after you for the money in your state, they must have given you a way cheaper interest rate (I'm sure you got 0.1 pts less on your rate) feel better now?

Fri, 07/16/2010 - 09:30 | 473198 Tense INDIAN
Tense INDIAN's picture

not related to this topic...but i wanted to put it up anyway.....

 

 

ALERT::::may be another false flag attack and stock market sell off....see this ...

strange trading going on with this power company in the gulf.......just like before 9/11...

http://beforeitsnews.com/story/102/476/ATTENTION_FALSE_FLAG_TERROR_ALERT.....

Fri, 07/16/2010 - 09:35 | 473207 Instant Karma
Instant Karma's picture

Hate to own that paper.

Fri, 07/16/2010 - 10:26 | 473288 Jim B
Jim B's picture

The FED probably owns most of this crap paper.... LOL

Fri, 07/16/2010 - 09:45 | 473218 FrankIvy
FrankIvy's picture

I have zero issue with people walking away from a mortgage in nonrecourse jurisdictions.

The whole "do the right thing" notion of loan repayment is obscene because the counter parties - banks - are monstrosities that would suck you dry in a second before showing any quarter.

The burden for default should be on the lender in all cases, with the impact on the borrower being a knock on his ability to obtain more credit.

Here are is the bit of info that convinced me of this position-

Neighbors went Chapter 7 - the week after their discharge, they were overrun with banks and CCC trying to give them credit.

If the last 9 years have shown us anything, they've shown us that there is no moral hazard for banks that believe they may be bailed out because banks are amoral.

The answer here isn't to point at defaulters and say, "you caused our tax dollars to be given to banks."

The answer here is to, simply, not give banks our tax dollars.

 

Fri, 07/16/2010 - 11:45 | 473511 jakeman
jakeman's picture

We may need to agree to disagree on whether life in Arizona is a sustainable long-term venture, but I concur with your final sentence here.

Fri, 07/16/2010 - 10:03 | 473238 three chord sloth
three chord sloth's picture

Does this author have any evidence it's "the rich" defaulting? Just because a home was worth one million or more doesn't mean its owner was rich... remember all of those "no paper" loans?

This is the third or fourth article I've seen that assumes "million dollar home = rich owner". It doesn't... and that is kinda the reason we're in such a mess, ain't it? Too many ordinary folk buying above their weight class...

Fri, 07/16/2010 - 10:39 | 473323 jakeman
jakeman's picture

I'm in AZ, we're in good financial shape but not rich, and we're strategically defaulting. We moved into a smaller, cheaper house ($550k) in 2007, right at the peak. We put 20% down like you're supposed to. We've paid the bank well over $100,000 in interest in 3 yrs. And now my house is worth HALF what it was; that is a quarter million dollars thrown to the wind.

I believe you are absolutely right that people buying above their weight class is at the root of the problem. We did everything by the book, yet we're at the mercy of screwed up rules that blew up the market. The secondary issue is that over-their-head buyers' problems, aided and abetted by the banking industry, became our problem by cutting my home's value in half. I'm not trying to polish my martyr badge--I'm a grown-up and I made the decisions that got me where I am. We've tried to talk to the bank, and they told us to go to hell. So it goes. Screw it. I'm taking advantage of my best available option, guilt free.

I do thank God every day that I told my wife "No Effing Way" when she wanted to re-do the kitchen.

Fri, 07/16/2010 - 11:01 | 473400 Yes We Can. But...
Yes We Can. But Lets Not.'s picture

People didn't buy houses above their weight class, they bought houses in their weight class priced above their weight class, they bought money/debt above their weight class.  They bought the ordinary 1959 split-level priced at twice a rational level.  That mis-pricing was induced by suppression of rates and mis-aligned risk induced by Fannie/Freddie/securitization.

Fri, 07/16/2010 - 12:46 | 473696 Pegasus Muse
Pegasus Muse's picture

You know, I remember moving to Northern VA in the summer of '04.  Alexandria, near Mount Vernon.  We were looking at houses.  The prices!  40 yr old, 2000 sq ft, split-level ranches in a "nothing special" middle class neighborhood were listed for $400K-450K.  Buyers were bidding them up from there.  The next year the same houses prices were starting at $550K-$600K and they were bidding them higher.

These buyers were nuts. We rented. 

Fri, 07/16/2010 - 14:37 | 474061 LauraB
LauraB's picture

"People didn't buy houses above their weight class, they bought houses in their weight class priced above their weight class, they bought money/debt above their weight class."

+1000

My family has wanted to buy a home for the last 5 years, but haven't because we saw that: 1) prices were out of line with incomes/rents; 2) lending standards were non-existent (no down payment, no proof of income); and fraud was rampant.  We sold our TH in '06 and will wait to buy a SFH until prices get down to their pre-bubble levels.

When we started looking in Montgomery County, MD in '05, houses built in '99 in the upper $200K to low $300K range were selling for $750K+.  These houses were poorly built and had water damage, cabinets falling off, etc.  We thought people were crazy to buy them at those prices.  Now, we've been looking in Howard County since '07.  Houses built in the mid-$300K's to mid $400K's in the mid '90's are still asking $900-$1M+.  When you look at actual sold comps, these sellers are still in fantasy land.  The current sold comps put the prices down in the $600-700K range (some even lower), but even those sales prices are too high considering they are still twice the pre-bubble prices. 

The people who bought these houses were not rich.  They were the same middle/ upper middle class folks who would have bought these homes at the lower prices, but were suckered into paying more by low mortgage rates and the bubble mania.  The low interest rates and loose lending standards fueled prices to go higher and higher all the way up the line from starter homes to mansions.

People only felt rich because their houses values were appraised higher, but they weren't really richer (unless they bought low, sold high, and didn't repurchase another overpriced house).  They were just more in debt.  The funniest part is the people who don't want to accept that the price of their house has gone down (like the delusional sellers holding asking prices way above sales prices mentioned above) because they think they're losing money.  The equity money isn't theirs until/unless they can find a ready, willing, and able buyer at the inflated price (which is highly unlikely with higher unemployment, tighter lending standards, higher taxes (including the possibility of doing away with the mortgage tax credit), and fewer credit worthy buyers), yet they have been paying higher and higher property taxes as the assessed value of their homes kept going up without any realized gain to them.  They won't lose any real money when prices fall back to what they paid for their houses (just the phantom paper gains), but they will again be able to pay lower taxes on the lower assessed value (at least until the gov raises the millage to make up for "lost tax revenue").

I saw on some slide shows on CNBC the other day that MD is 5th highest in mortgage fraud, 10th highest in foreclosures, and 5th highest in cost of living.  The foreclosures have just started showing up in the areas I've been looking over the last few weeks.  From what I've seen, not much is actually selling (in fact some houses are still on the market from when we first started looking in '05).  We've still got a looong way to go.

Fri, 07/16/2010 - 11:01 | 473407 FrankIvy
FrankIvy's picture

I'm glad it's working out for you.

For all the young pups reading this, the big picture item is this:

It's unwise, under all but extraordinary circumstances, to

pay

a half million dollars

for a house located in the middle of a desert.

Phoenix and the Loser Magnet will both be ghost towns in a decade when FF depletion becomes unshakable and electric rates triple and quadruple.

Here's today's forecast for Phoenix:

Today
Forecast:
Partly Cloudy
Temperature:
113° High You couldn't pay me to live there.  Seriously.

 

Fri, 07/16/2010 - 13:47 | 473896 Cathartes Aura
Cathartes Aura's picture

I lived in Sedona & Flagstaff AZ in the mid-to-late 90's, watched the real estate explode - mostly second home rental / vacation purchases, Flagstaff in particular, with people looking for "escape" from Phoenix summer temps - leaving neighbourhoods half-empty for the winters, and pricing the locals out of any chance to buy, average wages being low. . .

also remember flying to PNW, seeing the lakes below noticeably shrinking, rivers broken into a series of large "puddles" - the shallow parts just dry sand. . . the hugely overbuilt areas around Las Vegas, Henderson - just mile after mile of huge building blocks with enormous air conditioning units perched atop. . . as someone who remembers Vegas as a small oasis of lights, from the 70's vacations, I could only marvel at the incredible folly of building so many resource-demanding residences in the middle of a desert. . .

as much as I'd love to live in N. AZ again - it is unsustainable, and ridiculous to believe that man has any control over that environment.

Fri, 07/16/2010 - 20:37 | 474725 FEDbuster
FEDbuster's picture

I live in the Prescott area, we turn on the A/C less than 20 days per year (sometimes only for a couple of hours in the late afternoon) and the heat is on even less (house has some passive solar).  Water is a much bigger concern long term. 

Lot's of foreclosures and defaults here, but there are also many retirees that paid cash for their homes.  We are down about 40% from peak 05-06 prices.

Fri, 07/16/2010 - 11:11 | 473435 trav7777
trav7777's picture

Above your weight class? There's no one who didn't. Where the hell were you supposed to live?

In a housing bubble, RENTS rise with mortgages. Even if you don't partake of the bubble by purchasing, you are at the mercy of those "investors" who do! Even now, you see a lot of rental housing listed for rent at what the mortgage is. And they won't yet drop because of all the bullshit the gov't and banks are doing. Nobody is looking for real cashflow as long as they can play pretend on their M2Ms.

It was in your financial interest to PARTAKE of the ponzi and then get out before the crash. That's the nature of the herd moving one direction. You can't swim against it.

Fri, 07/16/2010 - 11:21 | 473457 jakeman
jakeman's picture

I'm with you. Perhaps "above the weight class" doesn't cover what I was trying to get at: the sheer volume of buyers without any skin in the game. In retrospect, the stupidest thing we did, among several, was put down 20% when everyone else was getting 125% loans so they could buy a car and set of jets skis.

Fri, 07/16/2010 - 14:47 | 474087 LauraB
LauraB's picture

We sold in '06 and have been able to rent for half the cost of "owning" the same home since then (even with the low mortgage rates).  We'll keep renting and wait for lower prices.

Fri, 07/16/2010 - 23:17 | 474950 moneymutt
moneymutt's picture

its just like when people with big pots of money slosh it around in everyday commodities...like oil...sure when oil gets real expensive we can try to avoid buying it, but it cost initially to move away from it...and then just when we bought fuel efficient car, moved closer to work, then oil price drops. The basics people need like food, shelther and energy should not be allowed to run up and down with highly leverage speculation...the cost of these things will fluctuate plenty based on fundementals...if you lost money in dot com, so be it, it was invesment, if you lost money in gold, so be...but people need food, shelter and energy...the FED printed house buying dollars, and encouraged even more investment via private MBS because older people and pensions could get no return in low interest rate enviroment...so low rates increase principle price of house, increase fraud etc...and regular folks got wiped in process

Fri, 07/16/2010 - 13:17 | 473788 trav7777
trav7777's picture

There was nothing you could have done.  If you decided to not partake, you were forced to rent into a rental market driven by the monthly mortgage payments of "investors" who did.

 

Fri, 07/16/2010 - 10:34 | 473307 bpj
bpj's picture

In CA, only the original loan is non-recourse. Don't know about AZ.

 

Fri, 07/16/2010 - 23:19 | 474953 moneymutt
moneymutt's picture

yeah, and who ahs one of those after years of dropping rates...eveybody re-fi'd...two tier justice..

Fri, 07/16/2010 - 10:57 | 473387 trav7777
trav7777's picture

Blame the legislators who socialized bank losses.

There is no moral problem with walking away from a debt contract.  Any corporation can Chapter it and walk, why should little people not be able to?

In fact, that's what the very BANKS themselves did, like WB, WM, and LEH.  They just BKd it up and that's that, nobody came after the officers to take their private assets.

Fri, 07/16/2010 - 11:11 | 473434 sagelike
sagelike's picture

Business, both large and small, walk away from debt obligations all the time under cover of the corporation and some (big business) get to keep their wealth and there's no consequences.

The way things are these days, why shouldn't the little guy dump unproductive though it seems unfair that a bankster can commit fraud or just be plain incompetent and still get to keep his money and credit rating.

Fri, 07/16/2010 - 11:27 | 473465 ZeroPoint
ZeroPoint's picture

Well, I have to agree that there is major moral difference from someone who loses his/her job and is forced into a foreclosure situation compared to someone who walks away because he/she does not want pay the price agreed upon, especially when there many families out there who will never even get the shot at ownership.

Frankly, rich people let greed dominate there decisions. Anyone who buys property should look at the median income to affordability ratio. Once it goes beyond 1.5 incomes, it should be a big red flag of a price bubble.

Some countries like France have gotten wise to real estate speculation, and require a 5 year period before you can sell your house without paying a substancial tax. Why? Because people need places to live, and treating housing like an infinite cash machine doesn't work.

Should we be surprised? No. Ignorance and greed is the American way. Should we ever bail out a bank again? No.

 

Fri, 07/16/2010 - 11:39 | 473494 ColonelCooper
ColonelCooper's picture

Responded to wrong poster.

 

Fri, 07/16/2010 - 12:29 | 473652 iinthesky
iinthesky's picture

Default on a 'loan' ? People need to start calling a spade a spade. There is no 'loan' , never was. The banks don't loan money. As soon as folks start to realize this the quicker we can stop wasting time talking about the morality of walking away from a fraudulent contract (ie. mortgage) and we can start talking about the real problems-- like a debt system that virtually guarantees situations like these while Godzilla banks walk away with every tangible asset that they end up purchasing with magic digits they create out of nothing or stealing from people through mortgage swindles etc.

 

Fri, 07/16/2010 - 13:47 | 473895 Return2Sanity
Return2Sanity's picture

A lot of people posting here seems to think that it's perfectly fine to walk away from a bad investment even though you promised to back the money you used to purchase that investment. If you think that way, you need to understand that when lenders don't get paid back, they are not inclined to loan money again in the future. That's where we are now in the economic cycle. Credit was way too loose for way too long, and people who lent out money (bought MBS) got burned. Now they are folding their arms and refusing to lend.

It doesn't matter if the Fed keeps the rate at zero forever, it still can't force people to lend. Lenders need to be reasonably confident that the money they lend out will be repaid in full. This lack of assurance is why the government is now practically the only lender in the housing market, and why the taxpayers will get stuck with the bill. I think if you sign a mortgage contract, you should do your very best to honor it, and if you can't do that because some misfortune befalls you, you should get yourself in front of a bankruptcy judge.

As you might guess, I am someone who has a little bit of money to invest, not someone who is eyeball-deep in debt. I would never knowingly lend money to any person, business or bank that advocates “walking away” from their commitment as a good business strategy, because I would suspect right then and there that I'm the “chump” in the room (as Bill Gross would say). Frankly, I would prefer we had an environment that would reward me for putting my money back to work in the economy. But that would mean getting a decent interest rate for accepting the risk that some borrowers will walk away. So until that happens, I won't participate in the high-risk, low-reward environment that the Fed has created with its insane policies.

Fri, 07/16/2010 - 14:14 | 473981 Cathartes Aura
Cathartes Aura's picture

you're advocating sticking to a system that was abandoned long ago, and in fact, probably only existed in "local" markets decades past. . .

update your thinking to what is happening now, today - how banks behave now, how business thinks now, and see if you still want to play that hand. . .

"no honour among thieves" springs to mind.

Fri, 07/16/2010 - 14:28 | 474032 faustian bargain
faustian bargain's picture

Lenders need to be reasonably confident that the money they lend out will be repaid in full.

What money? Banks don't lend money, they create debt. Out of thin air. The money was never there to begin with. They do this (fractional reserve lending) because they are allowed and encouraged to by the government and the Federal Reserve.

This system is collapsing because it's unsustainable, it's a bubble of fakeness. And it's going to continue collapsing because finally people (a.k.a. the 'borrowers') are starting to see through the scam.

Fri, 07/16/2010 - 15:06 | 474145 LauraB
LauraB's picture

If the agreement was that the bank gets the property if you don't pay, there is nothing wrong with walking away from the loan and giving them back the collateral.  The banks accepted the appraisals and gave out money without requiring down payments and without verifying incomes (since no/low doc loans were commonly known as "liar" loans in the industry because 90% of the people using them lied about their income (most by 50% or more) banks knew the risks that they were taking).  They also qualified borrowers on teaser rates when they knew the borrower couldn't pay the actual rate.  The banks knew or should have known that these loans would not be paid back.  IMHO, there is nothing wrong with walking away as long as the two guilty parties -- i.e. the bank and borrower -- suffer the losses.  The borrower loses the house and the bank loses any money left on the loan after they sell the collateral (i.e. money it never should have lent in the first place).  The problem comes in when the goverment shifts the responsibility for the loan losses to the taxpayers.  The government has no Constitutional authority to use public (taxpayer) money to pay off private debts (mortgages).  The only bailout that would have been justifiable would have been to pay back the FDIC guaranteed deposits of those who had their savings in the failed banks.

Fri, 07/16/2010 - 14:05 | 473962 Grand Supercycle
Grand Supercycle's picture

 

The DOW/SP00 leg down has started.

http://stockmarket618.wordpress.com

Fri, 07/16/2010 - 16:52 | 474437 carbonmutant
carbonmutant's picture

Banks giving out Ninja loans weren't betting on your credibility they were betting on the market.

Fri, 07/16/2010 - 23:24 | 474957 moneymutt
moneymutt's picture

so true, for $20 they could get your IRS records checked, something you have to allow for a NINJA loan...they didn't care, they didn't want to know truth...they just knew when housing was always going up, borrower losing house to foreclosure was boon to bank/investor....thats why subprime intitially was so popular, high interest rates and defaults make money too because underlying asset appreciating...they didn't care what you made, they only cared loan was secured by house...banks made same mistake home buyer did, thought housing would always go up....why should only homeowner pay? presumably professionals, at banks, had more insider knowledge to know the house of cards they had formed than average person just doing what mortgage guy and realtor told them

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