The real estate melt-down

So I go to lunch today with a former business partner and we talk about his daughter and her husband who are thinking of walking away from their condo purchase and defaulting on the loan because they are "upside down" (loan is greater than the house value). They haven't lost a job or been hit with unforeseen expenses, they just have a home whose value is less than the amount they owe the bank. In California, if the loan was taken out to purchase the home, it is called a purchase money mortgage, and California law protects the purchaser from the lender who can only look to the property in complete satisfaction of the debt.

Then when I get back from lunch I return a call to a client who asked me the same thing. He's an M.D. making about $180k a year and is thinking of walking away from his home he purchased earlier this year with 100% financing because it may not be worth the $700k plus he paid for it.

In both instances, they both wanted to know the tax implications which I answered, then I volunteered with some unsolicited advice that I didn't think it "walking" is a good thing to do based on morals and values.

This is a big tidal wave in progress and it is sad to see that some people are seriously considering defaulting on their loans in instances where they are not at a lose of job or income, but doing it because it is a quick fix than shuns responsible behavior.

Just had to rant this one out.

[Rufiedodg]

I can understand people bailing because they can no longer afford payments due to rising interest rates, however baling out simply because they’re upside down is different.

IMO, if they are thinking of bailing, they purchased the house solely for investment reasons. Investing in a house is no different than with a stock -some you win and some you loose. If they won would they allow the bank to take all the profit? NO. Then why would they think the bank should take the loss when they’re loosing.

I’m a big believer in Karma—what comes around goes around

On a similar note—investing is all about timing. And the older I get I’m realizing that timing seems to be the MAJOR component in almost everything.

Even in the world of fitness—meal timing, rest between routines, rest between exercises within the routine, progressive intensity, peroidization

—and the list goes on.



Dan

[.V.]

Keep those property values plummeting, it's way overvalued anyway and I have no plans of ever selling any of mine. I would buy a lot more when it comes down more though.

Bail brutha bail.

[LiftGirl]

Originally Posted by pierini

then I volunteered with some unsolicited advice that I didn't think it "walking" is a good thing to do based on morals and values.

This is a big tidal wave in progress and it is sad to see that some people are seriously considering defaulting on their loans in instances where they are not at a lose of job or income, but doing it because it is a quick fix than shuns responsible behavior.

I agree with you Mr. P. Buy a smaller, less expensive house. I know that's easier said than done out in California, but I was always taught that if you borrow money, you need to pay it back (or do your best to pay it back). Sticking it to the bank just isn't right.

[Dan C]

What do you do Pierini?

Dan I assume you mean what is my occupation. I am a CPA.

[F_Mac]

I agree with you P............it's a lousy irresponsible thing to do. One thing I am curious about is what exactly are the implications of walking away and defaulting on the mortgage?

Well the financial implications vary from state to state based on differences in law. But common implications include a poorer credit rating and history which could make the next borrowing more difficult.

But the bigger implication in my book is that you have to look at yourself in the mirror each day and know that you were a financial whimp. You didn't make your best effort and shirked financial responsibility. Sort of like that feeling when you didn't give it your best effort at a PL meet or some other fitness event.

Again, I'm not talking about the situation where a default happens due to a loss of a job or income that can't be replaced, catastrophic medical expenses or other unforseen economic events that clearly makes one incapable of honoring a debt. I have empathy for people in that situation.

[MAURER]

i'm only in college and i don't have a lot of first hand experience with investing yet but i would say... don't consider the home that you are counting on sleeping in as an asset. also, anyone who makes an investment on something which they can't afford to lose deserves to take responsability for that action. and we shouldn't support laws that encourage people to purchase a home or make any other investment they can't truly afford.

[arbit]

Originally Posted by MAURER

i'm only in college and i don't have a lot of first hand experience with investing yet but i would say... don't consider the home that you are counting on sleeping in as an asset. also, anyone who makes an investment on something which they can't afford to lose deserves to take responsability for that action. and we shouldn't support laws that encourage people to purchase a home or make any other investment they can't truly afford.

I completely agree.
And that is precisely why people who have mortgages more than their homes should walk away.
Banks are responsible in part for the real estate boom, with their lax credit policies. Even Bernanke had asked banks to be more judiciuos in their lending policies. But NOOO, managers were lured by easy (short term) money and padded the books by giving out loans left and right. The banking industry needs to be held accountable, and people walking away from their homes is part of the process.

This housing bubble is a very serious thing, and impacts responsible folks in a negative manner. The savings rate for US was negative in 2006, and that happened because house prices went up in the books. This leads to inflation, eats away at my hard earned $$$, and prevents responsible folks from buying a house (as they are not willing to pay crazy house prices).
Someone mentioned Karma. People defaulting IS karma for banks and their lack of oversight.

Unfortunately, the resulting fallout will also be karma for the common folk who would rather vote based on retarded issues like gay marriage and not demand action on economic fronts.

Originally Posted by arbit

And that is precisely why people who have mortgages more than their homes should walk away.

I disagree with you big time on this one young man.

And if you want to talk about karma, what goes around comes around, and walking away from a financial responsibility (absent a loss of income or job or catastrophic illness with major medical expenses) is a serious character defect that will come around and bite you in your behind big time sooner or later.

We are responsible for all our actions and decisions and nobody else.

[MAURER]

but then can't you say that the banks are responsible for allowing these loans in the first place?

[arbit]

Originally Posted by MAURER

but then can't you say that the banks are responsible for allowing these loans in the first place?

When someone applies for a home loan, the bank is supposed to make a judicious decision on how much the house is worth (in case of default), and give a loan based on that. Now, most home buyers are not financial experts, but the loan experts are supposed to be. Think of the people who are shareholders of the bank. They assume the bank offcers are responsible, and are judging values fairly.

Hence, if home prices fall significantly so that home owners consider mailing the key, I think it are the banks who dropped the ball.

Check out
WaMu in trouble - over appraised real estate to rip off consumers

"New York State Attorney General Andrew Cuomo's office charged today in a civil lawsuit that the nation's largest mortgage and property services corporation, its home appraisal subsidiary and the nation's largest savings and loan giant conspired to inflate the value of home appraisals, earning higher profits for the bank but leaving homeowners holding potentially risky debt loads.

A real estate thread on FW:
Discussion: Is there a real estate housing bubble, and, if there is, what will pop it? Part 3

[LiftGirl]

Originally Posted by MAURER

but then can't you say that the banks are responsible for allowing these loans in the first place?

To me, that's like saying hostess and little debbie are responsible for obesity. After all, people aren't nutrition experts. Shouldn't snack food companies be judicious and only sell Twinkies to thin people?

A reputable bank does indeed appraise a house when you buy it. Should the house appraise for less than your loan, you have to make up the difference when you make the down payment. This is so the bank can sell your house and get it's money back if you default. However, real estate values can fluctuate rapidly, and the life of most mortgages is 15-30 years. That's a lot of time for the value to change.

Of course there are predatory lenders, and there always will be. I suspect some people get rejected for their dream house by reputable banks, and instead of looking for a less expensive house they can afford, they go bank shopping until they find one that will lend them the money. It may be unethical on the bank's part to loan money to someone looking to buy a house selling for more than its worth, but it's caveat emptor, just like any other product you buy. Would you buy a used car without checking under the hood? Would you buy a house without researching its value and the bank doing the lending?

The value of your house going down is a risk you, not the bank, take when you decide to purchase it. A house isn't an investment, it's a place to live. If the value decreases, you shouldn't just walk out on the payments. Laws like California's encourage irresponsible behavior like this.

[Dan C]

If the law allows it, people will take advantage of it.

And since it's not illegal, I think something like this tips in favor of wise financial move over morally unethical. I don't have much sympathy for huge multi-million dollar corporations that take a relatively small loss once in a while. The banks can recoup anything lost on the resale anyway.