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Tuesday, March 2, 2010
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48 comments:
I don't know what axe Brett has to grind against banks, mortgages, or the bailouts, but he's grinding away pretty hard in this article.
Run! Run from your mortgage you fools!
TN-
I always find it funny when articles talk about how great the investors did during the good times and they didn't have to give money back in the bad times. I agree maybe you could blame the executives and try and get money from them, but unless investors sold at the top they took huge losses on their investment. I guess stockholders losing 95%-100% of their investments on these companies just wasn't enough for him.
I caught his interview on WTOP Sunday, where he claimed "you don't own the house, it's a myth, the banks own it, and you're just renting it from the bank," and I thought to myself "it's sad, but dude's got a point."
MM,
It's all in how you think about it. You can look at it the other way. You do own the house, you just rented a f-ton of money. And there's the rub, he's not talking about the fact that in many states, ours included, you owe that money whether you still have possession of the collateral or not. You could have chosen to borrow a house, that'd be called renting. Instead you chose to borrow money.
I think the article was really light on consequences. Yes, a lot of state laws and individual circumstances need to be accounted for to determine what the consequences may be. But for most people it's not as simple as just renting a new place for less money. Whether it's because you HELOC'd, have a second mortgage, or live in a recourse state. Just because they're not pursuing people now, doesn't mean they won't in the future.
Are you going to count on the government stepping in in time to get the banks off everyone's backs?
I also don't like when these authors tell people that their beliefs on morality are wrong. Personally if I owed someone money and had the ability to pay it I would because I think that is the ethical thing to do. I understand economically this might be bad and I understand that not everyone agrees with my ethics, but he is basically saying my views on morality are wrong.
If you don't feel you should pay the house because they lent you money for something that is worth less than the loan then surely you should never pay your credit card bills or car loans.
hb,
Yup that's the other thing that's wrong with conflating money-renting with house-renting. You didn't borrow the house, you borrowed the money.
Why he thinks morality and self-interest should align is beyond me. Actually that's not fair, that's not what he was saying. He's saying that in anything financial only self-interest should enter in and you should ignore morality. But that's equivalent to only doing the morally right thing when it aligns with your self-interest. Questionable.
OTOH I do think most everyone has a breaking point beyond which they can ignore morality. Being 50% underwater on a house is probably in that category for most? folks. According to the data, I think the breaking point at which more and more people start to ignore morality in favor of self-interest is around 120% LTV.
Cara-
I think 120 LTV is about what I would have said the breaking point is also for most people. I think this is partially, because most people are delusional and think there house is worth ~10% more than it is. So they do not really feel underwater until they are a decent bit under water on their 10% over inflated price e.g. 120 LTV.
Maybe I am looking at this from the sidelines when I am saying I would always pay if I could. It really isn't fair for me to say this since I don't have to make the hard decision of going out with friends or paying my mortgage...
he said if one's currently 25% underwater essentially won't break-even until the home appreciates 33%. and his advice is for people in that category.
MM,
I would say he left open to the owners interpretation and predictions for future appreciation what the limit point should be. He's drawing one at simply where it's obvious that it's in your self-interest. Voluntarily walking away when you're less than 10% underwater and 3-4 years of minimal inflation or 5 years of amortization might allow you to sell without rengeging on your debt, isn't in most people's self-interest.
hb,
Agreed, 10% underwater is something amoritization will heal, and since most people inflate their own house's worth by 10% that gets us to about 120% before it's no longer obvious whether time will help. I also think that people who put a good chunk of their own money down already will have a harder time not doubling down their bets by staying in place. For people who put 20% or more down the hardest thing to admit will be that your own money is all gone. The bank's money you could walk from, your own losses are harder. There's nothing so human as sending good money after bad.
Whatever happened to "take your lumps"?
I'd never walk on a loan. I borrowed the money, I'll take responsibility.
I don't think you are allowed to walk on student loans, and definitely not the IRS. BK won't discharge fraud as far as I know.
Whatever...lots of things have changed with the younger generations. I want a do-over on my stock portfolio and a bunch of other things. Walkers should be slammed on future credit.
Considering that the bank was using the value of the house as collateral, I see no problem with walking away. It's a simple contract: if you pay off the loan, you get the house, otherwise it's the bank's.
Novawatcher,
What about the recourse aspect? Yes, the only reason they lent you that much money was because you owned a house, but if the loan has personal recourse then the debt and its obligations exist beyond the house.
Nova-
They were using the house and the good faith you would make payments. If it was just the house then subprime people would have received the same rates as prime candidates. So as I said credit card companies just use your credit so do you think it is morally acceptable to walk away from credit card debt or auto loans, because it is not in your best interest to pay them. I don't, but many people do so as I said everyone has different moral tolerances of what is acceptable.
NoVa,
Collateral? Have you ever read the Note? The Deed of Trust is the collateral. Would you also walk on your car loan? I'm sure everyone who drives off the lot is "underwater".
Banks rely on all aspects of your credit history and income/employment, etc. To say that if your house goes down in value you get a "pass" is absurd.
If you have had a catastrophic event, file BK. If your house simply loses value, too bad.
Do think that it is morally acceptable to shackle your family under a burden of debt you have no hope of getting out from under?
Those are the only morals that play into this issue. To bring morality into this is to be a fool. The counterparty -- the company you are doing business with -- has no moral obligations (or at least their morality system is different from your own). To not realize that is to be a sucker.
cara: your point doesn't make any sense. They don't loan you money because you own a house (if you owned the house, why would you need the loan?).
housebuyer: they were counting on the collateral as both the principle but also as part of the interest in some cases (after all, their risk models made assumptions about appreciation). If they repossess the house, they get their principle back (in theory). What they don't get is the unrealized gains from the cancelled interest payments. On the other hand, this now frees up the money so that it can be lent to someone else, so lost opportunity cost is minimized.
Nevermind that originally the reason for having 20% down was not only because it proved that you could save money, but also because in nearly all cases it insulated the lender.
Va_investor: if I was one of those fools who bought a million-dollar condo in Miami that was now valued at $100k, had a collapsed HOA, algae filled swimming pools, etc., I'd be a fool to continue to pay. Essentially I'd be throwing money down a rat hole. The best thing to do would be to cut my losses and walk away.
See Pechito Lopez for a recent analogy.
Under the Heading of What the Heck was that, may I present:
http://franklymls.com/DC7226585
sells this summer for 124K, had been
appraised at 331K, i guess a flipper
bought it, fixed it and sells it for
265K.....
Dang, the market is nutty.
I agree that it is foolish to hold yourself to "morals" when dealing with an amoral entity.
You are bound by the contact you agreed to and of course the relevant laws in your area.
I don't see any reason why someone hopelessly underwater on their mortgage shouldn't walk away in a non-recourse state.
I also don't see any reason why any lender should ever lend to that person again.
...but it isn't about morality.
Nova-
You said that you shouldn't put your family in a debt they can never get out of. If you bought a house that you could afford then this is not really relevant, because the payments are not that burdensome. If you bought a house you couldn't have afforded that is at least partially your fault in addition to the banks for lending you that much money. If you lost your job or something like that then I agree walk away from your obligation, because you can't afford to pay.
Leroy-
Banks are no more immoral than many other industries. Trust me that banks are not the only industry that is trying to maximize its profits.
Novawatcher,
I refer you back to my first comment, you do own the house, just not the money. There's a lien on your ownership. That's not the same thing. It may seem like semantics, but I'm one that believes semantics matter. The legalese most certainly matters.
As HB said, it's only burdensome if you signed up for a debt you couldn't afford. If you can't afford the payment that's not "walking away", that's just default. If the bank lent you money that you'd never be able to pay back without selling the house for more than you bought it for, that's their own due diligence problem. If you lose income, again that's the bank's problem and should have been part of their overall risk assessment. If you can afford the loan, and you took it on in a recourse capacity then the bank has every right to pursue you for the difference after the sale. Unless you can get all lienholders to sign away that right, or if none of them had it in the first place, then it's not clear that it's a good idea to walk away even on a strictly financial basis.
You're right that there are other moral obligations at play. But I think the people who are choosing to walk away when 50% underwater are just gambling that they never are unlucky enough to be the person who gets pursued for the debt. At some point that gamble is worth it. Insolvency for instance may make it no gamble at all, because there's nothing to pursue. So most people's threshold is going to be somewhere above insolvency.
NoVa,
If your house went up 100%, does the bank get a chunk of that?
I see, the risk/reward only flows one way.
"Banks are no more immoral than many other industries. Trust me that banks are not the only industry that is trying to maximize its profits."
Not to be pedantic, but I said amoral, there is a difference...
I don't think banks are particularly amoral among corporations, the point is that they do not behave in a manner consisted with human morals. They will foreclose on your house and not feel the least bit bad about it, etc etc.
If the corporation itself were faced with a similar decision about continuing to pay or walking away from a mortgage it would most certainly walk away as well.
It is your obligation to abide by the terms of the contact and the relevant laws.
"If your house went up 100%, does the bank get a chunk of that?
I see, the risk/reward only flows one way."
A lender could attempt to negotiate a contract wherein they would be entitled to some portion of future profits in the event of a profitable sale...
A lender could also require a down-payment sufficient to protect them in the event of a default.
Etc etc
The lender has a staff of professionals who should be able to evaluate the risks they are facing and adequately protect the lender's interests. If they fail to do this then it is their own fault.
Leroy-
I guess our definitions of morality are a little different. Your morality changes when dealing with amoral groups. I think morality is the same and I would pay the person back whether they are a saint or a sinner. I guess I just don't think morality changes based on who I am dealing with.
I totally understand where you are coming from and I just think our opinions differ on this.
huh. it seems that nothing happens in this market and this blog can be closed. health care, absolute/relative morality, interesting topics.
Konstantin,
Things are not likely to get really interesting until the end of the month when the MBS program is scheduled to end. If rates start creeping up toward 5.5% or even 6% watch for there to be a lot of panic. Of course there already are murmurs they will just extend the program to keep rates at 5% causing us to just keep playing the waiting game.
tbw,
still there will be a spring selling season here. it will be interesting to see how credit landscape changes, but as of now it seems that there are plenty of people with high credit scores in the area and with reasonable downpayments that are willing to pay market prices in this area. i would expect a slowdown in sales in the second half of the year with rates going up slightly, tax credit expiring and not much positive economic news in general. without an uptick in foreclosure activity and massive layoffs not much downward pressure on prices that i can see. at the same time it is much more likely that one of this things happens than prices in the area go up by any significant amount. so i think it is gonna be boring and it will be more profitable to keep renting for couple of years. that's unfortunate, but most likely true.
TBW-
The morality argument is also relevant. Currently most of the population of underwater borrows continues to pay their loan off. If there is enough talk about how it is not immoral to default than peoples behavior could change, which would be very detrimental to housing prices.
NoVAwatcher said...
Do think that it is morally acceptable to shackle your family under a burden of debt you have no hope of getting out from under?
IMO you shackled your family by buying into the bubble. Since you can afford it, how is it morally acceptable to bail on your commitment? Walking may help you build enough equity to buy Junior a nice convertible for his sixteenth birthday or pay for Louanne's wedding in 15 years, but you're also teaching your children not to honor their debts or accept the losses in a gamble.
I understand that it makes sense in a purely financial aspect to walk, but it earns you the status of "deadbeat". Is that morally acceptable?
Konstantin-
I agree with your general consensus. Not much good or bad news coming over the next year or so. I think prices in the mid market will continue to trickle down, but we will see.
Kevin-
I agree with your view. I also like the name you come up with :)
Cara said yesterday
We're talking an over $300k house here even at it's REO price. You want simply a shell to live in regardless of finishings because it's the cheapest possible way to live be my guest. For that kind of money, there's no reason you can't live better than that.
Thanks Cara. I've learned a lot from this blog. I am interested in what people say about listings and even more in the thinking behind it so I appreciate your detailed explanation. I don't believe that you ever identified the particular property but from if I identified it correctly from the hints that you have dropped it went UC PDQ. I'm guessing that buyer wasn't you.
c,
That's the thing. People have widely varying ideas of what certain properties should be valued at. In my opinion most on this board have very high expectations. The market decides value, plain and simple.
Va_Investor said...
"If your house went up 100%, does the bank get a chunk of that?
I see, the risk/reward only flows one way."
I don't agree that the banks are in the losing end in this equation. The risk/rewards of the banks are based on the interest that you pay to them, and fees, for the money you borrow. The higher the risk you represent, the higher the interest you have to pay. That is all.
If you do not pay, the bank gets the house to recoup the loss regardless of its current value. This can be traumatic for many families.
If your house loses value and you walk away, you are also taking a risk not just the bank. I call it even.
I am not going to cry for the banks. Their business model is quite something. Easiest way to make money the way I see it.
They could be conservative and make pretty good money on your money. But no, they wanted huge profits, and for that they gambled as people also gamble in the stock market. The higher the risk, the higher the profits, but also the higher the losses.
Here's a listing that puzzles me:
http://franklymls.com/AX7263901
It's a Fannie Mae foreclosure listed at 127% of 2009 tax assessment (394,654). Sure it's a great location but it is also a 2 BR 1 BA that Alexandria shows as 872 sq ft no basement (the listing says it has an unfinished basement). Looks like it was foreclosed on just below $415000.
I'm guessing that the list price is based on this comp
http://franklymls.com/AX6960799
Same size, nearby area but 402 Royal appears to be a nicer property that was tax assessed at a significantly higher value (610 in 2009).
The only thing that makes sense to me is that the LA really flubbed this one. What do you guys make of it?
I don't think that banks feel any guilt from evicting families from homes they can no longer pay, and putting all their belongings out on the street. So, please let's not talk about morality. This is just a business transaction.
Now, if everybody who is underwater walked away there would be a housing market collapse of catastrophic proportions. I think that banks will then lend at very high interest rates, and housing values would deteriorate. So I am not cheering for this scenario.
What may make fiancial sense for someone can cause an economic catastrophe.
C,
I think you have room to negotiate the price down, but someone else may pay full price based on the previous comp.
Without pictures of the inside is hard to tell. Basements do add value. At the very least this is storage space for a relatively small house.
Konstantin,
I think we generally agree. If there is no dramatic mortgage rate hike this year but instead a rise to 6% over the next 1-2 years, then prices will probably be mostly flat and/or maybe down 1-3% a year in some higher end submarkets. In other words little to be excited about.
There are of course other ways we could have another bust but they seem unlikely to me (foreclosure tsunami, Congress and President decide to dramatically decrease the size of the federal workforce, or unemployment goes even higher.)
Thanks dc2. I am in no way interested in this property, but I do enjoy window shopping.
Va_Investor,
Are you listing this weekend? They are saying it will be bright and sunny and in the 50s this weekend...
the banks use fractional reserve lending so they lend 12 times the capital they have
"I totally understand where you are coming from and I just think our opinions differ on this."
That is fair enough. I don't think this is perfectly clear cut situation myself.
I consider myself a moral person, but in business dealings I consider my moral obligation to be honest with those I am dealing with.
I will give them complete and accurate information to the extent possible, but I wouldn't expect them to be looking to do me any favors nor would I penalize myself/organization to do them any favors.
You might go into a deal willing to cut your price, but if they agree right from the start to the higher price... you certainly don't give them the discount, etc etc.
So going back to the walking away thing... if a buyer really intended to pay off his debt when he agreed to it, which is to say he was honest in his intentions at the time of the deal, then I don't see why the borrower should be held to a higher standard than the lender.
It would be different to me if someone did something dishonest like taking out a home equity loan with the intention of allowing he house to go into foreclosure, etc etc.
tbw,
Looks like we will put it on by Friday. It will be interesting to see what happens. Recent solds are good.
c,
No worries. The one we walked through is not under contract yet. I'm guessing it will be soon. I just don't think it will require paying list price to win it. If they accept another 10% off list then it starts to be a good deal.
We bought already, so no, no more buyers will be us.
c, dc2
Yeah with no interior pictures those look pretty comparable. I think you did indeed identify the comp the LA was using to set the list price. Might as well see if anyone will bite, they were both REOs.
Konstantin,
Yeah, it may very well get pretty boring pretty fast. I think we're all here in case it doesn't. I should expand my Frankly alerts so that I can show more interesting listings without revealing my location. Because man, there was a laugh-riot of a short sale listing yesterday. Bought in 2002 for $360k (very expensive at the time btw), SS at $450k, changed their price to $460k later in the afternoon... Listed with an agent who's never bought or sold a property in the last 4 years, owners no longer reside at the address, and the highest comp for that model last year was $445k on a place that was impeccable and had finished the carport into a room, not just left it as is. All I can think is either delaying the inevitable, or setting the price so high as to get no other offers, such that the buyer they already have lined up can offer something ridiculously low and hope the bank takes it.
A couple thoughts...you do own your house, even if you have a mortgage. Why? If the house goes up in value, you get to keep that increase! If the band owned your house, they would have rights to that increase. Of course, you owe the bank money on your debt, and the house is collateral. So you don't own the house "free and clear".
Second, I find it a little odd that ethics comes up so much when it comes to the decision to walk away from your house. To the extent that you earn money, pay bills and decide how to invest, each of us, or our households are businesses. When a bank loaned you money, they factored all the risks into your interest rate and terms. If you think the benefits of walking away outweigh all the costs of doing so, you should do it. In fact, if it benefits your family overall, I think you are ethically bound to do what is best for them! Now, if somebody walks away from their house they are 5% underwater on and hurts their credit for years to come, versus waiting or selling at a loss and covering the difference, I would say that is a bad decision, not necessarily ethically or morally wrong.
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