2010 Jan 11th

Underwater Mortgages – What’s the “Right Thing” to Do?

I seldom, if ever, repost articles in their entirety from other sources but I thought this article by Roger Lowenstein from yesterday’s New York Times was really worth a read:

Walk Away From Your Mortgage!

John Courson, president and C.E.O. of the Mortgage Bankers Association, recently told The Wall Street Journal that homeowners who default on their mortgages should think about the “message” they will send to “their family and their kids and their friends.” Courson was implying that homeowners — record numbers of whom continue to default — have a responsibility to make good. He wasn’t referring to the people who have no choice, who can’t afford their payments. He was speaking about the rising number of folks who are voluntarily choosing not to pay.



Source: First American CoreLogic, November 2009

Such voluntary defaults are a new phenomenon. Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?

Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

The moral suasion has continued under President Obama, who has urged that homeowners follow the “responsible” course. Indeed, HUD-approved housing counselors are supposed to counsel people against foreclosure. In many cases, this means counseling people to throw away money. Brent White, a University of Arizona law professor, notes that a family who bought a three-bedroom home in Salinas, Calif., at the market top in 2006, with no down payment (then a common-enough occurrence), could theoretically have to wait 60 years to recover their equity. On the other hand, if they walked, they could rent a similar house for a pittance of their monthly mortgage.

There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. But in a market society, since when are people responsible for the economic effects of their actions? Every oil speculator helps to drive up gasoline prices. Every hedge fund that speculated against a bank by purchasing credit-default swaps on its bonds signaled skepticism about the bank’s creditworthiness and helped to make it more costly for the bank to borrow, and thus to issue loans. We are all economic pinballs, insensibly colliding for better or worse.

The other reason is that default (supposedly) debases the character of the borrower. Once, perhaps, when bankers held onto mortgages for 30 years, they occupied a moral high ground. These days, lenders typically unload mortgages within days (or minutes). And not just in mortgage finance, but in virtually every realm of our transaction-obsessed society, the message is that enduring relationships count for less than the value put on assets for sale.

Think of private-equity firms that close a factory — essentially deciding that the company is worth more dead than alive. Or the New York Yankees and their World Series M.V.P. Hideki Matsui, who parted company as soon as the cheering stopped. Or money-losing hedge-fund managers: rather than try to earn back their investors’ lost capital, they start new funds so they can rake in fresh incentives. Sam Zell, a billionaire, let the Tribune Company, which he had previously acquired, file for bankruptcy. Indeed, the owners of any company that defaults on bonds and chooses to let the company fail rather than invest more capital in it are practicing “strategic default.” Banks signal their complicity with this ethos when they send new credit cards to people who failed to stay current on old ones.

Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.

In some states, lenders also have recourse to the borrowers’ unmortgaged assets, like their car and savings accounts. A study by the Federal Reserve Bank of Richmond found that defaults are lower in such states, apparently because lenders threaten the borrowers with judgments against their assets. But actual lawsuits are rare.

And given that nearly a quarter of mortgages are underwater, and that 10 percent of mortgages are delinquent, White, of the University of Arizona, is surprised that more people haven’t walked. He thinks the desire to avoid shame is a factor, as are overblown fears of harm to credit ratings. Probably, homeowners also labor under a delusion that their homes will quickly return to value. White has argued that the government should stop perpetuating default “scare stories” and, indeed, should encourage borrowers to default when it’s in their economic interest. This would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms. In theory, this could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis.

No one says defaulting on a contract is pretty or that, in a perfectly functioning society, defaults would be the rule. But to put the onus for restraint on ordinary homeowners seems rather strange. If the Mortgage Bankers Association is against defaults, its members, presumably the experts in such matters, might take better care not to lend people more than their homes are worth.

Roger Lowenstein, an outside director of the Sequoia Fund, is a contributing writer for the magazine. His book “The End of Wall Street” is coming out in April.

This article has been revised to reflect the following correction:

Correction: January 10, 2010
An essay on Page 15 this weekend about underwater mortgages misstates the parties who believe their homes will go up in value quickly. It is the homeowners — not the “mortgagees,” who issue mortgages.

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  1. Lonnie

    This is becoming a reality all over even in the boating industry..
    There are Yachts floating off the coast of So. Florida without anyone on board….Basically, released by the owners with “Underwater” debt..
    Pretty Sad…

  2. Laki

    The article hit the nail in the head. The morality argument doesn’t hold water precisely because the other side of the “trade” (i.e. whoever holds your mortgage) is strictly trying to maximize the profit and especially since they are being assisted by the public funds! So a typical homeowner is already being forced to subsidize the holder of his mortgage (via government bailout policies) and now on top of it he/she is supposed to keep making uneconomical decisions for themselves and transfer even more of his/her wealth to financial institutions by continuing to make monthly payments when it doesn’t make sense to do so anymore?!? Moral arguments, if there were any to begin with, became defunct once the public money starting bailing out institutions (and other defaulting borrowers for that matter).

    If everyone is getting bailed out, and you chose to be “moral” and keep making payments – guess who ends up subsidizing the entire system? You are!

  3. Underwater

    Okay so I’m underwater for my place in Daytona. So far underwater I can’t see daylight.
    What do I do?

    I can pay the bills, but the place continues to rocket down. I feel like I was conned back in 2007.

    Do I pay for the next 5-7 years in hopes of a market return, or let Countrywide (now BofA) eat it, since they are the ones that approved me?

    I never thought I would even consider doing that, especially since I can pay, but when you buy something for $399,000 and now it’s worth $199,000 according to zillow, should I take the $200k hit?

    I have never been late on a payment for anything in my life (except by accident). But because I’m responsible should I now shoulder the problems of the world myself while totally draining my accounts?

    It’s a tough pill to swallow…

    Scubaman

  4. Tiger

    Man oh man! See things like that make me pissed off, it is one thing if you can no longer afford this payment, it’s another when you can just walk away.

    In other countries you don’t pay you go to jail. PERIOD. End of story, end of discussion. Now **that** gets people to get out their checkbooks and write. That gets people to forget about the new car, the vacation, and write the check.

  5. Tiger

    Scubaman, I am sorry to hear. But let me ask you this; have the crazy appreciation continued; and your home is now worth $600K, would you have given back that extra $200K to bank of America?

    Morality is a tough, very tough burden to carry.

  6. Underwater

    Yes, by buying something else… a new car, boat, another place, kids education… it would have gone back into the economy. I wouldn’t just sit on it and throw it in the air while laughing evily.

    So you say I should eat it while the folks at BofA get millions in bonuses? Let them buy their 10th luxury car?

    Yes morality is very tough burden to carry…

  7. Barry

    Tiger, I completely disagree with you. When a company doesn’t pay their bills, they don’t go to jail (“they” would probably be management), so it doesn’t make sense to hold individuals to a different standard. We did away with debtors’ prisons a long time ago.

    I think it makes complete sense for borrowers who are underwater and can otherwise use that money to pay for a lower rent, etc. to do just that. There will, of course, be consequences such as a massive hit on one’s credit report. If an individual knows the consequences (and what their mortgage company will do as per their mortgage agreement) then it becomes a business decision and one that should be approached as such.

    To me, the big argument for paying your mortgage when you’re underwater is that it’s good for the “industry” or the “market”. In matters like this, where it’s probably a person’s biggest financial commitment, people should act in their own self-interest. I wouldn’t just pay my mortgage to make my neighbor’s house worth more, especially when it’s in my interest to not pay.

  8. Tiger

    Underwater, all the things you mentioned pump money back into the economy, which is great, but then again, it’s still relative to you; the money gave you power to do things you couldn’t afford before.

    What folks at BofA make is too much, I agree. But then again, you can’t say that you shouldn’t pay back a debt because the person that gave you the debt ‘does not need it’. You are simply justifying.

    Why not just live in your home and enjoy it for what it is?

  9. Tiger

    Barry,

    Paying your dues is a business decision now? Ok, so you’re saying that one should take a vacation, buy a fancy car, max out a credit card on useless retail, and then not pay as this is a business decision afterall. Why should you pay your bill for the greedy bastards at Capital One or AMEX? They have a lot of money.

    How about Vegas? Let’s go to Vegas bet it all on a nice blackjack table and just walk away (of course you can’t, thanks to the casino’s own ‘law enforecement’)

    Why stop at that? Let’s justify everything using business decision mentality. I mean stealing or prostitution is an **excellent** business! As long as you are doing it to rich people.

    Where do you draw the line?

  10. Underwater

    Exactly, I am justifying. If the same folks I’m talking about sticking it to, did their jobs correctly we wouldnt be in this mess.

    Is it my fault they were apparently giving million dollar loans to folks that make 20k a year? That’s my fault? I should now work my tail off so I can pay those same people back??

    Why is it the honest guy needs to always do the right thing, but folks that screwed everyone over are allowed to do what they want?

    Did I cause the housing bubble? Did I give people with horrible credit, crazy loans? Did I do that thousands and thousands of times over?

    Gee I don’t recall doing that… but you’re right, I should pay for their mistakes for the next 30 years.

    Thanks for setting me straight Tiger!

  11. Barry

    Tiger, I draw the line at illegal activities. So far, not paying your mortgage is not against the law. You’re in a civil contract with your mortgage company.

    If someone wants to make their decision to invest in blackjack at the casino, it’s not my decision to say no. They’re more than welcome to take their chances.

    Paying your dues IS a business decision. Buying stuff that you can’t afford IS a business decision. Does it hurt you when you don’t pay the bill and the repo man comes to take the stuff you bought? That would be a good reason to not do it. Does it hurt when your next credit card company doesn’t want to give you a credit card? That’s a good reason to not do it. Does it hurt when your homeowner’s association puts a lien on your house for failure to pay? I certainly hope so.

    Maybe the problem you have with my argument is the use of “business decision”. Let’s go with “rational decision” instead. If I weight the pros and cons of paying my mortgage, then I should come away with a rational decision of what to do. If part of my rationale is that it “feels good” to pay my debts, then so be it. Pay away. But I personally would not impose my morality of wanting to pay debts onto others.

  12. Tiger

    Underwater,

    I am sorry if I sounded harsh, please don’t take this personally.

    I totally understand what you’re saying, and yes, a lot of people didn’t do their jobs right, a lot of people should be thrown in prison in my humble opinion.

    I can say the same thing man about anything! I work my behind off, and while I’m blessed with a job, my work demands that I stay on the road almost 100% of the time. Have you seen ‘Un In The Air?’ that’s my lifestyle. I am a hard working, underpaid, overtaxed guy here. Why am I giving away 40% of my income? Why should I pay for someone else’s kids school education, or some couch potato’s unemployment, or worse yet, for a war that I mentally and morally oppose?

    But towards the end of the day; it’s a vicious cycle, and we are all connected. Someone could argue, for example, that have you sold in 2007 and made a profit, you would have benefited from the subprime loans.

    But the overall picture, we all ‘got each other’s back’, through the good and the bad, in hope that if one day we fall hard, someone else gets our back (Not optimistic though). That’s the point of living in a modern society.

  13. Ari

    Tiger debtor prisons have been outlawed for hundreds of years in most of the 1st and 2nd world. I’m guessing the countries that you are referring to are the types of places that send people to prison for speaking out against the government.

    The Goldman Sachs reference in the article says it all. Here’s a financial company walking away from its obligations b/c it’s a smart business decision. There is no reason why the average person should not take a lesson from Goldman and other similar financial companies and do the same.

    Listening to idiots like John Courson tell you not to default on your obligations, no matter the cost to you or your family is about as morally bankrupt as General Motors urging you to “Buy American” in the late 80’s early 90’s while they closed factories all over the US and opened up shop in Mexico.

  14. Lori

    There is a disconnect between action and responsibility for that action here. The banks & lenders who made the bad loans do not suffer the consequences of their decisions. The loans cannot be modified in bankruptcy court and the principal cannot be reduced. Instead, the homeowner makes a financial decision and the entire community suffers.

    Should the homeowner care? No, he or she has moved on. But who is responsible for bailing out the decimated neighborhoods popping up all over America? Walking away from your underwater mortgage results in abandoned properties – now entire abandoned communities. The municipality has little tax revenue coming in to repair the damage. Schools close, people flee – it’s like Katrina all over again. The cycle worsens as the market value of the properties in these places continues to drop, causing more people to be under water. Politically, it is suicide to expect Congress to impose the responsibility back on the lenders to take the loss or clean up the mess they’ve left behind. Yet isn’t that where the responsibility ultimately belongs?

  15. Underwater

    Ari, right on.

    Lori, totally true. This is the banks fault, no one elses.

    Actually, I tried to refinance my place, it is a vacation home btw. BofA won’t do it because I am underwater. I also have no financial hardship.

    I’m underwater BECAUSE of BofA… and ironically I WILL HAVE financial harship if BofA doesn’t refinance for me.

    Then these banks wonder why folks walk away.

  16. Tiger

    Underwater, I totally agree with you on this one, I think more than anyone you should be able to refinance, take advantage of the low interest rate that banks are enjoying now. The system is heavily flawed, that’s all I can say.

  17. Underwater

    Just for fun here are 2 senarios, which one would you pick?

    I own a home in the suburbs, condo in hoboken, home in daytona. Hoboken and Daytona are rentals.

    I plan to sell Hoboken this spring. From the proceeds I plan to pay off my HELCO on the primary home. I can then:

    1) Pay down my mortgage on Daytona and refinance. Still being totally underwater, but doing the right thing.

    2) Go on vacation, buy a car for cash. Then walk away from my Daytona vacation home.

    Option two will ruin my credit, but hey, I already own everything I could want.

    Option one gets me nothing but bills for the next 5-10 year with little hope of coming out ahead.

    What would you do??? Hopefully there are many reasons to go for option 1

  18. Laki

    Underwater, it is not BofA that won’t refinance you. It is the US government. People don’t realize this but the US government is making up around 95% of the mortgage market today (I use the term “Government” loosely and by that I mean the treasury, the fed and the GSEs). Banks are just pass-through entities right now. Out of 1.5 Trillion of Mortgage origination this year, the government had purchased 1.4 Trillion. Ultimately all the mortgages end up with the government. So the bank will only make a new loan today if the government agrees to purchase it. The bank just makes the origination fee and then offloads the mortgage to the government.

    So, BofA would refinance you if the government was willing to buy your mortgage from them. (Un)fortunately for you the government will usually not buy underwater mortgages, so you’re out of luck. Maybe this is not so unfortunate as the best decision for you personally is probably to walk away even if you could refinance.

    As far as the mortgage rates being low today – this is so only because of the government intervention. Once they stop buying all the mortgages we’ll see at what rates the private market is willing to lend. I assure you those rates are much higher than where the government has them today.

  19. homeboken

    Let’s set the record straight.

    Banks are acting like banks, they are doing what is best for themselves.

    The government (Fed, Treasury, Senate, House and Presidency) are doing EVERYTHING they can to make sure that these banks do not fail. The effectiveness of their work is debatable, but the government could 100% change the way the banks are operating if they wanted to.

    After Obama was elected, there was a youtube video that made its way around the net where a woman claimed “Obama is gonna pay my mortgage.” That woman turned out to be 100% correct.

    As for abandonding your house, I fall in the business decsions camp. These foreclosures and bk’s need to happen so that the market can return to equilibrium.

  20. patk14

    Underwater, so it was all B of A doing terrible credit work on your application, lending you too much money on the Daytona investment, and you bear no personal responsibility? Please. Many prudent people realized that we were in a real estate bubble of epic proportions (with Florida being one of the regions with the highest appreciation) and remained renters. So we have to allow your mortgage to be reduced down to what is now considered the market so that you can keep it? Screw that.

    Why did you buy the Daytona property in the 1st place? Because you thought the appreciation was going to continue and you were dead wrong. B of A didn’t force you to borrow. You could have put down a large down payment and borrowed less. Why didn’t you? When you purchase a stock, and it declines in value, do you blame the broker? Do you want your money back when you lose and be able to keep your gains? How much have you made on your Hoboken and suburban NJ properties? Would you have been able to purchase them without lending institutions offering you mortgages? Should you be forced to sell them to make good on your mortgage contract in Daytona?

    Again, these mortgage reductions and other programs aimed at keeping “homeowners” in their residences are pure transfers of wealth from taxpayers to the owners of real estate. How is someone who speculated on real estate, put down only 10% on a property that has declined 40% from peak, and is deeply underwater a “homeowner”. They are speculators and need to be washed out of the system, allowing prices to fall to a new equilibrium, and encouraging sideline buyers to enter the market.

  21. JC

    Underwater,

    Did you skip any mortgage payments? Usually the bank (government) wont speak to you unless you skip a few payments.

  22. Tiger

    Underwater, from the wording of your question, I think you pretty much made your decision. My father told me that there are two kinds of people who seek advice; those who actually want a pure unbias advice (very rare) and those who want justifications to their already pre-made decisions.

    Not going to tell you what to do; it’s your money, it’s your choice and it’s your life.

    just thank your lucky stars you have a roof (in your case, three) over your head in this rough time.

  23. Underwater

    I’ve never skipped a payment in my life on anything.

    Yes it’s ironic, I really can’t get “re-adjusted” until I start skipping a few payments, but if I skip too many they won’t help me either… it’s totally absurd what they are doing.

    Patk14, what I’m saying is the “bubble” was caused by the banks, plain and simple. I bought the house with equity I had in hoboken as a vacation home. I also rent it out.

    Luckily my wife and myself make enough to stay afloat this long.

    What I’m saying is because of the banks, the market was apparently inflated unrealistically. Because of the banks, the market collapsed. Neither one of those things is my fault. Yet I am the one paying, not the bank. Is that fair?

    I’m not some idiot who just buys buys buys. My complaint is, I am now left holding a bag of shite for the next 5-7 years because the banks screwed up.

    Sure I can pay, the question is, why? Am I a good person for doing that, or an idiot?

    At this point, I think I’m the idiot.

    Real estate is not the stock market. If I wanted the stock market I would have bought stock.

    BTW, Zillow sent me an email today informing me my property has lost 10% of value in the last 30 days.

    Oh yes, thats my fault too…

  24. homeboken

    patk14 – Our system is so screwed up, I really do fear for the future of the American way of life. There is zero accountability for your actions anymore.

    I am a renter too, you know what happens if I don’t pay my rent? I get evicted, tossed out on the street, I lose my security deposit, my credit gets dinged and I get a negative rental history that will preclude me from renting anywher palatable for the forseeable future.

    If I “bought” a home with 0 down and then stopped paying the bank, then government, the bank etc all line up to help me figure out how to stay in my property.

    Let me ask you all this. Every transaction has 2 sides, buyer and seller. In the case of “underwater’s” example above why blame B of A? Why blame the buyer? Why not go after the seller? Afterall, he is the one that got paid in this transaction? If you are looking for the party that benefited then the Seller is who you want. Leave the taxpayers alone.

  25. homeboken

    Underwater says “I’m not some idiot who just buys buys buys.”

    Acutally, you are precisely this idiot. Sorry to break it to you. You seem to want to keep your money and still remain on the moral high-ground. You can’t have both.

  26. Underwater

    homeboken, guess you only read the lines you want.

    Thats okay. Whatever gets you through the day.

  27. homeboken

    No, what gets me through the day is that I don’t have to find a scape-goat for financial decisions that I make thay turn sour.

    You bought an investment property in Daytona, it is losing value. Now you want to blame the banks, the goverment, anyone except yourself. Do you want us to erect a statue in your likeness to celebrate the fact that you are obliging to your contractual obligations?

    If you want to know who really is to blame for your problems, go grab a mirror.

  28. patk14

    The bubble in real estate was caused by many things but basic greed is the primary factor. B of A had very little to do with you buying that “vacation” property. You looked at it, saw the price, and bought it on credit. You signed the contract knowing what your monthy payment was going to be and the sales price of the property. Same as you would buying a car. Did BMW offering 0% financing force people to buy a 7 Series for $80,000? No, they wanted the car, compared various models, knew how much they could afford, and made the purchase.

    The government, by encouraging home ownership, did everything in their power to make it easier for potential buyers to purchase a home. FNMA and Freddie Mac either underwrote or insured huge sums of mortgage debt. Banks would arrange a mortgage, FNMA and Freddie Mac would insure it, and then it was sold off to investors throughout the world as being US Government insured. The Fed did everything in their power to keep market interest rates low after the Tech collapse and subsequent recession fueling asset prices. Everyone was talking about how much they were making on real estate, buy now or be priced out forever, etc. Younger/poorer people had to stretch further and further to buy while earlier buyers smiled all the way to the bank (taking out home equity loans to buy the new SUV). The government actions were actually making it harder for many to actually afford a home without burdening themselves with debt. Yet people kept buying.

  29. JC

    jeez…Even if Underwater admits greed and responsibility for the purchase the underlying question is what should he/she do? Just because he/she finally admits should payments continue when Morgan Stanley is walking away too. Underwater will get the hit on credit rating due to foreclosure and all the associated problems that come with that credit score.

    Underwater…you did sign your name and ultimately make the decisionto buy the place right? Even if your banker is a snake salesman you could have said “no”. So, its on you. However, the question of what you should do now is still on the table.

  30. Underwater

    never said I wanted free money, never said it wasn’t my responsibility. Never said I wouldn’t pay for 30 years.

    I asked, should I, while banks continue to give out big bonuses and I go by every month paying my mortgage at a rate they won’t let me adjust.

    I will totally admit, trusting professionals was my mistake.

    It’s interesting to see how because I’m successful and still have a job, I guess that means I should just pay every dime I make for the rest of my life to cover for the mistake of others.

    Weird world we live in. Btw my credit score is 745, yet I can’t refinance that property.

    How is that fair? Oh that’s right, I signed a contract. Bend over, shut up, and pay your money…

  31. Underwater

    homeboken,

    How exactly is any of this my fault? Do you read these posts before you accuse people? I have paid every bill I owe.

    It’s my fault property values have gone down? How do you figure that?

    Because I own stuff it must be my fault… ah.. yes it’s thinking like that, that will fix this mess.

  32. Lori

    Maybe this situation is such a huge mess that there is no one party at fault. There were lots of circumstances and factors that contributed to the problem. There is not going to be an easy, painless or simple solution.

    I question, however, if there really is a big affect on one’s credit score. Underwater says his credit score is 745. Should it be? If he walks, will it really go very far down? I’ve heard otherwise and if that’s true, where is the deterrent effect?

    My gut tells me that as a taxpayer, I’m going to end up paying for this one way or the other yet I’m not getting any multi-million dollar bonus. Yes, it all seems very unfair. I’d love to hear some creative ideas about how to fix it all.

  33. BILL

    Underwater…its your fault for making a poor investment decision.

    If I buy a stock and the price goes down, do I get to cry that it wasn’t my fault?

  34. Underwater

    Do you pay for that mistake for 30 yrs, with interest while everyone else who bought the same stock walks away scott free?

    I like how people think the real estate market is like buying stock…

  35. Lori

    You get to live in the home while you pay for it. You haven’t lost any money except on paper if you don’t sell. You can’t live in stock.

  36. BILL

    they walk away like everyone else

    or dump it…whatever

    just stop acting like you were totally innocent here.

    I mean how much did you make on your Hoboken condo?
    How much of those gains are due to easy bank lending policies?

  37. laki

    Lori – No way to fix it at this point. The cat is out of the bag. The decision has been made by the government long time ago that taxpayers will eat up all the losses that are in the system that have largely been created by the housing bubble. Why do you think the government is running 2 Trillion dollars of deficits per year? They’re moving the losses from the private sector onto their own balance sheet. These losses will eventually be shared by all the taxpayers either through higher taxes or inflation. One or the other. Somethings gotta give. The politicians are too far on this road to make a U turn (Both democrats and republicans – same policies more or less regardless of the rhetoric). Bank bailouts, home buyers tax credits, mortgage interest deductions, below market mortgage rates, loan modifications, Fed purchasing mortgage bonds, FHA loans with 3.5% money down TODAY. etc etc. All of these are wealth redistribution programs that are indirectly subsidizing one part of the population at the expense of another. It’s not fair, it’s not right, but this is what is going on.

    All the market participants (homeowners, banks, regular people, everyone) know that the government has made this decision, and as such they’re all adjusting their strategy to MAXIMIZE THEIR OWN FINANCIAL OUTCOME. This is evident from the behavior of both banks (take subsidy on one end, give HUGE bonuses on other end) and homeowners that are deeply underwater (they’re pretty much all choosing to default even if they could keep paying).

    So, “What is the right thing to do?” is a utopian question at this point. The government itself has made the question irrelevant by distorting the markets and by creating perverse incentives. Given the rules of the game, and the behavior of other participants, doing what would’ve otherwise been “the right thing to do” becomes a dumb thing to do.

    People who have studied game theory know very well what I’m talking about.

  38. Underwater

    Bill,

    What does “just stop acting like you were totally innocent here.” mean?

    Am I guilty of something? What would that be exactly?

  39. leafgreen99

    This is America: CEO’s of major companies make a lot of money no matter what. Small-time speculators like Underwater don’t always make a lot of money. But because this is America, at least small-timers have the opportunity to make or lose money.

  40. Underwater

    Ah, I gotcha Bill. Well considering I didn’t sell it yet, I guess none.

    Thanks!

  41. Tiger

    laki, good points; there is no easy way to fix this (btw, I thoroughly enjoyed game theory in college! did you read anything good about game theory recently?)

    It’s a mess, and I think the only way to truly get out of this is for the US, as a country, to step up the game. We can keep on flipping money back and forth in taxes and bail out, we can keep on printing more money, but to truly increase our net worth as a nation we have to step up the game in this global economy. I work in IT, and I’m telling you the world is much flatter than you think.

    That means more hard work, responsibility, and less moaning. I can’t help but feel the constant ‘me, me, me’ in people’s words nowadays. Talk about sense of ENTITLEMENT!

  42. UPennAlaskan

    The stock market examples as a proxy for RE investments are totally valid. The only nuance is that for most people their RE venture (or speculative bet) is a levered investment. Hence, the losses are magnified and can be rather painful. Equally it can juice the positive returns. Imagine calling up your local banker and asking to borrow 80% down to start a hedge fund. :-)

  43. Bill

    80% leverage in hedge funds is pretty standard

  44. laki

    Regarding hedge funds… The borrowing they do is totally different than that of a homeowner. They constantly have to post collateral. So if they get leveraged 5 to 1 (i.e. equivalent of 20% down on a home), as soon as the underlying asset looses a little bit value they have to post more collateral. If the asset starts going down and starts approaching the -20% territory, the lender will liquidate them to make itself whole (and likely wipe the hedge fund out completely). The lender can do that whenever it choses for whatever reason. Lender can wake up any day and decide not to renew the loan, forcing the hedge fund to have to pay back all the money in short order. This is how Repo/Margin debt works.

    For homeowners however it’s a totally different story. FHA today gives home buyers (with pretty bad credit with history of missing payments in the past) more than 28 times leverage on their investment (3.5% money down), with no recourse (i.e. they cannot call the loan ever regardless of what happens with the value of the underlying asset), at below market rates (Fed/GSE buying mortgages pushing the rates down), with tax deductible interest. Holy cow how about this MASSIVE subsidy that makes no economic sense! (If you think otherwise think about it for a second – would YOU lend YOUR OWN MONEY to somebody you don’t even know at such lax terms for 30 years at such low interest rate ?!?!? I don’t think so).

    So on one hand you have lending to hedge funds that is facilitated by a private market which is extremely stringent with lots of safety features with loans that mature more or less daily. The setup itself is not conducive for speculative leveraging at all. So you better make sure you know what you’re doing if you want to make a leveraged bet as a hedge fund or you’re gonna lose all your money pretty quickly.

    On the other hand you have super lax standards (even today!) that provide 30 year no recourse loans with huge leverage at very low rates to just about anyone who applies.

    Which loan would you use to speculate? It’s a no brainier! And hence the housing bubble….

  45. curious

    maybe i missed this somewhere in the discussion, but underwater, why don’t you just sell? i know it will be a shortsale, but you’ll be out of the property and won’t have to make any more payments. this probably will also have the least impact to your credit score.

  46. Underwater

    I may do a short sale. I may hold until the market comes back. I may walk away. Still determining the best course of action.

    The comments here of how I must suffer because I knew the risks are BS. I have no idea what the angle is of some of the folks here, but it sure is twisted.

  47. homeboken

    Underwater – the argument is not that you must suffer, but you can’t simulataneously benefit and then look for sympathy.

    Many people have asked and you haven’t answered: How much did you make on your Hoboken condo? No details needed, you likely made a very nice profit. Do you intend to share that profit with the bank? Afterall, you expect the bank to share in your losses on your Daytona property.

    You say, “Is it my fault that real estate prices have declined? The answer is no.

    But when you purchased the Daytona property, you paid a price that you determined the property was worth at that time. That decision was 100% yours. Nobody forced you to take a loan and buy an investment property. So live up to you obligations, or walk away, it doesn’t matter to me at all. Just stop trying to pin the blame on someone else.

  48. stan

    hate to pile on, but I agree with Homeboken.

    You made an investment, take responsibility for it. You have option, decide which one works best.

  49. Underwater

    so it’s not the banks fault that this happened? I’m not talking about MY situation. I’m talking about the millions of people in the US alone.

    It is 90% the banks fault. I’m not saying they should pay me for that. I’m just saying that everything is a result of their lack of judgement that I, the lowly customer, depended on.

    I didn’t think the banking industry was a Ponzi scheme.. but it is.

    I haven’t received 1 cent from anyone for anything. Not sure why you all don’t get that. Not looking for sympathy. Clearly I would have stopped writing here a long time ago.

    I was looking for answers or suggestions on what to do. And explain that the “solutions” that are being pushed make it easier to just walk away, than fix the issue. I see now that there are no creative answers other than “suck it up and pay your bills”

    Wow, great advice.

    You would think in this situation I could call up the bank and say, hey can I lock in todays rate?

    The answer is NO!!!!!! Because 1) I pay my mortgage each month 2) I make 6 figures 3) I have good credit 4) my place is underwater

    So the deal is if you ARE a responsible adult you get penalized!!

    Why don’t you read what I’m saying instead of saying I want free money…. NEVER SAID THAT

    If I just walk away or stop paying my mortgage and ruin my credit, then and only then with the bank assist me. Does that make sense????

    I’m I pissed I’ve lost money on this, of course. Did cry to you and ask for money? As I have said 20 times already, never asked anyone in my life for money. Get it???

  50. Topdot

    Great Article! Heres my argument. What if you take out a mortgage on a home that costs you $800,000, then two years down the road the same home is worth $600,000. You default on your loan and loose the home. Then another 3-4 years later then same home is now worth $900,000 and eventually more. I understand the fear in selling but you never know.

  51. Topdot

    Great Article! Heres my argument. What if you take out a mortgage on a home that costs you $800,000, then two years down the road the same home is worth $600,000. You default on your loan and loose the home. Then another 3-4 years later then same home is now worth $900,000 and eventually more. I understand the fear in selling but you never know.

  52. BILL

    Underwater…what rate are you paying?

    What type of mortgage did you get to buy this place?

  53. Underwater

    1 yr adjustable. Yes, I am pure evil.

    So here’s the thing I had a 5 yr adjustable in boken with the intent to refinance or sell after year 5.

    I am in year 7 but have not sold or refinanced. Why, because my adjustable is 2.25% until september of this year. I intend to sell this spring. And according to you folks make so much money I should never be allowed to make money again!

    Daytona is also low at the moment. 5.25% and being the responsible person I am (believe it or not) I’ve already tried to refinance. Which I was rejected because I am underwater.

    So, once again my point is, they are pushing people (not just me) to ruin their credit and get out because in a year from now my rate may be 8.5% and I will be even further in debt because of the banks refusal to work with me.

    I’m enjoying the fact that folks here are bitter and we should all have 0 net worth. Sadly I am being responsible and trying to optimize the situation.

    So rather than attacking me for having a few places, perhaps you should understand I am seeking advice.
    Or is that people who are able to survive in this economy should not seek advice and just keep their mouths shut and move along.

    Very amusing. I swear if this was a resturant discussion board you’d all be saying “you bought the restaurant, you opened it in a very bad economy. You should suck it up and get what you deserve.”

    Advice board this is not… but now that I see you are all just angry folks that think one person has cause the housing mess, I am enjoying the comments.

    Perhaps there is still one peace of advice I will get out of this discussion. (here come the DROP DEAD! ones)

  54. homeboken

    Underwater – I guess I don’t understand your point.

    You are askig the bank to adjust your rate, because your home is worth less than what you paid? The bank has no reason to do that. You state you can easily afford the monthly payments, but yet you want the bank to lower your rate so you can save money. Why should the bank renegotiate a profitable loan, just because you want them to?

    By that token, would you allow a bank to raise the rate on your properties that have appreciated in value? They have as much right to your profits as they do to your losses right?

  55. Underwater

    where did I state I can easily afford monthly payments?

    Never said that… and rentals are paying 25% of what they were because of so much availablity and the abilty for folks to buy places rather than pay rent. Plus everyone wants the “deal” which I can’t blame them.

    again, not asking for free money, just to make that clear.

    Homeboken, do you work for a bank? Did they not make profits beyond expectations in 09? Did they not already get my tax monies to save their butts?

    Once again, I am stating they are making it EASIER for people to walk away, than work with them to get through this mess…

  56. homeboken

    Under -You said:

    “You would think in this situation I could call up the bank and say, hey can I lock in todays rate?

    The answer is NO!!!!!! Because 1) I pay my mortgage each month 2) I make 6 figures 3) I have good credit 4) my place is underwater

    So the deal is if you ARE a responsible adult you get penalized!!”

    My last point is this – You can either default on your mortgage, get your credit dinged but possibly save some money via debt restructure
    OR
    you can continue to pay as normal and hope for the Daytona market to recover.

    What you seem to want is for the bank to refi your existing loan even the “V” in the LTV portion of you loan has dropped by X%. This would involve the bank taking a loss for your gain. Unless forced to a bank won’t purposefully enter into an agreement where they lose money and you make money.

  57. JC

    My advice, leaving out the ethics of it, would be start skipping payments. The bank may approve a short sale if you can bring them a buyer or they may modify the loan via Interest rate or principle write down.

    There are specialists out there that will handle the sale and negotiations with the bank. I’m sure there a are plenty of crooks too so do your DD. Also speak to an attorney ASAP, one that works closely with this specialist. You should find out your tax and credit implications. Also if there is any recourse above and beyond the agreement of a short sale. good luck

  58. Tiger

    I find myself agreeing with JC actually; perhaps you need to go with option 3 that they described; a short sale after consulting with a specialist. That is probably a good compromise between walking out entirely vs paying for a property that lost half it’s value.

    On another note, I’m surprised you kept it for seven years+, it is one thing to keep your primary home, but for a third home (i.e. vacation / investment), I would have sold the moment I got down to ‘break even’ point (I assume you bought in 2003/2004 and saw some appreciation at first).

  59. Underwater

    JC is the second person to give me that advise. (other person about 4 months ago) I haven’t done it exactly for those reasons. It doesn’t seem ethic to purposely skip payments.

    So they are forcing people to be unethical.

    It is a sorry state we are in, that is for damn sure!

  60. BILL

    “So rather than attacking me for having a few places, perhaps you should understand I am seeking advice.”

    Your options have been layed out multiple times
    1. keep paying
    2. walk away / default and refi
    3. pay the loan down and refi

    As you said you could have everything you could need paid in full and wouldn’t need any credit so I would go with option 2

    You have no choice but to play the game the banks set up

  61. What

    Underwater,

    It is clearly a business decision; the consequence of not paying is that you forfeit the house to the bank; that is the contract. Don’t let anyone try to steer this towards a morality discussion. Whatever you decide needs to be in your families best interest. It’s difficult for me to say that as I will likely take a tax hit when the next round of bank bailouts occurs if mortgage losses continue. You should contact a lawyer to fully understand your situation before deciding what to do.

    That said, please don’t deny responsibility for your initial over-priced purchase.

  62. JC

    Yes, they are forcing people to be unethical. They are only helping those that need it. So, skip a few payments and show you need the attention. If you feel bad about it later and nothing comes out of it then make a lump sum catch up payment.

    Foreclosure will hurt community pricing the most and your credit the most. If you have assets they MAY come after you but the chances of that are low. Even if they do it could be years out and you will negotiate a deal .50 on the $1.00.

    Short sale will hurt community pricing a bit and your credit a bit. You will be on the hook for payment at your income tax level for the $ forgiven. Make sure there is no recourse above and beyond the short sale deal.

    Regular sale will hurt community the least and your credit the least, but you will have to come to the closing with a large chunk of money. This will surely hurt your wallet.

    wait and hold…well, who knows.

  63. UPennAlaskan

    >It is 90% the banks fault. I’m not saying they should pay me for that. I’m just saying that everything is a result of their lack of judgement that I, the lowly customer, depended on.

    Who bears the responsibility of the aftermath effects of drug trafficking? The drug dealers or the drug users? I like to think its the later.

    What I will say in Underwater’s defense is that the mainstream media and the government has been very pro RE for the past 50+ yrs. Thus creating a culture where homeownership (and RE investments) is normal and a good thing. This basic premise is seldom challenged. Generations have been brain washed into oneway thinking.

  64. Lori

    What constitutes homeownership? Do you really own your home when you have only a 3.5% stake?

  65. BILL

    “What constitutes homeownership? Do you really own your home when you have only a 3.5% stake?”

    Nope….at 3.5% down you only own a call option on the property

  66. homeboken

    Lori – Getting back to Hoboken, do you have any data (anecdotal or otherwise) on what the average % down payment is for first time buyers in our town?

    FHA is the lion-share of the market nationally, but I am not sure that translates into similar stats for Hoboken.

  67. stan

    “That said, please don’t deny responsibility for your initial over-priced purchase.”

    this was my issue exactly. sorry to hear the situation, you have some options, deal with it, but don’t deny you responsibility. You made an investment, it didnt work out, play the game by the rules set out and do what’s best for you.

  68. Lori

    There are so few FHA approved buildings in Hoboken and spot approvals are very hard to obtain. My educated guess is less than 5% FHA and over 85% of buyers today put down 20%.

  69. Craig

    You are not getting a condo in today’s market via a conventional loan with less than 20% down. It is true that here are only a handful of FHA approved buildings in Hoboken. But spot approvals are not that hard to obtain. They are quite easy to obtain as long as the building meets the spot-approval guidelines and you have a competent lender that specializes in FHA loans. I am purchasing my unit with a FHA spot approval (I put down more than 3.5% though) and it only took 30 days from contract to closing. My lender is Wells Fargo and they are really on the ball. Only problem is HUD is ending spot approvals effective 2/1/10. You need to have an active FHA case number by then or you can’t get one.

  70. patk14

    As someone who works in lending (not mortgages) at a bank, it absolutely shocks me that after all that has gone wrong in the real estate sector, that the FHA is making low interest loans with only 3.5% down to people with questionable borrowing habits. How in the world will this not end badly for the taxpayers? The taxpayer is taking all of the downside with a very low return while the purchaser gets all of the upside. I assume that they are doing this to artificially put a floor on real estate values without coming right out and saying that they are preventing the market from determining the true price.

    Underwater, I think many people on this thread want to see you write that you are ignorant about real estate valuation. That you did zero due diligence prior to buying a vacation home in Daytona that you intended to rent out at a profit and eventually sell at a nice profit all the while deducting interest expenses from your taxes. That you purchased this $399 thousand asset despite your ignorance of the market. That due to your stupidity, you deserve the profit driven B of A to reduce your interest rate (why not reduce the face amount of the mortgage while you are at it) to a rate that is well below what they could earn on other potential loans to individuals or businesses. Otherwise, assume responsibility, admit that you are an educated adult who was chasing real estate fortunes, driving up real estate prices by making highly levered purchases, and that your aggressive bet on Florida real estate has gone all wrong.

    What to do now? If the rules allow you to walk away and you already have a place to live, do it. Many others are apparently doing it, so why not play the game the way it is designed? If I were in your exact position right now, I’d walk away from Daytona. Just like selling a stock that had fallen from $50/share to $2/share. Blow it out. It will have negative repercussions for that local real estate market, it will hurt B of A if they truly hold the underlying loan (most likely have securitized it and it is owned by investors throughout the world), and you won’t be able to borrow at market rates for 7 or 8 years (might be a good thing considering your track record).

  71. Tiger

    But the unit is rented / does this mean that underwater can continue collecting rent on the unit? BTW what happens in situations like that? Can the renter be evicted as well?

  72. Rob

    It’s certainly no one’s job here to decide what is moral and immoral and seemingly correlate that to a smart financial decision the likes of which are made every day but the “experts” who are supposed to know what they are doing.

    Fact: Well over 125 banks failed in 2009. Moral or immoral? We trust these institutions with our money.

    Fact: Keeping an asset that has no chance of recovery in the near term is a waste of capitol..that’s all, nothing more.

    That’s how the financial world interprets it. You can sit around and take in the a** for the next 15 years or more under the guise of being “moral” or you can make a smart financial decision and get rid of a none performing asset. Let’s separate morality from smart financial decisions as two don’t and haven’t ever mixed.

    That’s the way the tax code is set up and the corporate world as well.

    On other news..Lori mind if I give you a PR 3 editorial link back to this article? It’s a beauty!
    Rob

  73. Walking Away From Your Mortgage | Sacramento Real Estate Views | Rocklin and Roseville Homes

    […] was surfing some of my favorite blogs today and ran into an article by Lori Turoff from […]

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