According to the Washington Post:
- 24% of all U.S. homeowners are underwater with their home loan, meaning they owe more than their home is worth.
- New foreclosures are far outpacing loan modifications.
- Economic weakness and government debt is what is really ailing the housing market.
And, strategic defaults are on the rise. These are homeowner's who still have the capability to pay their mortgage, but for one reason or another, maybe that Joe who purchased a foreclosure three months ago for the exact same home next door owes $200,000 on the same house you paid (and owe) $400,000 for in 2005.
Nothing I have read expects prices to go back up to 2005 values for at least 5 to 10 years, maybe more and maybe never.
I read a blog post yesterday here on AR where the writer believes if you have the capability to keep paying on your loan and don't, that you are cheating and stealing. Quite a few readers agreed with her comments and a few, including me, did not.
First of all, I'm giving you my opinion, which may change as the economy continues to evolve and banks get their heads out of their b*//s and do more for their customers. However, until that happens...
I do not believe that most people still have the same situation they did when they purchased their home even if they still have the capability to make the payment. I know in our county, the state and federal government are the largest employers. The state and county have cut wages by way of furlough days. A great concept for someone who makes more money than they need and wants more time off, but who exactly fits into that category?
Many of these folks can still make their house payment, but it ain't easy and now that the economy is sucking so bad, their kids needs help making their rent, paying for day care, food and gas have gone up, utilities have gone up, heck what hasn't gone up? So, yep, you can still make your payment, but barely and you have no reason to believe your home will ever be worth the price you paid for it, but you are honorable and scrape by for the next 5 to 10 years. The bank gets all their interest because they load their loans up front to make sure they do, plus they got the hefty fees they charged you for borrowing their money in the first place (fiat money that doesn't really exist by the way), and 10 years from now, when you go to move to take a really great job, you can't sell your home for enough to buy another.
However, you are moral and upright and signed your name and will stick by that no matter. You tried to get a loan modification along the way to help you with the interest rate or maybe have the one or two payments you were behind added on to the end of your loan so the bank would quit charging you the late fee every month, but no one would return your calls and after one year of waiting to hear on the loan modification you gave up. You figure you paid about $1,500 in late fees for the year you waited for the loan modification to come through. You begin to wonder why you're playing by a set of rules (the high road and doing the right thing) when banks are playing by another?
You remember that your mortgage is with the same bank who tripled your interest rate on your credit card to 33% for one late payment (not missed, just late) a year ago. Since then, some regulatory agency told them they can't do that anymore and they refunded you about 1/4 of the interest they sucked out of you before you finally took what money you had in your savings to pay off the card before the interest killed you. Yep, the banks definitely play by the rule book of greed, manipulation and fear. Maybe the phenomenon of strategic defaults are happening because people are fed up and don't want to take it anymore...yah think?!
I am one of these homeowners by the way. I have not tried to get a loan modification as yet because I know several people who are one year into theirs and are still waiting. What is the point? The Treasury Department's Home Affordable Modification Program (HAMP), provided permanent payment relief to only 116,000 of 1.7 million potentially eligible cases through January 2010 or less than 7%.
I am hanging in there for now, watching, waiting, reading, watching, waiting and keeping an open mind. However, if I keep paying my mortgage for another five years and need to relocate for any reason, the chances are against me that I will be "above water" in my mortgage at that time and able to sell. I don't see this as a moral issue at all but as an economic issue that has far reaching consequences for homeowners, our economy, our government, our children, for everyone.
In my opinion, banks could turn the tide in strategic defaults by being helpful, speeding up the loan mod process, doing more to identify customers who would benefit from a loan mod and acting like they care even a little bit. Until then, foreclosures, whether strategic or not will continue to rise and prices will continue to fall because of those very homes hitting the market at below market prices.
What say you?
Thank you for stopping by. Your comments on this post are welcomed and appreciated.
No one sold more homes in Del Norte County in 2009, 2010 and 2011--*in units sold and volume--than Fran Gatti. Put Fran to work for you!
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I agree with your post here. They (banks) are so motivated by GREED they really don't care about the little guy. They got their bailout money to get back on their feet but forget the homeowner who is struggling to make ends meet. They have, and for quite some time adopted the i don't care attitude.
A total of 170,000 mods completed so far! Barely a drop in an ocean. But a huge percentage of people who had approved mods re-defaulted quickly. Some even missed their first payment on the new loan. Not a pretty picture for anybody.
Before we start throwing around 'GREED', could we define it? It isn't a word as much as a weapon. Every definition I have heard has relied on someone deciding that somebody is getting more than they are worth... and there is somebody willing to say that EVERYBODY is getting more than they are worth...
So, the word is meaningless.
Hi Fran,
My wife and I purchased a modest home. We drive modest vehicles, which are each ten years old. We have sacrificed while others were moving into beautiful homes that they could not afford, but on which they took a bet on the value increasing.
The banks received bailout money that is required to be paid back. Some of those banks didn't even request or need the funds. Either way, it is not the bank's money that is at issue. For the most part, it is the investors (401ks, pension funds, greedy Wall Street types, etc.) who took the hit until the government stepped in to shift the burden to the tax payers (your neighbors).
To you, it may seem like a purely economic issue. To me, it is clearly a moral issue as well. And if you default while you are in a position to uphold your end of your contract, then you are acting out of greed. And your neighbors and fellow citizens have good reason to resent you.
Not that I resent you, but I will understand if your neighbor does when your windows are boarded up.
Hi Fran, No one "complained" when their homes were going up by double digits every year. Several people I've met are underwater because they took the equity out of the home they had been in for a while. Time will resolve this problem for many who can hang on. Like many of us in this business, the past 2 years have been tougher, but we're making adjustments and hanging on.
I do no believe strategic defaults are immoral. There is a contract (the Mortgage) and a remedy if the contract breached (foreclosure and a deficiency judgment). This is not a moral issue. However, I do believe strategic defaults are, for a lack of a better term, dumb. I will give you three reasons:
1. Your credit is now damaged and now you need to rent because you cannot qualify for a mortgage. If your new landlord runs your credit (and he will), guess what shows up. It will be more difficult to find a place to live than you think.
2. If you do have credit cards, often times the rates on the credit card will go up because your your credit score took a huge hit. This could wipe out any savings you might get by defaulting and finding a cheaper place to reni.
3. If you own your own home, as long as you make your payments, no one can force you out. If you rent, a landlord can kick you out once the lease period is over or sooner if you have no lease. Which way would you rather live?
There are other reasons why a strategic default makes no sense. I think sometimes people are too clever for their own good.
Fran - I am going to disagree with you. I believe that the arbitrary breaking a contract is a moral issue, and strategic defaults are arbitrary. A contract is a promise and breaking a promise arbitrarily is a lie. If one has the ability to keep their promise, one should keep his or her promise. As for credit card interest, that is even more a discretionary and arbitrary bill that people should continue to pay, if possible. Anyone who uses a credit card makes a voluntary decision, every time they use it. Too many people get into credit card trouble because of bad financial discipline (yes, there are exceptions) and paying for lifestyle choices with credit. I learned that lesson a long time ago and quit using credit cards entirely for almost 10 years. I have since restarted using them, because of business and travel. However, I do pay off my balance every month and do not charge beyond my means. If one month I have unexpected expenses, as in January I had a high deductible for some medical tests for my wife, I still pay it off but curtail spending in other areas.
While I do commiserate with homeowners who are under water, I have no compassion, with some exceptions, for those having credit card interest jacked up for over spending, late payments, etc.
And, as several have pointed out, a strategic default can lead to major credit issues for years, including, in some cases, loss of security clearance, loss of job, the inability to finance a buisiness if a business owner, etc.
I have a hard time with this. The fact is you need to live somewhere, and unless you own your own home outright, you will have to make some form of monthly payment (even owners still pay tax/insurance). On the other hand, the Note is simply a contract, and we have all heard contracts are made to be broken, and the terms of the contract spell out the remedies. My issue is with banks who preach that the individual has this moral obligation on top of the contract, when they as a corporation rely strictly on the contract, and remedies under the law when it is in their best interest. Banks have no moral issue with abiding by the terms of the contract, and giving back the property if they feel it suits their best interest. This being the case, it is very hard to hold an individual to any kind of higher standard.
By The Way - the "hit" to your credit score is temporary, and when done properly, a strategic default will allow the borrower to get another home loan in 2 to 3 years so if you come out $200,000 ahead (not that tough these days) is it greed, or smart Capitalism?
I also have mixed feelings about this. I come down on the side of it is ok to do a strategic default. I do have some questions for those of you against them. Does one have a moral obligation to their spouse and children? How far down does one have to go before it is ok to default? Should one have to break into their childrens college fund? How about breaking into your retirement fund? Your employeer cuts you back to 30 hours a week. You should be ok for about 6 months. Its been 2 months, you are unable to find another job. Should you default now or use up all of your savings and default later?
I wish people would include information about their state along with their opinion. I am in northern Nevada. Our prices have dropped over 50% from the top. I will be dead before my house regains it value. Unemployement is over 13% here.
Paul,
You are hitting the nail on the head, startegic default does not benefit that distressed owner one bit. DEFAULT is default. Currently with many of the major lenders (Chase, Citi, Wells Fargo, Bank of America) they are going out of there way to help these people. A vacant strategic home only adds more burden to the now super inflated inventory. So I know they are willing to help those upside down owners. After all that was one of the major objective of the HAFA program. I think it is our extreme first priority/responsibility to educate the public of the shortfalls!
My understanding is that a strategic default is one where the homeowner is capable of making the payments, but decises not to because it seems like a bad economic decision. So I think what has been missing from this discsussion is the fact that real estate has long term value. If you are capable of making payments and can pay off the loan, at the end of the loan period you won a home, you are not a renter. There are many advantages to this. I think this is my next blog topic.
Marcy
I listened to a webinar today about HAFA short sales thru Fannie and Freddie. The presenter, who is with Service Link said that Freddie and Fannie did not want to encourage strategic defaults, not because it is imoral, but because it is bad for the neighborhood and they will drive prices down even more. I thought that was an interesting perspective.
Marcy
What I think no one is talking about is the deficiency judgements. A foreclosure, short sale, etc... just removes the mortgage not the note. The debtor is still responsible for the note, it just becomes unsecured. If the the property is sold as a REO or short sale, the amount received is subtracted from the amount owed, but what happens when that amount is less than the amount owed (whish is usually the case)? There is still a deficiency and the note holder can still go after the debtor. I recently read an article that these deficiencies are being sold to collection agencies for pennies on the dollar. So 4 or 5 years down the line, when the borrower believes they put this whole nightmare behind them, bang! The collection agency comes knocking and they are back to square one. Credit is a mess again and creditors calling everyday. This is a market never seen before! If the government doesn't stop messing with things, this down cycle could last for decades, in my opnion. What say you?
I have struggled with all of this bailout money, first-time buyer credit, loan modifications, reduction of principle, etc. that has happened in the past few years and will no doubt continue for the next few years. However, I think a contract should only be between the entities that signed the paperwork--the borrower and the investor. On a case-by-case individual basis, if the investor decides to modify the loan, approve the short sale or foreclose then it is his/her choice. When you start giving investors government incentives to do it, giving buyers government incentives to buy, builders government incentives to build, etc. then it becomes an issue the general public has the right and should weigh in on it morally and financially.
I can see both sides of this debate. On one hand, when an investor has a "bad asset" - such as many homeowners who have houses that are worth far less than what they owe - that's a bad asset. What does an investor do - dump the asset. I've heard it time and time again, "I'll never recoup what I paid for this house." The banks had a lot to do with where houses are today - they made "new, hybrid" loans to get more and more people to buy back in the early 2000s. Many of these people could not afford the loans. Many move-up buyers bought larger more expensive homes - in the hopes the values would continue to climb. There was a lot of speculation and gambling - well they lost ... and so did those Americans who didn't gamble. My home is worth $200,000 less than what I owe. We're working on getting a permanent loan modification - we're in the trial period phase. Our hardship - my husband lost his job and his new job pays less and he has no overtime.
Now, those "strategic defaulters" - I understand their reasoning, but I believe those defaulters need to realize some type of penalty for doing this. When a homeowner walks away from their obligations simply because their home is worth less than what they paid and they can afford their mortgage - they are taking from their neighbors by reducing the value of the neighborhood.
Is it a moral issue - I don't believe so. Morals are something that vary from person to person. Walking away from a financial obligation I don't believe falls in the moral category.
Regarding deficiency judgments against those who walk away when they can afford the mortgage - I say go for it - you owe the money. For those who lost their home in foreclosure, or a short sale - the first trust agrees to take what they receive in the foreclosure or short sale - it's the second trust that doesn't go away. I tell my short sale clients to talk to a bankruptcy lawyer because there is a potential they may still owe this money. I believe if you have a hardship the deficiency should go away.
I believe the government has given a lot of thought in what they are doing. The first time homebuyer credit helped get new homebuyers out and get money flowing into the economy. The Making Home Affordable and HAFA are helping by giving banks incentives and borrowers help so they can keep their homes - which will help the economy.
This housing market crash is an almost mirror of what happened in the 1929 stock market crash. It will take time to recover from this mess.
I, too, see both sides. But in my opinion what it all comes down to is simple: What is your word worth to you? When I signed my mortgage, I was giving my word, that I would uphold my end of the contract I signed. If I don't, there are consequences (remedies). If I am able to maintain my payments, then to NOT do so would be wrong.
My property has lost value, too, though this area hasn't been hit as hard as many parts of the country. The fact is, if I sold it now, it would have to be a short sale. The bank would be left losing money, my credit would be impacted, and I could possibly end up with a deficiency judgment against me. How is that possibly a smart move? How is breaking my word going to benefit me? I don't care about the financial end of it, I care more about doing all I can to keep my word, so to me, walking away when I have the means to keep making the payments IS a moral issue...
California has been hit hard by the housing downturn. The Inland Empire and Bay Area inland areas have been hit especially hard. The financial crisis erased thousands of the area's banking and financial services jobs. The housing slowdown crippled dozens of manufacturers that made building supplies there. And the closure in April of California's only auto plant, in Fremont, snowballed into the shutdown of dozens of inland suppliers and the disappearance of tens of thousands of jobs.
Some areas have seen median prices go from $400k to $100 in just a few years. Miles upon miles of McMansions in these counties have buyer's who purchased at the height of the market now finding their neighborhoods turned into rental markets by investors who are purchasing cheap and putting tenants into the homes. Many of these homeowner's are finding their neighborhoods are now becoming unsafe for their children to play outside or walk to school alone.
There are so many aspects of the housing crisis to consider. Is it moral that these homeowners caught in the middle of the housing colapse stay in a neighborhood where they now feel unsafe? Whether this is morally right or wrong, I guess each person has to decide for theirselves. I don't see it as a moral issue so much as a keeping your family secure issue, at least in this circumstance.
Each person's situation is going to differ. I guess my point is not to judge these folks. As professionals let's continue to point out options, but remember that in the end, we don't always know what's best.
Read this article for more info. on what is happening to the real estate market in California. http://articles.latimes.com/2010/aug/09/business/la-fi-inland-20100809