Flipped out: Gamblers who walk away

Good morning. Here's how far we've come in this housing cycle: The Mortgage Bankers Assn. is now talking about flippers who gambled on houses, got stuck, and then walked away. Jeez, that doesn't sound like a Washington lobbying group talking, it sounds like a comment on one of those cranky housing blogs.

Annette Haddad writes in today's L.A. Times: "Blame it on the speculators. That's what the Mortgage Bankers Assn. did Thursday in a report showing that as many as 1 in 5 mortgages in default in California belongs to borrowers who are not living in the homes with the troubled loans."

Doug Duncan, the trade group's chief economist: "Defaults are on the rise in most parts of the country, but it should be recognized that it is not always the case of a homeowner losing his or her home but is often the case of an investor gambling on a continued increase in home values and losing that gamble," Duncan said.  Many of these investors "simply walked away from the mortgages," he said.

Our take: Many commenters have pointed out here that the gambling mentality is not unique to investors -- many people who bought homes to live in were also gambling that they'd be able to refinance, or sell the home at a profit.

Your thoughts? Comments?  E-mail story tips to lalandblog@yahoo.com.

Comments

[Mr.X]

A lot of people also just "walked away" weren't gamblers... just extremely shrewd people.

After seeing prices drop and incentives rise, they secured a second mortgage to purchase a larger home with more BR/BA and swimming pool / yard for the same price/ monthly payments.

Then, they just let the bank foreclose on their first mortgage.

These people had everything to gain and nothing to lose... not even a conscience. Who gets stuck holding the bag? The bank? The federal government? The tax payer?

[AndyA]

I wouldn't shed too many tears for these banks holding the default mortgages. These aren't unsecured loans: they are secured with actual land. Even including several housing slumps we've had here in LA, nothing has appreciated like real estate. So the banks aren't getting paid back with $$, but they still own all this land. If we bail them out, they'll hold on to these foreclosed houses (leaving them empty and creating blight) until they are profitable to sell again, then walk away with a DOUBLE reward for suckering people into crazy loans.

[john beaty]

Hey Mr X, got any evidence for this being more than one or two scum, er people?

ANyway, if we help some people out, they should be required to be living in the hose and have lived there at least 1 year prior to getting into trouble (2 would be better.)

John

[vultur]

Can someone PLEASE reconcile these two statements for me?

PRICES RISE 3.2% (BLOOMBERG)
>>U.S. Home Prices Gain at Slowest Pace in a Decade (Update6)

By Kathleen M. Howle
Aug. 30 (Bloomberg) -- U.S. house prices rose at the slowest pace in a decade during the second quarter as lenders tightened mortgage requirements, according to a government report.
Prices for previously owned single-family homes rose an average of 3.2 percent from a year earlier, the smallest gain since 1997, the Office of Federal Housing Enterprise, known as Ofheo, said today in Washington. Prices grew 0.08 percent from the first quarter, the slowest since a decline at the end of 1994.<<

PRICES FALL 3.2% (WSJ)

Steep Home-Price Drop Stirs Fears
Market May Get Worse Still
As Effect of Stricter Lending
Has Yet to Show Up in Data
By KELLY EVANS
August 29, 2007; Page A3

The decline in U.S. home prices accelerated in the second quarter as a glut of unsold homes and tighter lending standards continued to weigh on the market.

Home prices nationwide tumbled an average 3.2% from a year earlier, according to an index compiled by Standard & Poor's Corp. The decline was sharper than the year-to-year decline in the first quarter, when the S&P/Case-Shiller national home-price index dropped 1.6%.

WHAT AM I MISSING! WHY ARE TWO OF THE BIGGEST FINANCIAL NEWS SOURCES PUBLISHING CONTRARY STORIES? WHICH IS IT?

SO FRUSTRATED!

[Timc]

Look at it this way, if I walked into a bank with a business plan and asked for $200-300k they would laugh me out of the building. But they handed out mortgages like nothing. Granted, they were secured by the properties they were buying, but the risk is not anything less than what I would ask them to assume in starting a small business.

I feel little sorrow for these banks and their brokers, maybe the ones who were honest. I am not all that thrilled about the flippers and investors either. All of this was a house of cards, fueled by speculation and frenzy. Again, the average Joe, who wants one modest home with a mortgage they can afford will suffer in the end. But not to worry, it will happen again when the next generation of first time buyers goes looking for their American Dream. Next time those banks should look for better investments instead of ruining the home ownership experience for everyone.

[eprobert]

Vultur - you just need to work on your reading comprehension skills.

[investorguy]

vultur: it just depends on how you crunch the numbers, and who is doing the crunching. That's why no one knows what's really going on. Economics is NOT an exact science.

Re: the gambling thing. 1 in 5 is certainly not "most" as AnnS wrote in another thread. Ann, you might want to adjust your statement.

[vultur]

eprobert,

That may be the case but enlighten me, please.

Bloomberg says:

"Prices for previously owned single-family homes rose an average of 3.2 percent from a year earlier"

WSJ says:

"Home prices nationwide tumbled an average 3.2% from a year earlier, according to an index compiled by Standard & Poor's Corp."

Which is it? Does WSJ's figure include NEW HOMES and Bloomberg's figure exclude them?

What's going on here?

[Gordon]

I have no sympathy for all the whinning in LA-LA land. You all thought you were sitting pretty with the unsustainable appreciation and spending all you could mortgaging your overpriced homes to the top. Now it is time to pay the bank. Pay up and shut up. If you couldn't see this coming you are blind.

[Kathy]

vultur, check the Times today for an "explainer" story, I think by Annette Haddad. There were different sets of data examined; the set with the resulting lower prices from Case/Schiller included higher priced homes, which was excluded from the data that resulted in the slightly increased prices. Apples vs apples and oranges.

[Pete Viles]

Vultur asks, "Can someone PLEASE reconcile these two statements for me?
PRICES RISE 3.2% (BLOOMBERG)
PRICES FALL 3.2% (WSJ)

Vultur -- Thanks for the smart question. This is an ongoing frustration: so many different ways to measure housing prices, so many different and conflicting stats. The first number, rising prices, comes from a government survey that does not include non-conforming loans, so it is somewhat irrelevant to California, where we have so many Jumbo (417K and above) mortgages. The second survey, which I consider more accurate, includes non-conforming loans. Here is how Annette Haddad described the two surveys in todays LATimes:

"The federal home-price index tracks average house price changes in repeat sales or refinances of the same single-family houses. The agency, however, follows only those sales financed with so-called conforming loans, or loans for less than $417,000.

That's why Thursday's data varied somewhat from another national home-price index released this week that found U.S. home prices actually fell 3.2% in the second quarter.

That index, by S&P/Case-Shiller, includes repeat sales involving both conforming and nonconforming, or "jumbo," mortgages.

The discrepancy between the indexes "indicates that prices of houses financed with jumbo loans or sub-prime loans are dropping much more than houses financed with conforming loans," said Patrick Newport, an economist with research firm Global Insight Inc."

That said, we'd like to hear other opinions on this. Thanks, vultur.
Pete

[MyLessThanPrimeBeef]

Vulture, close your eye and trust the Force.

What does your intuition tell you? Is this a good time to buy? Should home prices be going up?

[are they crazy]

Of course shrub's plan won't work - that's not the point. The point is to calm the masses back into being docile spenders. Look what happened when the MSM finally woke up to the housing bubble story. Up until about a month ago, there was no bubble, real estate never goes down, it's only small pockets. All of the sudden, the general public could not avoid the story - it's one thing if it's happening to you, its another if it's happening to everybody. Lot's of sellers with toes over the edge may sigh in relief at the idea that somebody is going to save them so they take a vacation or buy an SUV. The market psychology is more important than whether the plan ever gets going.

[Eurotrash]

Gordon:

"I have no sympathy for all the whinning in LA-LA land"

What are you talking about dude? Who on this blog has done any "whinning"? Pretty much everyone that posts here are unanimous in their disdain for the attitude you describe. Are you just trying to stir the turd to get a reaction out of people?

The vast majority of us that read this blog did indeed "see this coming". That's why you see such vociferous opposition to this morning's bail-out proposal by our esteemed leader.

[jemarqu]

MyLessThanPrimeBeef: "Vulture, close your eye and trust the Force.

What does your intuition tell you? Is this a good time to buy? Should home prices be going up?"

I almost spit coffee out laughing when I read this. lol

A lot of home buyers didn't use the force when they purchased their home that they couldn't afford. They did however close their eyes when they signed the loan docs.

[chet]

Bernanke said that the lenders need to come up with new products to get themselves out of this mess instead of getting a bailout and I see the logic of that. Why not offer 40 and 50 year loans that lowers the payments so sub-prime homeowners can stay in their homes? Believe me, these people want to stay in their homes...and the banks would get a lot more interest money.

And just my 2 cents ~ why are we constantly preached "Leave the Free Market alone" from Republicans when jobs are headed overseas or they oppose raising the minimum wage - but when a coporation needs a bailout because of bad management they're the first to suggest it?

[MyLessThanPrimeBeef]

Should have been 'eyes,' not 'eye.'

My hands and my brain, they don't get along so well.

[vultur]

The fact that the Fed survey doesn't even recognize loans over $417k and that the AVERAGE mortgage on a purchase in California probably exceeds that should be a major red flag for anyone who honestly believes that average housing prices (of ALL houses, big, small, enormous, apartments, etc.) of more than $500,000 for a population of 30 million+ is probably not sustainable under there is an oil gusher beneath each property.

[Raughle]

Vultur – you'll never read this post because it's too long.

As the saying goes, there are lies, d^#n lies, and then there are “statistics.” If you want the housing stats to be meaningful to you, you have to be willing to take the time to understand how these numbers are all calculated because OFHEO, Case/Shiller, NAR and others all have different methods. If you don’t have the time, I suggest you ignore them altogether. Why? Here’s a brutal yet incomplete list of the way these stats can lie to you:

Average vs. Median: Some stats you read use “average” home prices (total home sales $ divided by number of homes sold) which skews things upward every time somebody sells a mansion in Beverly Hills. Others use “median” which is the point at which half the homes sold were more expensive and half were less expensive. Both are blunt tools.

Listed vs. Sold: The weekly home price numbers Pete posts here are taken from the LIST prices of homes on the MLS, not the prices at which homes are SOLD. It doesn’t reflect the true market value because those homes may or may not ever sell at list, but it IS a more immediate indicator in a market where not much is selling.

Month-to-month vs. year-over-year: Some organizations quote the change from last month or quarter to this month or quarter, and some quote the change this year from the same time last year. The media does a horrible job of differentiating between the two, and it's exacerbated by the eye-grabbing headlines like "Home Prices Down 3.2%" Pete is not off the hook on this one.

Data access: Some organizations only report on the subset of the total market that they deal in (certain city/state/region/loan type/loan amt/conforming vs non/single family vs condo, etc.) and therefore their statistics don’t represent the entire market.

Event definition: OFHEO/NAR/NAHB/RealtyTrac all use different events to measure their sales/construction/foreclosure activity by counting things when they break ground / take a deposit / complete construction / open escrow / close sale / become past due / receive foreclosure notice/ bank takes possession, etc. Some count ‘em at more than one step! Is your head spinning yet?

All sales vs matched pairs: Some indices measure the total of all homes sold in one period against all homes sold in another period, which can skew things one way or another when the mix of homes sold changes (e.g. one year people are buying more condos and another year they’re buying more single-family). Other indices take the exact same home that’s been sold multiple times and looks at the difference (a better measure, but by using short-term sales it becomes heavy on flipped properties in an up market and troubled sellers in a down market…because that’s who’s selling in such a short time).

But since you aren’t even reading the body of those articles anyway and you just want the headline to tell you where home prices are going, how fast, and for how long, I’ll summarize all the stats for you into one headline:

"DOWN, SLOWLY AND PAINFULLY, and FOR A LONG TIME."

[Bert]

One of the big problems of the mortgage crisis is that many home owners did not understand the products which were offered to them. These types are not gamblers. Lenders should be forced to be more transparent when they offer their products. However, Government should stay away as much as possible and leave gamblers to market forces...

Here a great educational site for people who would like to get to know the difference between gamblers and investors

www.marketobservation.com

[NoWayinLA]

Bert: "One of the big problems of the mortgage crisis is that many home owners did not understand the products which were offered to them."

I can certainly see how that is possible, but I highly doubt that it accounts for a significant proportion of the problem. Of the personal stories I've read during this situation, it seems most people understood the product all too well.

Instead, the common theme seems to be a belief that "real estate always goes up." This theme was embraced by everyone in the marketplace... lenders, buyers, real-estate agents, even trade magazines and the national media. Based on that preconception, an interest-only ARM on a new purchase or refinance makes perfect sense, particularly for first-time buyers with little money down and limited credit histories. IF real estate prices continue to rise, then you make the interest payments for 3 years, effectively renting the house from the bank at a fraction of actually renting, then refinance before the balloon kicks in, using your new equity as a down payment and converting it into a prime loan. Brilliant!

Of course, we now know, the original preconception was incorrect. If there aren't any buyers at your price three years from now, your equity goes the other way. It was a gamble, and they lost.

Except in specific circumstances, it's hard to blame anyone for it. I remember in 2006 when I did the math and figured out I couldn't buy a home, perfectly educated and experience homeowners were urging me to get in while I still could. It wasn't a case of bad real estate agents, or mortgage companies, or stupid buyers. The problem was a widespread, systemic belief in a false preconception.

[vultur]

>>But since you aren’t even reading the body of those articles anyway and you just want the headline to tell you where home prices are going, how fast, and for how long, I’ll summarize all the stats for you into one headline:

"DOWN, SLOWLY AND PAINFULLY, and FOR A LONG TIME."<<

Raughle,

Never underestimate who you are dealing with. When my money is on the line I real things extremely carefully. Macro stats mean little anyway- local economies determine real estate prices for the most part, even in international cities like Los Angeles. As long as employment and income levels stay high (no certainty there), and interest rates stay flat or trend down (as they are starting to and trend will accelerate) home prices will not necessarily tank.

[jb]

Perhaps someone could provide some steps that folks who are frustrated with the bailout can take to let our politicians know that we will not ever support them if they let this go through? I am sure we could all complain to various places but perhaps a united front to the best place would have the best effect?

[FM71]

Somebody call John and Ken. Once those guys get a hold of something, they don't let go. They were huge when it came to Gov. Davis' recall. They can help spread the word to start bombarding Congressmen and State Senators with phone calls about a bailout.

[Frank Giovinazzzi]

Game over folks. Prices are going to drop 50% across the country. Take the median income for your area, multiply times three and you'll have the new median price.

And no amount of sob stories are going to erase the memory of everyone who was treated like an Indian untouchable for not being a real estate genius.

Reap the whirlwind.