A tipping point? "Foreclose me ... I'll save money"

A homeowner who can't sell his house tells the L.A.Times, "Foreclose me. ... I'll live in the house for free for 12 months, and I'll save my money and I'll move on."

Banks and lenders fear this kind of thinking -- that walking away from a house could be the smart economic move -- appears to be on the rise.  Wachovia, in a conference call yesterday, warned  investors that increasing numbers of homeowners are walking away from their homes by choice: "... people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they've lost equity, value in their properties..."

Calculated Risk notes this is "one of the greatest fears for lenders ... that it will become socially acceptable for upside down middle class Americans to walk away from their homes."

A commenter on L.A. Land this morning writes, "I am one of these people.  My condo has dropped in value from $520K in 5/06 when I bought it to $350K now. My ARM payment will probably go up $900 per month in June.

"Despite all this, I would be willing to stay if the bank would refi the loans to a 30 year fixed, but since I'm not a 'hardship' case they'd apparently rather foreclose. I guess the only way I could qualify for loan mitigation is to get my boss to fire me, stop making payments, and wreck my credit.  In fact, my bank won't even talk to me until I miss a couple of payments. 

"I have purchased a cheaper place in a nearby area now, while my credit is good, and will stop making payments on house #1 after house #2 closes. I know the foreclosure will be on my credit for 7 years, but I will have saved a lot of money.

"I realize I agreed to the deal when I signed the mortgage papers, but I am within my rights to walk away from a bad deal and suffer the consequences, just as many corporations write down billions of dollars of debt, lose money for their shareholders, and lay off people as a result of their bad decisions. 

"I don't really understand why people view a business decision by a homeowner as a terrible moral lapse. However, when large lending institutions, with access to more sophisticated information than any consumer could imagine, make mistakes affecting thousands of people worldwide, they are not excoriated and vilified with the same righteous zeal."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: AP

Comments

[Todd in WeHo]

Bravo! I applaud this person's enlightened self-interest when analyzing a real estate transaction as a "business decision" and for taking responsibility rather than pointing fingers at others.

[Joseph...The Real Estate Guy]

Irresponsible lending brought us to this point!

Otherwise we would have had a softer landing. Not the crash that we are witnessing right now.

Giving loans with "NO-MONEY DOWN" to people with bad credit was a "STUPID" idea.

I remember Loan Reps from "First Franklin" pushing these loans in 1996,1997. I didn't believe it then...but now I can see the mess they created.

Sub-prime became Prime...

[TakeFive]

Commenter wrote:

"Despite all this, I would be willing to stay if the bank would refi the loans to a 30 year fixed, but since I'm not a 'hardship' case they'd apparently rather foreclose. I guess the only way I could qualify ..."

To anybody in this situation, don’t “guess”, call. Then call again.

I am assisting a borrower with a loan modification. After a10 minute phone interview with the servicer, a loan mod application was promptly sent out. And this servicer had all kinds of negative comments blogged about how unfair, rude, and unyielding they were. Don’t assume the lenders are hot to foreclose – they’re not. They may be a little short with you on the phone, but don’t take it personally. They’re getting buried. And keep calling back.

Saw on the news the other night – the CEO of IndyMac saying they were calling borrowers and asking if they needed a loan modification!

Here’s a couple of resources:

List of numbers to loss mitigation departments that might get you around some of the screening:

http://forum.brokeroutpost.com/loans/forum
/2/171761.htm

Gov’t program:

http://www.hopenow.com/

[Ed]

Gawd, I hate deadbeats. I have a (former) friend who did this with his house, then his credit cards (but not before max'ing them out) and filed b.k. He then drove two leased (both wrecked, one twice) high-end cars back to the dealers and gave 'em the bird.

"Thanks, Buddy, my credit card interest just went up!" End of friendship.

"Bad deal" my a$$. Yes, you agreed to "the deal" when you bought the house. Show some integrity and honor your end of the bargain. You're not "writing down" anything--you're just showing what a loser a$$_ole you are.

[Ace]

Boy, talk about someone who didn't learn a lesson. You bought a condo that you couldn't afford with little or no money down and an adjustable rate mortgage. You are going to let it go to foreclosure and went out and bought another home?!?!?!

Sounds like a great plan. Good luck with that.

[Kat]

You're a freaking moron so it's okay to leave someone else holding the bag?

I have never in all my life read a bigger more bloated diatribe of rationalization than this.

This moron has a rational for everything - mean ole bank, dirty ole corporations, bad ole market - all made him do it. So he craps all over a bank -that he beleives is exempt from the standards of decency since they are a rotten, money grubbing institution in bed with socially unconcious corporate America - turns his back on his bad move and expects someone else to clean up his mess.

[Uncle Billy]

It's like the folks that scam insurance companies or other large companies... "big companies are bad guys and they're so big it doesn't hurt them anyway." Weeeeeell... the theory is, that when companies have to adjust for higher risk due to people behaving illegally or immorally, other individuals pay a higher price. With insurance, premiums go up.

Contrary to what the fellow above thinks, there's not a love for lenders lately, and this is probably why people find it so easy to walk away from their homes (that plus the penalties are minimal). Another vicious cycle: Guy above walks away, adding another foreclosure to the pile. Others who don't want to walk away, but need to move, can't sell, and they in turn walk away, adding more to the pile. The higher the pile, the worse it gets.

Our country has piles, and they hurt.
http://en.wikipedia.org/wiki/Hemorrhoid

Here's some more cheery news from Calculated Risk: Housing assets in the U.S. are estimated at about $21 Trillion. If, as some speculate, we have an overall reduction of 30% in housing value... that's about $6 Trillion that goes poof. Brother, can you spare a trillion?

On the bright side, we'll probably survive, just like we'll probably survive asteroid TU-24, a skyscraper size hunk of rock, which is expected to pass between us and the moon at the end of the month.

http://tinyurl.com/32xpun

[Cal]

That homeowner is very smart, although they are probably committing fraud buying a 2nd house and planning to foreclosure on the 1st. The person giving the loan on the 2nd house is going to ask about the first house and anything other than letting them know you are planning to let it go would be fraud.

That being said, there are many cases where walking away from the house is in the homeowners best interest, the government and bond holders are just hoping this group of homeowners dont figure that out.

[Kat]

For some reason my post was edited.

I noted that we responsible borrowers will be picking up the tab for creeps like this. I wanted to make that point.

California is a rabbit hole of a place. The rest of us live in homes we can afford. We spend reasonable amounts to buy a house. We don't pay hundreds of thousands of dollars to live in a slum just because it's in California. So, therefore, we aren't in the mess people like this are.

In fact, the vast majority of the people in this country live responsibly but places like New York and California make the news.

To all you fools in California, the rest of us grown ups will be looking forward to cleanin up after the likes of this jerk.

[Michael Snyder]

I was confronted with a similar although smaller dilemma years ago when I had eighteen horses in my backyard. When I did the numbers I realized for every dollar I spent on hay I spent another dollar to haul it away when the horse was done with it. So recycling became an obvious solution to the eight dumpsters of manure my boarders were producing every week. When my research was done I'd learned it would cost an additional $700 a month for me to recycle what looked to be an obvious resource. Needless to say, that manure continued to go to the landfill.
When confronted with a choice between the "greater good" and personal survival, survival will win every time. What's a bit scary is the number of people looking towards similar tactics right now and I can't honestly say I wouldn't join him in the same situation. Let's see, upside down, house poor and headed toward BK or...
Again, the people who sold these exploding loans had to see this coming. I find a bit of poetic justice in hustlers being hustled, but sadly the consequences of this debacle will touch us all before it's over.
Speaking of hustlers, am I the only one who's outraged at the President's $150 billion award for the businesses who've propagated this debacle?

[JonM]

excellent business decision. when it comes to money, it's all business. why pay into something that's gonna worth half what u paid for, not good for business. save the money for another rainy day.

[Marc]

While I do not agree with this persons actions, however I am in a similar bad situation. I bought a house with an arm, with the plan to refinance to afixed. Well, it seems my credit is not good enough to do that now even though I have never been late on a payment, and have put a bit extra to principal every month. Banks are greedy scum. Credit score, just like standarized testing does not define everyone ability. I will most likely have to sell my house, because I can not afford another rate increase. Logicc would say, wow, this guy never missed a payment in 3+ years, regardless of his credit, he knows that his mortgage with us matters most and always pay's it, let's give him a chance... No, they will bleed me dry untill forclosure...

[ProblemWithCaring]

Hernandez knows that an eviction is a lengthy process. "I'll live in the house for free for 12 months, and I'll save my money and I'll move on."

The banks fatal projected mistake: sheeple aren't acting as stupid as they were predicted to be....

[sfvrealestate]

I don't blame this person. The banks made very, very risky loans, they knew it, and somehow their investors knew it and okayed these bad risks. The financial institutions didn't only assumed the risk, they created the risk. 100%, no down loans? Why, that's practically inviting the borrowers of these wacky loans, who have no skin in the game, to walk away. In my mind, here's the bigger question: why are we so anti-government regulation of big business and financial institutions that we allowed these loans to be made in the first place?

[ray]

The lending institutions didn't see this coming.

We should all feel sorry for them. Oh, the humanity.

[David]

I'm sure that the same people railing against the "deadbeats" are perfectly fine with electing people that indebt those that aren't even born yet with a war that they don't want to pay for through taxes. These same people believe the "market" will fix everything. No need for the goverment to regulate. This was all so preventable. But wait, this is just the beginning. We will see if worshipping the market will save you. By the way Ed, intrest rates go up when the goverment competes with the private sector for capital, not from the deadbeats who don't pay. As long as this administration continues to borrow, interest rates will have to go up evntually. Right now we are on the Titanic ingnoring the iceberg warnings.

[vultur]

The ability to access credit for 7 years is a far greater punishment than the harm he is causing on the bank by walking away. He is probably going to have to pay 300+ basis points more in mortgage interest alone!

For 7 years this individual will be unable to get a mortgage anywhere near prime, a credit card, a car loan/lease, and probably won't be able to get his toddler into pre-school.

Personally the prospect of that occurring is enough to stop me from doing what he proposes to do.

[kat]

It used to be banks would only loan money to someone who could pay it back. What happened? When did they decide it was a good idea to put people in homes they couldn't afford? Loaning money is not profitable if you don't get it back.

The fact is, no matter how unlikeable this featured blogger is, he should not have been in that house in the first place. He can't afford to pay the loan, he's of low or absent character, his credit was probably shakey, his income was probably not enough to carry the loan, the house was overpriced,
yet the bank gave him the money. Now they are paying. I'm not sure who's scummier in this deal - the bank or the borrower. I'd say it's a race for last place.

[arroyogrande]

"I bought a house with an arm...Banks are greedy scum"

Weren't fixed rate loans at *historic* lows when you bought? Why did you get an ARM instead of a historically low fixed rate loan? Oh, ARM rates were lower than fixed rates then, so you took a chance (aka "gambled") in order to get a lower payment, or in order to 'afford' a larger house?

What were we talking about again? Oh yeah, greed...

- arroyogrande

[Paul]

Boo hoo, poor you, Mark. Why do you think you had such cheap payments in those early years with the ARM? That is the choice you made and the risk you took. You wanted cheap payments. The bank gave it to you. You think that was for free? No. It was for you taking the risk that rates would climb in the future and you'd have to pay them more. Many of us are still renting, or buying with fixed rate loans for this reason. Why do people like you think that financing hundreds of thousands of dollars is a right, or some kind of game? You took the loan with risky terms by doing an ARM.

[kay]

David,

Are you just basically a whiner who believes someone else should take responsibility for you or are you from sub-saharan Africa?

In the real world you take responsibility for yourself and if you screw up you lose. In the real world, poor people can't afford a $500,000 homes nor can people making $100,000 a year. It's simple math really. So when a dumb a*s who makes $75,000 a year, or a non-English speaking person who works at McDonalds has a house payment of $3,000 they will soon discover they can't afford the house and they will lose it. And you know why they lose the house? Because they couldn't afford it in the first place!

I'm not sure where you live but that's how it works here.

Go suck your thumb.

[Marc]

arroyogrande and Paul,
The ARM was my only option, I could not get a fixed rate at the time my credit was rather bad, and just made the cut to get any type of loan. So, I was not trying to be greedy, I was only trying to own a home.
I have been working for over three years to get my credit cleared up, and have not missed a single payment, but still do not qualify for a refinance. You shouldn't jump to conclusions unless you know the whole story. My point was that someone who never missed a payment in over three years can not get a refinance just because of a credit score... Forget the perfect mortgage and car payment history, a bank would rather jack up my arem and have me foreclose than be human about people's situations. Like I said earlier: Credit scores, just like standarized testing do not paint a clear picture.

[LA-renter]

Can't argue with the man... other than the fraudulent purchase of a second home (as Cal pointed out).

If the house did not equal the value of the loan, the lender should have asked for more collateral.

If lenders had been more careful, maybe houses would have reasonable prices.

[original thinker]

I would expect that the consequence of such a mass action
by upside-down homeowers (who just want to clean the slate
in enlightened self-interest) could and would damage the U.S. economy
beyond any hope of repair. Before that happens, expect Congress
to pass de facto law requiring that non-recourse become recourse, if
any ability to continue paying is established. Remember, all
government action here is ultimately about helping bankers and
the conditions of worldwide credit markets, not homeowners. If
homeowers decide to put a gun to their lender's head then
bankers have a right to chain them to their land obligations
like indentured sharecroppers. Of course, such changes in
morgage law will make homeownership a very risky venture
for any buyer, regardless of their initial downpayment amount.
It will ultimate supressed the RE recovery even further but it will
be necessary to prevent chaos. And please don't tell me de facto
law is unconstitutional if national interest is in the balance.

[Nancy]

"So, I was not trying to be greedy, I was only trying to own a home. "

LOL. You all were being greedy so you can own a home.

And for the record, your credit score paints a very clear picture about what a deadbeat you are.