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

[David]

Dear Go suck your thumb,
I completely agree with taking responsability for ones choices and the consequences that go along with that. My point was otherwise. Morality among many is selective and I was pointing out the hypocrasy of it. It is obvious in my comments that I believe in goverment regulations that would have prevented this whole situation and pointing out the non-sense of a regulating market. There will always be people that are immoral and /or stupid. They have contributed to this situation on both sides and will suffer the consequences. But there consequences don't just affect them in a global economy. I want the goverment to isolate me from other peoples consequences as much as possible through regulations.

[arroyogrande]

"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."

Marc, we are not really trying to be hard on you, but look at it from our point of view. Isn't buying a house *before* clearing your credit score just a bit greedy. As in "I want to own a house today, I'll get an ARM and worry about cleaning up my credit score tomorrow." Congratulations on paying on time; however, if you would have waited ("delayed gratification") until your ducks were all in a row, and locked in a historically low (and I can't emphasis 'historically low' enough) fixed interest rate, you would have been in the catbird seat.

In other words, "greed" can also mean "wanting and getting it now, even when you don't have a good fall back for when things go bad". 0% down? Cash back at closing? Stated income/liar loans? I/O ARMs with teaser rates? Option-ARMs/Neg-Am loans where you don't even have to pay the full interest for the first few years, and your loan value goes up? All these are (were?) ways for us to have it now, have it our way, we deserve it, so give it to me now. I don't want to have to document my income. I don't want to have to save up a down payment. I don't want to pay down the principle. I don't want to pay higher fixed rates. I don't want to wait until I get my finances in order. Just let me buy my d@mn house.

Do you see?

- arroyogrande

[TakeFive]

vultur wrote:

"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."

Nonsense. I've seen credit reports with pages (pages!) of charge-offs, delinquents, settled accounts, etc. These people didn’t open all these accounts at once – they were able to open them, one after another, even with a lousy report.

I’ve even seen someone with a fresh BK pick up a new truck and a handful of credit cards. Next time you’re in a department store and being hustled to sign up for their charge card, tell them you just got foreclosed on. Bet you still get the card.

[sunsetbeachguy]

Marc:

You aren't doing yourself any favors.

Fix your credit, then buy a house is the prudent action.

You wanted a shortcut, the banks obliged and now you are returning the favor.

I hope the banks go after your for a deficiency judgment and fraud charges and you should spend some time in prison!

[mark g]

It seems to me Marc needs to see the loan doc... he needs a shot in the ARM so we can be relieved of the pain in our collective A$$...

[Hula Girl]

I asked this on another thread of this blog: What's the difference between walking away and getting foreclosed on in terms of credit/financial repercussions? Why would someone choose one option over the other?

Be nice if this is a stupid question - not my area of expertise.

[markl]

"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. "

Business is not about honor or integrity its about the bottom line.Survival of the fittest,take no prisoners etc...As long as what these people are doing is allowed then why wouldnt you walk away?Honor doesnt feed or keep you sheltered.Big business knows this all too well.
It was the banks and their financial wizards that set up this ponzi scheme.These loans were flawed from the get-go but since we no longer have any regulations or oversight in govt these kind of schemes are accepted(remember it is banks that have lobbied hard for less regulation and lax rules)
Looks like the ponzi scheme is about to bite the banks in the backside big-time.And seeing the little guy walk away from a fraudulent loan (on a worthless investment) from a sophisticated institution is priceless.
This may be poetic justice the banks foolhardedly never fathomed but it really looks like a possibility they they will reap what they have sown.

[CD]

Why buy a house, you could have rented a house, why take on such a burden, buying a house is not Nirvana, so much extra expenses are attached to it. Unless one wanted to use it as an ATM.??? I think commitment is a word no longer in the dictionary. By the way, Today was a fake rally on wall street, don't let yourself get fooled. We are going down...

[Victor the Predictor]

My prediction last year that homes would lose 50% in value is not looking too silly any more. I did predict that the sun would rise the next day, but I could have easily been wrong.

Anyone else curious about why Warren Buffett just bought a major portion of a Swiss Reinsurance company? (SwissRE.com) Berkshire Hathaway is more and more like Clark Kent in the phonebooth.

[Laker]

Uncle Billy: "Housing assets in the U.S. are estimated at about $21 Trillion" That is the problem Billy. This figure is inflated beyond proportions!
The true value of housing assets in the US is about $11Trillion. Now do your math! The extra 10 are not lost, or about to be lost. THEY NEVER EXISTED. They were only on paper...

arroyogrande, "Why did you get an ARM instead of a historically low fixed rate loan?" Easy answer. Fixed 30yr payment was 1.5 times the ARM payment and sometimes even more. That is why he and all others took the ARMS. With fixed 30yr (even at historically lows) they could only afford 250K homes not 700K !!
The problem is that the incomes of people wasn't and is not today at historically high levels! Only Income pays the mortgage, not interest or type of a loan...

[Keith]

"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."

Nah, see this is where the banks cut their own throat. Credit card offers will start coming in a few months, can go to a car lot immediately and finance a car. Potential personal negative effects of a foreclosure are really pretty inconsequential. Keep up on your credit card payments, nobody's going to take them away. A strict cash flow analysis might prove this person correct in their assumptions. Credit used to be hard to come by & was guarded carefully, now it flows freely and is therefore less valuable. BTW, other peoples defaults have very little if any effect on your credit card rate, instead the CC companies try to price "competitively" for a given credit score and history, ie they try and get as much out of you as they think they can. The actual rate of defaults is extremely low.

[CaptHowdy]

Just so you're fully aware of what you've done, people like you who had no business buying with toxic loans, helped run up prices to the point where responsible, hard working families no longer have a chance to buy a home. Until prices fall, these families will be stuck renting, throwing away money that should be going towards building equity that can later be used to move up into bigger houses, and ulitmately used for retirement.

And don't worry, I blame the scum who lent you the money too. I agree with kat - both you and your lender are scum. As a society, we'll be feeling the effects of what people like you and your lender did for decades to come. Good day.

[xtine]

Marc -

I am sorry, but if you could not afford fixed rate, what made you think you'd be able to afford the readjusted rate when it came due?

I appreciate you sharing on this blog. It's a tough crowd. Mostly we are people who saved money and chose not to buy because we knew we could not afford the inflated prices. Yet, people kept buying at inflated prices so savers were shut out of homes.

So we're angry at people like you, and you come onto this blog, looking for sympathy and get none. That's a drag, but next time SAVE YOUR MONEY. You do not need to own a home. You are not entitled to a home. You do not need to twist yourself like a pretzel to own a home.

I know the fact that the bank will "only" look at your credit score bugs you, but maybe it's about time they did that. Maybe it's about time they realized you cannot afford the house you are in. Maybe you really can't afford that refi any more than you can afford the mortgage you already have and it's time to chalk it up to experience.

Good luck.

[anon]

Awesome!

Lenders paid-off congress to create rapacious new bankruptcy standards.

They were in collusion with entire RE industry to sell loans, risky loans, no matter what the consequences.

And the whole time the Cheney admin turned it's back on all oversight while draining the treasury for a trumped up war.

The system is rigged from the top down.
We all know it now.

We are exhorted to be prudent and pay off our bills while the government and the corporations do whatever it takes to suck every last nickel out of our pockets with whatever chicanery is needed.

The banks tried to scam the system and it turned on them.
They made a bad bet.
Borrowers have every legal and MORAL right to take any legal recourse the desire...the banks sure will.

I hope every single ARM holder does this.

The revolution will not be televised...but it seems it will be blogged.

[Uncle Billy]

Weird story in Wall Street Journal: A virtual bank run that has real financial consequences.

Second Life, the virtual world that allows buying virtual money with real money (I guess that makes their virtual money real money) had a bank run. Online institutions had promised high returns, and when they couldn't perform... boom... the depositors revolted.

I downloaded Second Life last year to check it out, but it was slow on my relatively fast computer, so haven't touched it since then. I saw then that people buy real estate, rent it, sell it, give it away, etc. Anyone very familiar with it? Have their been any virtual foreclosures? The economists have their goofy computer models, but this virtual world could very well be the best tool of all for learning how we behave in all possible situations -- since it's driven by real people. Maybe in the near future we will be able to model virtual recessions, use virtual stimulus packages, and see how they play out. (though they might have to add a lot of real world features... I don't remember seeing any "leaders" or government in that world.)

[Tombstone Realty]

Keith is right....

Banks are so desperate for customers that they'd even give a dead man a loan. This will never change. Short term profit trumps long term strategy any day.

Instead of letting the market run its course, we rip the dollar down another .75 bps.

I had a low credit score because I didn't have an auto loan, or much in the way of credit card history. Paid off my debt, including what I owed on my credit card - and you wouldn't *believe* how many offers I got - my own bank keeps sending me checks - HEY! SPEND! We'll give you 1.9% rate if you use these checks (+the fineprintcharges). They upped my balance, they've polished my score to 736!

And I still won't spend beyond my income. I must drive them crazy. But goes to show the banks are desperate, and will continue to be desperate. Look at the short term CD rates - they *need* money, and they are happy to loan to anyone so that their quarterly results look good to the investor.

This kind of nonsense will keep happening. Especially with the government claiming that "spending is patriotic" rebate checks. I'd rather pass on the $800 and use that money so that schools are funded for the next ten years.

Wholescale, top-to-bottom abandonment of responsibility. That's what this is. If we hold Joe Schmo accountable, we have to hold Mozilla the Tan just as well.

[Ed]

David - Nobody was talking about how interest rates go up or government regulations. You made a gigantic leap to Bush and the I-Wreck/Afgangsterland wars from a scenario of an ignoramus bankrupt of personal integrity.

Quite a jump, my friend, but it doesn't alter the facts. The whole system was screwed up--no argument--but who held a gun to that moron's head when he signed those loan papers?

I rest my case. Your witness, Counselor.

[Inland Empire]

Since he thinks evictions take a long time and he will save money, has he considered that most landlords will run a UD check on him? And most who find something like that won't rent to him. Then what?

[Timing It Right]

What no one is bringing up is that the banks will 1099 these dopes out fo sheer revenge -- so that the unpaid debt becomes taxable. Then, when the dopes don't report the capital gains...guess who comes knocking...the IRS -- and that's when we start seeing criminal prosecutions for fraud, etc.

[Timing It Right]

What no one is bringing up is that the banks will 1099 these dopes out fo sheer revenge -- so that the unpaid debt becomes taxable. Then, when the dopes don't report the capital gains...guess who comes knocking...the IRS -- and that's when we start seeing criminal prosecutions for fraud, etc.

[RationalLogic]

The point of walking away from a house is smart, and surely the banks are bracing for a wage of people eventually figuring it out.

In a free market economy individuals have the same rights as corporations, so an individual walking away from a property if it doesn't makes economic sense and leave the bank holding the bag, equals to the bank going bankrupt and closing all credit cards it had issued (remember Aspire) and the clients without the credit available to them.

Both are business decisions and equally moral. When the lender sold a loan to a person that didn't qualified in first place was betting that house prices will continue on the rise, and that in few years (or months) it would be able to milk the customer again with another refi, more points and more fees.

So when the customer got the loan was betting on the same thing, house prices going up, and expecting to get milk the bank for another equity line in few years (or months).

Then, being both equal, if the bank can write off billions of $$$, and stop paying investors, well, the individual can also write few thousands of $$$ and stop paying investors.

And talking about moral, has anyone questioned the morality of getting thousand of properties on the market at a hugely discounted price with total disregard for the rest of homeowners? That is what banks are doing with the short sales.

[Joseph...The Real Estate Guy]

Anon,

Your comments make a lot of sense. Regrettably, it appears to me you are a "Partisan Hack".

I have been in the business for over 17 years. This mess began in the mid 1990's, with the Clinton Administration...and the Bush Administration letting it continue to go on.

Most Real Estate Agents care about their clients. You have a small percentage, who don't care(Very minimal though).

A lot of mistakes were made by brand new agents who fell into the Sub-prime trap.

I opened a "Mortgage Company" in 2004, and I had lines of Sub-prime Reps. soliciting for business.

[Laker]

Timing It Right: "banks will 1099 these dopes out fo sheer revenge -- so that the unpaid debt becomes taxable."
Good Morning! Bush has sign into law the bill that is call Tax forgiveness of 2007. That eliminates any 1099 for forgiveness debt for 1st and 2nd house.
Now this is one of the fuels that will increase the fire of foreclosures/evictions/jingle mail...
Great news for future home buyers with good down payment and good credit.

[Laker]

"Then, being both equal, if the bank can write off billions of $$$, and stop paying investors, well, the individual can also write few thousands of $$$ and stop paying investors."
RationalLogic - Well said!
Walking away from a depreciating asset is the smartest thing to do.
Hey, If the median house in LA is not loosing $5,000 per month and lets assume that the median mortgage payment is $3000 (safe number for 500-600K homes purchased in 2005) Add a property tax, insurance and maintenance of another $1000 to $4,000.
So Do you guys see that the median owner is "paying" or "investing" $9000 every month to a property that is loosing value!
That is insane, considering the same "owner" can rent same house for a total of $2000-2500 easy!
WTF??? Give me a break and walk a way from your houses. You'll buy same if not better house in 3-4 years for less than half!

[Dave P]

This guy is both amoral and shrewd. He not only is backing out on his agreement but he's trying to sell us on the fact that since the greedy bank won't let him out of the deal he signed it's their fault. Whatever. He's smart not to keep holding on to a depreciating asset tho.

Here's the part he left out. Since 100% financing has gone the way of the dodo, why didn't admit to taking out a home equity loan on home A to use as a downpayment on home B? Does anyone NOT think he did this?