'Condoblue' explains: Why I'm walking away

An update this morning from Condoblue. For those of you just joining us, Condoblue is the poster who plans to walk away from a mortage and move into a new home -- even if it means foreclosure. Reaction here was split on whether Blue's decision was a smart business move, or a sign of poor personal character. Condoblue read your comments and responds this morning:

"As the original poster, I'd like to add some facts to the story since there have been so many assumptions made about my situation. Apparently, it hit quite a nerve, judging from the torrent of postings.

"I did not get House #1 with a liar loan; it was fully documented. I could have put money down but chose to hold on to my cash. As it turns out, the value has dropped so much, it would have just been money down the drain anyway. I never planned to flip the place or make a quick buck (although I don't see anything wrong with making money). I just figured I'd sell or refinance it before the ARM readjusted. At the time I was looking, it was one of the cheapest condos I could find in a decent area.

"I don't have a grudge against big companies (hell, I work for one) or feel like I'm 'sticking it to the man.' Like many posters have said, it's just business.

I have a good income, credit, and savings, so am qualified to buy House #2 using my savings as a down payment. I have adequate income to meet the lenders' debt ratios to cover both homes, and then some. Servicing the debt is not an issue. Ironically, House #2 is a short sale.

When I applied for the loan on House #2, I expected the lender to question the upside-down status of House #1 (they can Zillow as well as I can), but they approved the loan with no questions or issues. I was surprised that they didn't even ask how much the new ARM payment on House #1 would be, but was told that they don't take that into consideration. Huh?

As for Big Lender on House #1, I called their loan department to see if I could refinance the mortgages and was told they don't refi homes with negative equity. I asked the loan officer if they have any programs available for people in my situation. He said he didn't know of anything, but that they did have loan counseling people available, but you have to fill out a questionnaire first before they'll talk to you. So I called another 800 number to get the questionnaire and requested it via their automated voice system. That was 2 weeks ago; no questionnaire (not that I have a hardship anyway). Later, buried on Big Lender's website, I saw where they supposedly contact borrowers 4 months before their loan reset, which would be early February. We'll see.

In terms of selling House #1, this is a cookie cutter condo in a town full of them, so it's easy to figure out its market value (zilch) and average days on market (eternity). There are plenty of short sales right here in the neighborhood, and they are not moving.

Finally, I realize my credit score will take a hit, but remember that I don't need to rent since I own House #2. I have stable long-term employment, decent car, and no debt so speak of. So what if my car insurance goes up a bit. Incidentally, the Federal tax-exempt status on mortgage debt forgiveness is only temporary, so if you are considering walking away from your equity-less home, better call your CPA and lawyer to find out the rules and start making plans..."

Thanks, Blue. Your thoughts? Comments? Be respectful, and please don't expect Condoblue to explain every intricate financial detail of these transactions. There's a lot of information here.
Read below for Condoblue's first post.

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."

Comments

[mdp]

Problem No. 1: "they can Zillow as well as I can." Zillow is bs--it can't possibly fairly evaluate view, quiet/noise impact, quality of interiors, etc. It has some--some!-use in tracts or for new homes, but if people take their garbage Zestimates as gospel it's going to punish anyone who wants to improve their property. As a--full disclosure-- architectural Realtor, I find its spread pernicious, because it's already the case that the horribly flawed appraisal process doesn't factor design quality (much less structural strength, caliber of systems like electrical) in. This is how we get McMansions--assuming size is everything and quality worth zero. I suppose this is the American way, but over-quantifying everything just pushes us more in the direction of more is more, which the world doesn't have enough resources to support anyway.
Problem No. 2: What happens when our walk-away friend has to change jobs and move to a new city? Does he walk away from House No. 2 as well? Unless financial necessity requires getting out from under it, this is unethical. He can always rent both properties. And wait for gratification until he can afford it...by the way, this cheerleading for a collapse is kind of amusing, although it would help me buy finally (didn't buy in NYC ten years ago, one of the worst mistakes of my life), all it will do is enrich cash-flush speculators who will buy up everthing to rent the properties (which will then be high cash flow) while all the bubble-watcher wait for another 30% down, and then the (smart, not just boom-joining) speculators will book obscene profits 7-10 years later. This is exactly what happened to condos in Manhattan during the early 90s bust.

[Kelly]

Tell the president and congress no bailout!!!!!. Don't raise fannie mae limits, don't bail out the banks. Let them pay for their lax lending policies.

email: comments@whitehouse.gov

[JesusCrispy]

You didn't have to buy condo #1. You drove up the prices for everbody when you acted like a lemming and bought in the first place. Typical Californian, following the crowd over the cliff when you bought now following the foreclosure crowd.

[are they crazy]

What it appears the majority are saying is as long as a business component is involved in a decision there's no morality necessary. I also see lots of comparisons of corporations and people. The only purpose of a corporation is to make a profit - is it being suggested that now it's the only purpose in life for humans also? With this guy's thinking, I guess no one should ever pay their car payment's either - once you buy the thing, it's a depreciating asset, so why keep paying. This guy chose not to put his own money into the home, chose to take an ARM and is now choosing to walk away from the house solely because it's not making a profit. I don't see where this is right. It's not as if he has no means to pay his obligation, he just chooses not to.

[RadioManTodd]

Why is it that developers form LLCs for all their new properties?

So that when the new property tanks, they can walk away from it without making their whole operation tank with it.

The only difference here, is Condoblue wasn't wise enough to forsee the future and plan ahead and buy property under the name of a newly formed LLC.

I don't agree with the principal, but to the same extent, I can't say that I necessarily blame him for doing it.

[sunsetbeachguy]

Condoblue is a self-interested, somewhat smart, scumbag. It is both the right thing to do for him personally and deeply wrong and bad for society.

There are lots of them in greater LA.

Hopefully, condoblue loses his job (due to the instability in the market that his behavior created) and his next employer checks his credit out before hiring and decides not to hire a scumbag.

We don't know what profession condoblue is in, but hopefully it doesnt include any fiduciary obligations, since he doesn't take commitments all that seriously.

[chost]

the people denouncing this guy for moral lapses are just completely stupid... do you seriously think that any corporation (ANY corporation, not an Enron type) would do any different? it's a business decision. there was no fraud. fulfilling your "obligations" means turning over the house. done.

if you have a problem with it, your master is calling you right now. he's probably listening in on your phone or email.

[Dr. JwB]

if l.a. guy is right, then Condoblue is fulfilling his contract by giving back the house. Then there is nothing to discuss, except that old topic:

This is a TERRIBLE time to buy a house, don't do it Condoblue!

[anon1137]

First, I'd like to compliment Peter V. and the posters on this blog for the thoughtful and well written comments.

Secondly, I agree with most of the posters, that walking away from your mortgage is a business decision and not a moral one in this case.

The only thing I wonder about is whether condoblue is overpaying yet again by buying in this market. He/she may have solved the short-term problem with house #1, only to transfer it to house #2. Of course, now you have skin in the game, so it will be harder to walk away from #2.

[upthecreek]

Mr Walk A Way//

will you be paying your HOA dues for the condo ..or will you expect the other owners in the complex to pay your share....and just walk away from that also...people like you make me sick!!!

[firesale]

If justice is to be served here, both for the irresponsible,
slimy lender and the greedy bubble-inflating buyer, then
several things need to happen.

(1) Let the bubble buyers walk and crash the market. Screw
the banks. The lenders deserve it. If a larger downpayment
is required or interest rates rise as a result, this will simply force
prices lower and lower. Gloating homeowners who think
they're RE braintrusts also need their noses rubbed in Economics 101.

(2) No smart new buyer must risk his or her real skin in
this game until we're on rock bottom. Let the inventory rot
under the hot California sun.

(3) When the bottom-feeders emerge, there numbers need to
be cleansed of all deadbeats who created and benefitted
from the bubble. Credit needs to be checked so ruthlessly
that these people and their extended shell families can't
possibly get clean enough to buy again. They will be welcome
to move into the newly vacated rentals of tomorrow's responsible
home buyers. It's their turn.

When Mr. Bubble finally returns to the market, he can live with 20%
of his neck in the noose (in what will, by then, be a recourse state)
and watch his home value creeping along with inflation.
May God speed the day.

Anything less is simply not "justice for all".

[Ann]

" am not a real estate professional nor a lawyer so could "Ann" or someone qualified please confirm or correct my impression of what a "Deed of Trust" is? Is it not true that the reasons we have "Deeds of Trust" instead of "Mortgages" in the west is so that if we do not make our house payments the "trustee" can more easily remove us from the property? And is it also not true that we in the west like "deeds of trust" more than "mortgages" because if we cannot make the payments, we can walk away and the ''trustee" cannot take any other property we own?

If these interpretations are correct, would Condoblue have any obligation to the lender?

Posted by: Mike Barker"

Hi Mike

Deeds of trust are used in a majority of the states as being faster and easy if the lender needs to foreclose as compared to going through the court.

You hear about judicial and non-judicial foreclosures. The deed of trust is the non-judicial foreclosure mechanism. (Judical foreclosures offer a LOT more protection to the buyer - like making sure all payments were credited and that the company trying to foreclose really does own the mortgage.)

Works the same way as mortgage with a judicial foreclosure. If it is a purchase money mortgage, the lender gets what the property brings at auction (or 'buys' it themselves for the amount owed) and that is the end of it. Can't come after you for more.

If it is a refi though .......just like a judicial foreclosure auction, in a deed of trust foreclosure auction if the propoerty doesn't bring enough at AUCTION, they can come after to you for the rest. Of course even if it is a refi, if the lender buys the property for the amount owed at the auction, the debt is paid in full and you owe nothing. It is highly highly unusual for the lender not to bid in the property for the amount owed.

It isn' whether the mortgage is in a deed of trust or in a traditional mortgage with judicial foreclosure that makes the difference in whether a lender can come after the borrower. What makes the difference is whether:

(1) Iti is a recourse or non-recourse loan where non-recourse meansyou (a) have to live there as your primary residence and (b) it was a purchase money mortgage and not a refi

(2) Did the property go at auction for the amount owed - even if the buyer is the lender as is the case 99.9999%o of the time

Now this is the general answer that applies probably to 95% of the states. There are always the 5% that do something weird and contrary to the rest.

[George]

It's not the bank's money. Once the loan is written it's wrapped up onto a collateralised debt obligation and sold off into the commercial paper market. The bank stays on as administrator and, as it is turning out, could not care less if the loan stands or falls. Spending extra personnel hours rescheduling the loan is something the bank is not paid for; so, it doesn't bother. It looks to me that the bank probably gets paid nice fees for processing a foreclosure. In the meantime the homeowners and the noteholders are both being taken for a ride.

[Hula Girl]

Hey Condbleu,

You could be smarter than the rest of us buy walking away, on the other hand, you could be watching the equity zoom back up on the condo and kicking yourself.

I know. I was in your shoes. Husband left, took his retirement, left me w. two kids and a house in Santa Barbara that was upside down. He threw the keys to me and said it wasn't worth what we paid for it. It's my problem. That sucked. I couldn't sell it as I was upside down. I couldn't move to a rental w. two dogs, two cats and a pig (real pig, not ex).

So, myself and a 5 & 8 year old moved into the 400 sq.ft art studio I had downstairs and rented out the top. (The zoo came, too).

Well, guess what? The house doubled in value, I sold it and made a small but substantial profit. The buyer made 3X as much as it soared in value from 2003 to present. (It's worth more than a million now).

The long and winding moral is that everyone told me to walk away, but I knew if I did, it would be a long time - if ever that I could afford another house on a single mom, free-lance income. It was tough, but I did ride out the bottom and five years later was rewarded with a profit. The other moral? Damn, I wish I'd never sold that house.

[Tom]

It's hard to have sympathy for condoblue when he obviously has been able to use the system to his advantage, and come out smelling like a rose. We are looking at an economic disaster looming over the horizon, and it likely will be worldwide, not just in the US. It is shameful that so many, many homeowners have-or soon will have-lost their homes to foreclosure. Condoblue states that he will save money, but if his occupation becomes one of those sent overseas, perhaps he won't save anything. I would venture to say that he very well may walk away from house #2 before 2012.

[LA-renter]

With the new information, I've flipped:

Condoblue would be sympathetic if he were duped or misinformed and found himself in a desperate situation. For instance, he were capable to make payment now but incapable a year or two or three from now.

I imagine Condoblue's administrative assistant --at the big company, he says, he works at-- is barely making ends in a not so decent area and only dreams about pulling off the boss' trick.

Let's face it, Condoblue is not sticking it to the man... he is the man sticking you.

[A Beaupre]

We got out of the SoCal market 4 years ago because we knew the market wasn't sustainable - anybody who could read could figure out that the numbers didn't make sense. Tell yourself whatever you want, but at the end of the day you are screwing all of us because we will all pay for your default. Have a fantastic day! I hope you don't believe in karma.

[Downtown Bubble]

So I'm one of those bubble buyers too. And now I'm slightly considering foreclosing because I'm thinking it's going to take a long time to sell home at what I bought it for.

I bought directly from the developer during a sales launch and now they are selling the same unit for 50k less than what I paid for and expecting the price to go even lower. So I'm not so sure what to do right now, still doing my research.

I can actually afford to pay for the place though its really tough since 90% of my post-tax income goes towards this place. I am also considering Refi though, I'm waiting for the quote, hopefully that'll help, not sure though.

Yes, I bought in Downtown LA, HOA is also a killer..

[short seller]

"It's hard to have sympathy for condoblue when he obviously has been able to use the system to his advantage, and come out smelling like a rose..."

This reader's comment seems to exemplify the attitude of those who are critical of condoblue. They don't seem to be able to quite put their fingers on it, but they disapprove of his "using the system." Like the very rich who "use" the tax system, for example, to pay far less proportionally than the middle-class? Why is it OK to use the IRS's deeply flawed system but not the financial industry's broken lending system?

Condoblue's story rings absolutely true to my experience with the dysfunctional mortgage credit world, and it is condemning. Those who blame condoblue for successfully navigating it are probably just misdirecting their frustration and rage with themselves for not having managed to.

[joeinlosangeles]

I don't know that I agree with your take on this. The way I read it, the majority are saying, "You signed a contract with a knowledgable lender who has done a hundred thousand times more real estate deals than you have, so your only obligation is to follow the terms of that contract. So if the contract allows you to walk away from the loan by surrendering the title to the house, you have no need to have moral qualms about that, because the knowledgable lender should have factored in that possibility."

--What it appears the majority are saying is as long as a business component is involved in a decision there's no morality necessary. I also see lots of comparisons of corporations and people.--

[???]

Uh, Hula Girl, learn how to spell. In the context of your statement, "buy" is spelled "by". And this bubble far surpasses any rational modicum of affordability. As such, a double in value is a long shot at best. Worse than Vegas. Common sense would then dictate walking rather than waiting.

[Confused]

Condo, good for you. Why should the irresponsible who knew (or at least should have known) get a pass (read: bailout) while the ones who can afford be made to pay the full vig? Oh yeah, I forgot we're in the USSA, the United Socialist Society of America. Reward the lazy and irresponsible at the detriment of the more intelligent, responsible individuals. Great. Maybe we can also build a wall to separate us from those wannabe Americans who call themselves Canadian.

[Lewis]

Admitting that I'm not the most erudite of posters, and empathizing with the dilemma, I want to expand on something that has had little mention so far.

Let's say that the lending corporations indeed either blindly or knowingly (being guilty of greed and/or myopia) ignored the consequences of grabbing all they could get from borrowers, and created large amounts of bad debt/risk.

Also, let's say that, as always, "good business decisions" are sought to determine the best interest of the corporation over the individual employees.

Now, let's add to that hundreds of thousands of foreclosures of much of that bad debt (due to "good business decisions" by the borrowers), resulting in $billions of lost income that was expected and necessary for operations.

When seeking a remedy, the corporations make "good business decisions" and decide to cut jobs, expansion, spending, etc. Then, what was for the borrowers a "good business decision" accumulatively becomes a direct, indirect, or even global economic consequence. (I do realize that the whole economy is much bigger than just this sector.)

There was REAL money given to the seller, so someone has to pay for the REAL loss. In the end, I doubt it will be the Angelo R. Mozilo's of the world. Even if we WERE trying to "stick it to 'the man'", it would be to ourselves and our neighbors.

[debrap]

You "walkers" are absolutely right. Good on ya as the Aussies say!!

[Steve]

For Condo this is a pure buisness decision like it was for the mortgage company and the risk factor is part of the cost for both parties. As far impacting your credit rating that is a joke, Condo will have mortgage companies mailing him applications within months after House 1 is foreclosed on. Again, nobody gets paid until the deal closes and all the mortgage brokers, mortgage companies and Fed Govt are whores. As far as Zillow, I feel it is 10X more dependable on values then appraisers when they only get callled back if the deal closes. With technology the appraiser offers no value at this point and is always subjective.