When homeowners just walk away...

Commenter Take Five points out an ominous little item over at Calculated Risk today: Wachovia reports that some homeowners who can afford to pay their mortgages are now opting instead to walk away from their homes and their debts:

"From the Wachovia conference call: 'Part of one of the challenges is, and we've mentioned this before, a lot of this current losses have been coming out of California and it's -- they've been from 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, and so in a way, we may have -- it's hard to know right now, but we may have seen somewhat of an acceleration problem loans as people have reached that conclusion and we're just going to have to see how the patterns unfold here.' "

CR points out that this is a growing worry among lenders -- that it will become socially acceptable for homeowners to walk away from their mortgages.  Against that backdrop, the Bush administration's push for a rate freeze for some sub-prime homeowners takes on a slightly different tint: it's a subtle reminder from the government that home ownership is worth fighting for.

While we're on the topic: Today's DataQuick report on California foreclosures also contains an ominous  "below the headline"  observation: "Of the homeowners in default, an estimated 41% emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe. A year ago it was about 71%."  If you do the math, that means homeowners going into default now are more than twice as likely to lose their homes as homeowners who went into default a year ago.

Hat tip: Take Five
Comments? Insights?

Comments

[alvin]

tombstone,

the mortgage is an asset to the bank, and a liability to the borrower.
the home is an asset to the homeowner, and collateral to the bank.

when a bank writes off a loan, it isn't walking away from it, it is simply recognizing the loss. it can't walk away from it's liabilities (it's depositors and other financing obligations) although it can become insolvent and declare bankruptcy.

the house is an asset - but the mortgage isn't - it's an OBLIGATION, secured by the property. some states have more liberal laws than other's regarding which assets beyond the property itself the mortgage lender can pursue. i would advise anyone, including those in a non-recourse state like california, to speak with attorney before just walking away...

[mbob]

"Salsi puedes" y'all.

California folklore is rife with this wonderful bit of Spanglish. "Leave while you can" is one translation. Another is "vote with your feet." The literal meaning is "hot feet." Sometimes it's used as an insult, other times as a sage observation. It's a pretty all-purpose phrase.

Then there's the old bon mot of how a rat manages to look casual while scampering down the mooring line of a sinking ship.

Today's photos of Gazans pouring over into Egypt to get food and water is a variation on the same theme: after a certain, never fixed point, people generally figure they have had enough and simply take a hike.

[Bubblewatcher]

Hey, CondoBlue -- has it occured to you that the other owners in your condo are going to have to pick up the slack when it comes to your unpaid HOA dues? Or that you just might have an obligation to pay back that loan as you promised? Or, like millions of other financially ignorant Americans, are you just insisting that you have the right to "have it all", despite the consequences?

Uh, the fact that you were stupid enough to buy another place right away (any guesses as to what that's going to be worth in a few years, and if my guess is correct, will you walk away from it, too?) -- it would appear that you still haven't figured out even the most basic rules of personal finance.

[Chris]

Another interesting look at Real Estate's future as impacted by National Elections....
http://www.realtytrac.com/news/Press/
newsletter-articles.asp?a=b&ItemId=3784&accnt=167383

[Chris]

When poor folks (incomes under 500K) start acting like rich folks look for Rome to start burning

[Laker]

Bobc: "By the way, if they walk away, where are they going?"
I personally have this case in my family. My uncle simply walked away and lost the house to foreclosure. He got his credit trashed for the next 7 years. However, within 1 month, he bought a better house, larger, newer in better neighborhood for less money and is now extremely happy. You ask how? He simply bought the new house using his son's name....
Now, I know similar case too, where the husband had the loan on his name only, he was loosing the house to foreclosure. Then he managed to unload the house as a short sell from 1.2M to 650K. Do you know who bought the house from him (for 650K), ...his wife...
SO the smart a$$ never moved out yet got to stay in the same house with a payment of about half !
The bank lost 500K... almost half the mortgage. Now don't be surprised that stocks are down a lot. The Dow can crash to half of the peak 14000 down to 7000 and that will not surprise me a bit.

[TakeFive]

If I were in this situation, I think it would be fairly easy to rationalize that walking away is not being irresponsible, particularly if the debt service is crushing, or the neighborhood is significantly degrading. Know why? Because ultimately you (and your kids) are going to pay for this – just like last time.

The banks will unload as many of these turkeys on Fannie Mae as they can, either by lobbying to get the loan limits raised, or by failure and takeover by the FDIC. Remember the RTC in the 1990’s? Who do you think paid for that little operation.

Here in California, we pay excessively high sales tax and income tax, coupled with property tax, fuel tax, and all kinds of ridiculous fees – like a $30 “Adventure Pass” to use our local mountains. Meanwhile, our legislators cannot control their masturbatory spending urges and we’re $14B short on the budget. If you think this is going to get fixed with spending cuts, you’re out of your mind. Arnold will wimp out (again) and float another bond issue.

So go ahead, walk away. Think of it as your own personal Bush “Tax Rebate” stimulus plan. You’re paying for it.

[Tombstone Realty]

Ah, but have the banks not gone and repackaged alot of these loans as securities?

I'm not saying that the banks don't consider mortgages "obligations" of the buyers.

I'm saying the *perception* is that since banks are foisting these loans in SIVs, that banks are "writing off" debt, getting funding from outside sources (and trying desperately to get Fannie and Freddie to take bad loans on) - that the *perception* is that the banking/mortgage industry isn't behaving above board, and so the consumer feels they don't have to either.

That's my point, and that's *exactly* why we are seeing these walkaways. I bet it's even higher than these banks are letting on, just because they don't want to spook any future investment.

I guess walking away is preferable to someone setting a fire and killing some innocent person.

For me, a house was going to be the place I could live the way I wanted to, have a doggie, and raise a couple kids. Unfortunately people like me weren't wanted by the mortgage/real estate industry. They played it up as "a great investment, flip flip flip!!!"

They have noone to blame but themselves for the attitude consumers have towards houses now.

[mike]

hey condoblue...if i wrote what i really thought about you, viles would need to use his authority to moderate all comments. i hope someone worthy picks up the scraps of your bad credit at a discount and i hope your new home lender sues you for breech and you lose both homes.

[JohnnyB]

Why not have an army of appraisers march through CA, AZ, NV and FL and adjust home values down 60% and be done with it... it's about as arbitrary as the initial "valuations" were, but at least it's more time-efficient.

This is facetious, but the reality of the need to adjust home values down is not. Any remedy that does not address the over-valuations will miss the mark and prolong the correction and exacerbate the agony for individuals and the economy.

Personally, I decided not to purchase in LA (2004) when I was finally ready (with down payment and seeking 30 year fixed) and postponed my dream... or rather - and in retrospect - had my dream squashed by greedy bankers, RE agents, appraisers, lenders and a shameful, complicit government. A system devised to provide incentives for the highest loan values possible without any regard for long term consequences. The wall street derivative based CDO/SIV Ponzi scheme is well documented as is the rampant fraud and criminality in the mortgage and banking industry over the last 7 years... with more still to be revealed.

We’ve got these cheating scum bag CEO’s walking away from their devastated investment banks, mortgage lenders and related industry financial institutions with tens (& hundreds) of millions in personal gains and with huge cuts going to industry “insiders” and to the tune of hundreds of billions (TRILLIONS) in total dollars. That’s a mass distribution of wealth to the upper 1% the likes of which we have not experienced and are still coming to grips with. And, we’re selling off core assets to the Saudi’s and Chinese (among other so called “sovereign” wealth and “private” equity funds). It literally goes on and on… and it’s all really bad for America and the homeownership dream, and devastating to our middle class.

Let folks walk away… seriously, why should I care about the continued flow of “over-valued” loan payments to corrupt bankers? I consider any process or system that props up these over priced homes as bad… for me personally and for our economy. The sooner the bottom falls out, the better for those of us waiting to buy at a reasonable price and not wanting to become debt slaves for half their adult lives. The industry needs regulation and transparency, not housing price controls.

Now the Bush/Paulson/Bernanke triumvirate want to send out a small “pittance” check to individuals. It comes across like they view the middle class as a collective group of cheap “whores”… who now realize that they have just taken it up the collective a$$, are turning around to see who screwed them, and there’s the smirking, weasel triumvirate handing them a few Jacksons for taking it like a good whore.

[TakeFive]

Tombstone Realty wrote:

"Ah, but have the banks not gone and repackaged alot of these loans as securities?"

You raise an interesting point TR. We feel an obligation to the bank, but what is the bank's obligation to the securities holder? Do they get to say "well, investing in stocks is risky, so losses are inevitable. Have a nice day"

Did they slap on a phony rating and a little fictitious insurance and say they’ve met their obligations? Bet we’ll see plenty of walk-aways by the banks.

[Vidal]

I am thoroughly enjoying watching this entire process unfold as I predicted it over 4 years ago. What can I say? Not only are 98% of people morons but they also have very short memories. I'm only 37 and I REMEMBER THE S and L SCANDAL... I also remember when everything DROPPED 40% back in 89! The only people dumber than all the people who bought homes they couldn't afford is the BUSH ADMINISTRATION... And whatever you do, don't believe a word any SLIME REALTOR or MORTGAGE LENDER tells you about it now being a "BUYERS MARKET!". Yeah right... I'll bet anyone $5K anything you buy today will be worth LESS this time NEXT YEAR! Were not even out of the 3rd inning of this... add in the falling dollar and this never ending war and you are in for a world of hurt. Be smart... walk now.. not later after you've made $35K in payments on a house that worth less than you owe. Like pissing on a forest fire. I've got homes on my street that were going for $700K and now they can't even get and off on the table at $425K. I love renting now! In fact, I just rented a $700K home for $2500 a month and one other guy pays me $1300 for 2 bedrooms with all utilities! You know what? I'm living in a $700K home for $1500 net! You couldn't give me this home free and clear and have me live here that cheap! It's got a pool, spa 3 car garage and 3300 square feet. Oh the beauty of renting in norcal! I got off the roller coaster at the right time, but will you?

[Joseph...The Real Estate Guy]

Rome is burning...thanks to Irresponsible lending!

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

SUB-PRIME became PRIME...go figure!...this phenomenon started in the 90's.

California home prices will never be the same. What we see here is very similar to the Texas's bust of the 80's.

[Ace]

PugTV asked 'Just curious ... when people walked away from their home loan obligations, did the bank go after the former homeowner's assets (besides repossessing the house)? eg. Roth accounts, savings / investment accounts etc ...'

In CA, the bank can't go after you if you loan was a purchase money loan (a loan to buy a house). If you refinance and then get foreclosed upon, the bank can get a deficiency judgment recorded against the borrower. That judgement will be attached to every property in the future until it is paid.

[Patrice]

I understand why people walk away I sold my home of 15 years in 2003. House cost us $84,000 we sold for 250,000 cleared $141,000 after closing cost. My wive and I are high school educated with decent job we never want more than a decent home for our family. We lived in working class neighborhood and we where proud of it. But when the market took of we did get foolish. I think everyone want a really nice house but we knew everyone does not live on the top of the hill. However this was our chance for a better nice house we though in hindsight we did not do better. We had a nice fix FHA loan that was less than $1200 with PTI with 15 year to go. But we did sale I paid all of our debt off and we purchased this new home at the same time. Now where I screwed up is we put $86,000 down on our new home even though the lender told me no way just keep that and let me get you this 80/20 loan lol I wish I wish I had listen to him. Will we said no and we paid the $76.000 DP and 10,000 closing cost now we even more screwed everything in the area has drop by 60,000/100,000 in terms of what is actual being sold. There is also very little being sold only two home in last 9 month have sold with about 10 that neighbor had for sale signs up but withdrew after months of no activity.. Now I can afford my payment but at 55 I am still no better than a renter because there is no equity and will not be for years to come. I think the next pool of buyers has all ready dry up in this last housing bubble. Unless we think the raising immigrant pool is larger enough and able to get 300k/500k with real W2 verify income and 680 FICO score to qualify for these mortgage. I can't see how we sell all the baby boomer homes coming on market plus with the builder excess inventory of new homes. I mean how do you increase home values, if we can't maintain 2004 home values. If you look at historical value ie: income verse mortgage cost they where on track up until 1999. Now the median household income in California for a family of four is $74,800 which is not enough to purchase the median home price of $450,000 (2004). With the number of homes on the market at current pricing level there are not enough buyers to bring this market back in the near future maybe 4/8 years maybe. So yes it is wrong to not fulfill you obligation and yes we who play by the rules are getting screwed as well with declining equity. But if a young couple is facing exploding mortgage cost because they purchase way more home than they ought to. Maybe because they where stupid and or greed what would you have them do. Pay until they went bankrupt so that we can say they did the honorable thing and stuck it out. No if they have to walk away so be it. I knew what I was doing and still we will lose money on this house but it is just paper money. If we are not able to sell in 7 year and get what we put in when I plan on retiring I will walk away as well. People must do what best for them not for you morale amen.

[Long time listener . . .]

For those placing the blame squarely on CondoBlue for walking away, it should be remembered that these are collateralized loans. The bank agreed to loan CondoBlue money for the purchase of his home, and in order to secure that loan, his new home wasoffered as collateral to the bank. In other words, the value of the loan shouldn't be greater than the value of the collateral, and in fact, should be less. In non-recourse states like California, the bank is limited to the agreed upon collateral should the homeowner default (over simplification). The reason for this rule is to incentivize banks to properly value property before agreeing to the loan. While CondoBlue may have some fault in taking on more than he can handle, the banks are just as much at fault for over-valuing his home so that his mortgage would be more valuable on the secondary market. The loan originators wanted to make this loan just as bad as CondoBlue wanted a new home (maybe even more).

[RichW]

Fredke, Maggie, Sheila, I couldn't agree more. Industry and government should bear responsibility just as individuals should. It appears we are a minority though. If the majority agreed with us, then people like Bush or Clinton would never had been president, majority shareholders would be booting corrupt CEO's and board members out of corporations, and we would have elected better members of Congress so they could pass sensible laws.

[Maggie Knowles]

JohnnyB wrote:

"We’ve got these cheating scum bag CEO’s walking away from their devastated investment banks, mortgage lenders and related industry financial institutions with tens (& hundreds) of millions in personal gains and with huge cuts going to industry “insiders” and to the tune of hundreds of billions (TRILLIONS) in total dollars. That’s a mass distribution of wealth to the upper 1% the likes of which we have not experienced and are still coming to grips with. And, we’re selling off core assets to the Saudi’s and Chinese (among other so called “sovereign” wealth and “private” equity funds). It literally goes on and on… and it’s all really bad for America and the homeownership dream, and devastating to our middle class."

All I can think is "MISSION ACCOMPLISHED"...

[Joseph...The Real Estate Guy]

In 100% agreement with RichW!

I think you hit the nail on the head!

Well done!

[Maggie Knowles]

It seems we will continue to support an economic system that allows some to take advantage of others, to profit at the expense of others, with no negative consequences. As the following article demonstrates:

http://www.latimes.com/business/la-fi-scotus
23jan23,1,5100297.story?coll=la-headlines-business

High court rejects investors' suit against Enron bankers
By David G. Savage, Los Angeles Times Staff Writer
January 23, 2008
WASHINGTON -- The Supreme Court on Tuesday rejected a lawsuit from Enron Corp. investors who sought to recover more than $30 billion from Wall Street investment bankers who they alleged had schemed with the failed Houston energy trading firm.

Without comment, the justices dismissed an appeal from pension and investment funds, including the University of California. The funds had argued that all the key players in the Enron debacle should be held liable for their losses.

In a separate action Tuesday, the justices overturned a ruling that would have allowed the California State Teachers' Retirement System to sue major companies, including Avis and AOL, on allegations that they schemed with Homestore Inc. to inflate its financial results.

The pair of decisions follows last week's major ruling that sharply limited who can be held liable for a massive stock fraud. In that 5-3 decision, the high court said lawsuits for securities fraud could extend only to the company that allegedly fooled its investors, not to bankers and vendors alleged to have participated in the scheme.

(click the link above for the entire article.)

[Tommy]

Debt obligation is for fools, which is why W. Bush Americans are so keen to enforce it. The banks loaned money for homes not worth the selling price. The banks did this knowingly because they made great profits on the fees charged and knew they were going to securitize the bad loan and sell it to another sucker. People upside down on their mortgage debt should become just like the bankers who sold them the loans, and let their collateralized home go back to the lender instead of overpaying for a place to live. They will save a lot of money.

[Hula Girl]

Stupid Question: Is there any difference between walking away and being foreclosed? Which is more damaging to credit?

Seems like it's all one big race to the door.

[alvin]

take five,

a legal obligation is not based upon how you "feel" - it is predicated on abiding by the terms of a contract and how the courts can and will enforce it.

i really don't have an opinion one way or the other as to what is the "right" thing for underwater homeowners to do. There are way too many variables to even begin to suggest some kind of one-size-fits-all solution, and for many walking away very well might be the best option. but i would definitely encourage anyone who is thinking about it to double check with an attorney as to what the legal ramifications for their specific situation might be, regardless of who else down the food chain may or may not be living up to their end of the bargain - legal or otherwise.

[Responsible Adult]

>My wive and I are high school educated with decent job ...

Doesn't that just say it all?

Nor did the rest of the post get any better, grammatically speaking.

The truly irritating thing is that the people who behaved responsibly are once again getting [messed with]. My better half and I earn roughly $150,000 annually between us, but can't begin to afford anything where we can both feel safe coming home late at night and also have a small backyard for our dog. Since giving away the dog is not an option, we continue to rent and save our pennies... and watch the ethically-challenged next-door neighbor walk away with the moon. I'm not surprised, really; it's just a microcosm of national politics. But let's not go there...

[TakeFive]

Alvin wrote:

“take five,
a legal obligation is not based upon how you "feel" - it is predicated on abiding by the terms of a contract and how the courts can and will enforce it.”

Where did I say anything about “feelings”?

But consider this: in business, contracts are broken all the time. Sometimes there’s no cost, sometimes the cost is great. A prepayment penalty is an example of such a cost for early contract termination. Or see what it costs you to cancel your cell phone contract.

The point is that you look at the cost of abiding by the terms of the contract vs. the cost to get out of it and make a rational decision. If you’re struggling as a debt slave, fighting with your spouse over money and wrecking your family’s home life, it may be better to get out and live with the consequences.

Many here would argue that the borrower has a moral obligation to repay the loan in full. Fair enough. But do you believe lenders ponder on the moral implications before foreclosing on a borrower? Not likely. It’s a strait-up business calculation.