Foreclosure in Fontana? A 27-year-old ponders walking away

From a front-page story in today's LATimes about the impact of the slowing economy on younger workers: "Dulce Maya is worried that she won't be able to squeeze by much longer. The 27-year-old restaurant manager bought a three-bedroom, two-bath house in Fontana for $350,000 two years ago with a $5,000 down payment and an adjustable-rate mortgage.

"This year, her $2,300 monthly payment will probably rise to $3,300 and her work hours were recently cut because business is slow. Maya has asked her bank to lower her payments so she can keep her house, which is now valued at $200,000, and expects to hear back in the next few weeks. If it doesn't agree, she says, she may have no choice but to hand the bank the keys.

"'I don't know what happens next,' Maya said. 'I may try and rent an apartment for around what I'm paying, but rents are going up too.'

Random thoughts and bloviations:

1) The estimated decline in the value of the house is 42%. In two years.
2) Is this mortgage salvagable? And should it be saved? The Dodd-Frank plan, as I understand it, would offer the lender the following deal: The government will guarantee a new mortgage at 85% of current appraised value, or $170,000. That would certainly make payments more affordable: roughly $1,100 per month for a 30-year-fixed at 6%. This appears to be a pretty good deal for the homeowner.
But it raises questions: Is a lender going to take $170,000 for a $345,000 loan? (It's more complicated than that: There are probably two lenders involved.)  And what are the neighbors going to think? I'm talking about the neighbors who have just dropped their cable TV service and taken part-time work so they can pay their $3,300 mortgage on a similar house. Kinda makes them feel pretty silly if the house can be had for one-third of what they're paying.
3) In a long newspaper article about economic trends, the best anecdote is often at the bottom of the story. This one was.

Your thoughts? Comments? Feel free to correct my interpretation of the Frank bill. E-mail story tips to peter.viles@latimes.com.
Photo Credit: LATimes.

Comments

[peter m]

"Dulce Maya is worried that she won't be able to squeeze by much longer. The 27-year-old restaurant manager bought a three-bedroom, two-bath house in Fontana for $350,000 two years ago with a $5,000 down payment and an adjustable-rate mortgage.

Dulce is a restaurant manager making maybe $2500 a month tops , and the restaurant and retail sector is taking a severe pounding as is everything else in the IE,. thus her work hrs and monthly pay was cut.

She brought a property in fontana in 2006, in one of the worst hit areas of the IE. Fontana had a ton of new overpriced mccrappers put up in the new north part astride the new 210 fwy extension . This was a serious speculative bubble- building of vast tracts of spankin new IE homes which buyers over payed using ARM's with the lowest min inital monthiy payment. Can't these folks do any basic research in basic RE economics. I know the IE was in deep sh*t 4 years ago but i had a rare insight as i did a ton of traveling all over the IE and saw all that massive overbuiding of cheaply-built asembly-line tracts.

Fontana,rancho cucaminga, Corona, Sw riveride, temecula, hemet, menifee, perris, banning, hesperia, victor valley,norco, are just a short list of IE areas which saw massive overbuilding of standard assembly line stuccos built on cheap abundant IE land(The IE is vast, even the IE area west of the mountains is 4 times as large as the city of LA.

This is a primary reason why we are seeing housing prices all over the IE tank 30%, and this is only halfway to the bottom. Already there are tons of REO properties even in relatively close IE areas like chino, corona, ontario norco & lake elsinore available for under $200,000. Large 4-2 2500 sq ft on 6000 sq ft lots too.

[Matt Simmons]

A lot of people are waiting to buy because they think home values will keep going down... But what people don't realize is that interest rates are often affect your monthly payment more than a lower price. If somebody can get this property for 42% less than it was two years ago, it is a steal. Especially at today's interest rates. I believe interest rates will be going up dramatically as banks say the cost of lending has gone up and we are borrowing money from foreign governments at a higher rate than we are loaning it to our citizens.

Take a look at this mortgage calculator to show how interest rates play a bigger factor in your monthly payments than a modest decline in value. Now if you combine a 42% off AND low interest rates, there is a pretty compelling argument to buy now.

http://www.qzaki.com/Archive/when_to_buy_
calculator.xls

[Casey E]

It's a difficult situation but seriously, plan ahead. A single person (one income family) buying a house for that much with that little down..? She doesn't need a bail out, she needs a math class.

[Cal]

Matt Simmons :"I believe interest rates will be going up dramatically "

Another reason NOT to buy. If you ever have to sell your house you are going to most likely do it in a higher rate enviroment. So we have the current depreciation in the face of historic low interest rates. Then we will have higher rates which will affect basic affordability as well. Long term average interest rates is somewhere around 8%. Could you imagine what this market would look like with rates at 8%?

What if you bought and needed to sell in 7 years with "high" interest rates. You think there would be any appreciation, especially in the face of likely high interest rates. Add in selling costs... it's a no brainer.

People make long term plans when times are good in the expectation that times will always be good. It is an exceedingly stupid way to be. But God protects children and drunks, Like Bernanke protects speculators and people who get in over their head. So we all get to enjoy $4 gas and food inflation while our savings get destroyed all in the hope of savings these people. Rates are being kept artificially low (thus the rampant inflation) the data is clear in this regard. Ben can't keep this up he is trying to buy some time for people to get out of their bad debt decisions (lock in artificial low rates) and then he will have to reverse course.

Anyone buying during this time simply has to plan for selling during a higher interest rate time. And will have to think what that will mean to them. I would much rather buy with prices low and interest rates high than high prices and low rates. You give yourself a chance of lowering your costs later when rates drop through a refinance and costs such as property tax are started at a lower base.

[bulwark]

Beware of Matt the troll. "Buy now and have low payments because of a good interest rate!" Sure... if you don't mind someone buying a house next door for 20% less next year.

[anonymous]

Take a look at the Case-Shiller data for Los Angeles going back to the 1980's. Pop it into a spreadsheet and graph it. Pretty obvious there's another 50% drop necessary just to get back to historically average levels- this is a $150k house at best. The speculation is only about whether the owner or the lender eats the difference. I suspect the one with better lawyers will win out.

[anonymous]

I'd rather buy at a low price and with low interest rates personally.

[el guapo]

Matt,

I believe the interest rates will go up as well (and soon). However, if they do, it will only drive the prices down further. The soon to be higher interest rates don't bother me a bit (and I welcome them as we need to address inflation) as I am far more concerned with the price of the home. I can always refi a 30 year fixed to a lower payment down the line, should interest rates drop later. I can't adjust the purchase price.

[fred]

Matt Simmons sounds like a real estate agent. And he is wrong. While it's true that you should always look at the interest rate while buying a home it's more important to buy a home at a low price even if the interest rate is high. Interest rates will eventually come down and you can always refinance then. The price you over pay for a home will always be the same. Good luck with lies Matt.

[Justin McCarthy]

"Will the bank accept $170k for a $345k loan?"

Yes, I believe they will (neighbor's sentiments not with standing): Bank's alternative is to spend $50k + to foreclose on a $200k home. Must upkeep home and eat payments until the house sells, which, in a dropping market, might bring a sale price of $175k - 6% agent commission. It would be a prudent business decision on the part of the bank to work with her (that's why I think they'll eventually come 'round)...Also, neighbors values as well as regional tax base arguably wouldn't be effected to such a degree...This will then make them happy jealous :-)

[Justin McCarthy]

Also, if Maya sells her property for over $170k within the next 5 years, anything up to $345k goes back to bank...

I have no clue how they are going to rearrange these securities that already have investors, but if I was an investor, I'd opt for bank to accept $170 from Maya with possibility of retrieving some equity down the road. Because Maya WILL walk away...If she doesn't, many like her will...They simply see this as a prudent business decision.

[Kaye Thomas]

I'm always amazed at the idea that interest rates always come down... maybe if you wait 15 years. Interest rates in the late 70's were running 10-11% then shot up in '79 and '80 to 17%+.. yep they did go down.. to 12% and stayed there for a long time.. it wasn't until 1991 that rates dropped to single digit rates... 9%.. The late 90's saw rates hit 7% but they did not reach the 6% or less until 2002.. Current rates are lower then they have been in 40 years.

Any of you who are banking on rates moving to 7% then back to 5.75% in 2 or 3 years are going to be in for a rather rude shock.. If this market follows what happened in the 80"s you are going to see interest rates jump far higher then any of you anticiapte and stay there for a very long time.

[lefty]

hey guys, here's some trivia: fontana isn't a real spanish word; and it's the birthplace of the hell's angels! education is great isn't it :) but there's no way to beat metro L.A.!! grab yourself a house right now and good luck!

[alan]

This loan was doomed from the get-go. I would suspect this was a liars loan. Loaning $345,000 to someone making what $60,000/yr that's 5 1/2 x income. The most she should have been able to borrow is 3x income or $180,000.

The Dodd-Frank plan must add a clause for liar loans, no bail-out for any loan done for more than 3 1/2 x income.

[Tommy]

The only way to prevent people from abandoning their mortgages for homes purchased at unrealistic prices is to reduce the principal of the mortgage to a more equitable market price. Otherwise the person in this example should stop making payments and force the lender to foreclose. That is what a Wall St. or Silicon Valley investor would do and what the real estate speculators have already done.

[Matt Simmons]

I'm not saying it's a good time for everyone to buy, it depends on the individual. And if you're looking to move in four or five years, you may want to think twice.

I have a friend who is paying $2,600 a month in rent, because she is waiting for prices to drop. And my point is, is that prices will drop but the interest rate increase may offset the monthly payment. A 0.5% increase in interest rates is roughly equal to a 10% drop in price in terms of what your monthly payment will be.

Of course I would rather buy low and then refinance when rates go down...but how long until that happens? Does anyone really believe interest rates are going to come down in the next 10 years?

Meanwhile if you were paying $2600 a month in rent, you do not have a tax shield and you are still 30+ years away from owning the home free and clear.

[Perdido en el Ecuador]

I think a lot of people in the United States trust the major institutions of this nation, such as banks, mortgage lenders and the myriad levels of government. I'm sure that there are a lot of people, such as Miss Maya, who believed that banks are trustworthy institutions that would not manipulate the marketplace and had the interest of the consumer in mind when making financial decisions.

There is also a generational divide here. This lady here, Miss Maya, probably went into this thinking that she had no choice but to take this mortgage because this is what was going on a few years ago and it was what everyone else was doing. She in all likelihood had no memory of the last major real estates bubbles in the region (the late 1970s and the late 1980s). This is why so many young adults like Miss Maya are getting caught in this present cycle.

What I do not understand is why the history of California real estate and very tangibles thing, such as the process of buying a home and the variety of mortgages in the marketplace, are not taught in schools? As a social studies teacher, I try to bring these elements into my classroom, but our state standards are major bulwarks to providing real life skills to students. Not to get off the topic too much, but these are the things I would want to teach to students and these are the things that students want to learn, but I have to teach them things like the XYZ Affair and the Embargo Act of 1807, which are significant, but when considering the limited time and resources in a classroom, what is more important for students and society-at-large?

There is actually a course - Civics - that is mandatory for all California students to take and could be used to teach children these skills. It would, in all honestly, take a week or two to go over items like interest rates, the history of real estate cycles in California, how mortgages work, the importance of a down payment and the power of equity. Unfortunately this course is often treated as a joke by both schools and students.

[skeptical]

But who determines the appraised value? Clearly a lot of lenders are still holding on to unreasonable expectations, given the # of unsold homes at auctions.

This story makes the plan sound perfectly reasonable, but real estate in the I.E. is a lot further along on its correction than the rest of the country. Maybe it makes sense in the I.E., Phoenix, Vegas, etc., but set this story in Los Angeles or Boston, and you're putting taxpayers on the hook for a massive second wave of foreclosures.

[jeff]

I think the comments in this case are a little over the top. This is not a person who was a speculator, this was not a person who cashed out several times to finance a luxurious lifestyle, this was simply a person who had to make a difficult financial decision in the middle of a bubble and got hurt. We're not talking about a financial professional here.

Should the bank refinance the loan? Well, in a truly rational market they would because it is their best chance to recoup some money. Unfortunately that world doesn't exist and they'd rather carry the land on their books at loan cost for a while and still they will take the hit in the end.

What does it matter what the neighbors think? The value of the house is the value of the house whether or not bank refinances or forecloses.

Better to keep the loan serviced I'd say and in this case I don't mind some "pushing" by the government to help these particular situations but I do believe these are the MINORITY. A story like this is misleading in the end.

By the way, I sold my condo in late 1995 because I thought prices were insane and have been renting ever since so I am definitely hoping prices come down!

[E]

There should be no shame in walking away and renting a nicer place for less.

like this one...

http://losangeles.craigslist.org/ant/apa/657912725.html

[tew]

Assuming it's amortizing 30 years, the payment info implies a current rate of 7% resetting to 11%. Putting aside any prepayment penalties as well as any principle paid thus far, there would seem to be a fair way to deal with situations like this with no government involvement:

Refi into two loans:
One at 7% fixed on 80% of $200,000 (80 LTV) = $160,000. $1064/mo.
Another at same terms as current ARM going at 11% on the balance ($350,000 - $5,000 - $160,000) = $185,000. $1762/mo.
Total: $2826/mo
It's a big (23%) jump but only about half of the currently planned jump.

Of course the big problem is that it could be impossible to find anyone willing to loan the ARM at only 11% for a loan with little actual equity behind it (40,000 of $185,00).

[mbob]

Anonymice, el Guapo & Fred are right, IMHO

Spammin' Matt, well, what can ya' say. There was that guy in high school who swore that if you'd stand on a street corner and proposition every female who walked by, then, by golly, things would happen.

Matt musta read about that strategy and is givin' it a try.

Note Bene: didn't work then, won't now.

BTW the other scary story--in the LAT no less -- is the food pantry situation. As it happens, I garden. As anyone who's ever tickled the ground with a hoe in S. Cal knows, it's real easy to grow 10X as much stuff as you can personally consume. So I donate surplus to our church's food pantry.

Lately, it's gone before we make it out the door. And these aren't homeless folk, either. Shoot, I know some of 'em.

Maybe Matt can hand out leaflets to 'em about surprisingly affordable housing bargains, in beautiful metro LA!

[Ann]

"And what are the neighbors going to think? I'm talking about the neighbors who have just dropped their cable TV service and taken part-time work so they can pay their $3,300 mortgage on a similar house. Kinda makes them feel pretty silly if the house can be had for one-third of what they're paying."

Well it doesn't matter if the "new" price is set by an appraisal and new loan through the Frank-Dodd plan or if it is set by a short sale or a sale after foreclosure. Bottom line is that the current value in only $200,000 and the neighbors need to get use to it.

-----------

Re: Interest rates

Cal is 100% correct. I would rather have high interest rates any day. Buyers can still only afford to pay a certain amount each month which is split between interst and principal. If the interest low, they can pay more principal (the sticker price.) If the interest is high, they pay more in interest and less in principal (lower sticker price.)

Interest rates can go up or down but that purchase price is forever under the terms of the loan. Better to pay a lower purchase price and higher interest because if interest goes down, one can refinance and/or sell at a higher price.

[qzaki]

i think if you look at the spreadsheets i have published, you will find no bias. if anything, they tend to be biased towards "the sky is falling". however, i was glad to publish Matt's submission because it cannot be both the worst sellers market since the great depression AND the worst buyers market. Right? If it is a horrible sellers market, doesn't it stand to reason that there might be good buyer opportunities?

meanwhile, the criticisms of the spreadsheet would be more convincing if they were themselves quantitative spreadsheets rather than just words.

[Susan]

She's 27 and she bought a three-bedroom house on her own? Is this considered normal nowadays? I didn't buy any house at all until I was 34, and then it was a duplex because the rent on the other side helped pay the mortgage. And I put 20% down. (This wasn't 40 years ago, this was in 1993.) This woman had an "I want it all right now" mindset. She needs to get out of that house and into an apartment -- with roommates, if she needs them to make the rent -- so the house can be sold to someone who can afford to live there.

[R Kellmer]

Does Matt work for a real estate company?

[Laker]

Let me start from the end. If the bank accept and lower the payments to maya, then the people that would walk away are THE NEIGHBORS ...
Since they will see her paying $1100 per month..and they have to pay $3300...they will guaranteed to stop paying and wait for similar decrease in their mortgage payment...obviously banks could not accommodate such a thing as then ALL people would do that, and the banks and I banks will collapse. So they neighbors walk away. Values keep dropping and dear maya will also find a nice apartment for $1100 and walk away...You see, historically people that default once, will after any workout, default again.
The Bank in this case can be smart and foreclose as fast as they can. Then they put the price at $180,000 and sell the damn fontana shack. The longer they wait, the less they will get.

On another note and it was said here zillion times, but still, I'm thinking about going to the closest dealership of Mercedes and get me an AMG 500, the new model with 500 horses...buy it with $500 down and get a payment of $1500 per month, then give it a month or two, call the bank and ask them to lower my monthly to $400, otherwise i walk away....
CAN WE PLEASE STOP WITH THIS BU** SH**.
I really think that Frank and Dodd should pick up the tab and help Maya with her mortgage using their fat bank account that are getting direct deposit money from NAR, NAHB, and wall street.

[No Sympathy]

1) Could this person, a restaurant worker, afford a $350k house to begin with?

While not politically correct, not everyone deserves to own a home. If you can’t afford in California, move somewhere else that is more affordable. Or rent. People make these decisions all the time. It is called responsibility for your own actions.

[Laker]

After reading the article, all i want is the poleticians that are working on these bailout plans to look straight in the eyes of these 27-34 year old X and Y. Tell them we are trying to put floor on housing prices, we are doing anything we can to prop up the home values.
We will do our best to KEEP YOU out of housing forever.
You have two options:
A) Rent for the rest of your life
B) Become a mortgage owner/slave, and pay 60% of your paycheck to the bank....house rich, cash poor.
Nice! and thank you mam.

[sfvrealestate]

J. McCarthy and El Guapo, good posts. Just one thing about Realtor commissions: the vast majority are 5%, not 6%. They've been at this level for many years.

[Enlightenment]

It would be better for the bank to make a deal with her, because it would cost them more if the house went into foreclosure.

The bank should bump up the payment in a smaller increment to prevent "PAYMENT SHOCK", and to get her to pay past the recovery period to a point where if she did foreclose the price of houses will be more stable to minimize the loss to the bank. The bank should increase the loan $100 per year.

The banks are idiots for creating the PAYMENT SHOCK mess. If they would make loans that step up in small amounts, people could handle the smaller increments, but almost no one is mentally prepared to pay $1000 more per month, but if it is $250 per year for 4 years, many people aren't going to have payment shock.

[sean]

Matt Simmons MUST be a realtor.

Sounds like more "rosy" talk being put out by the NAR to get suckers to buy now.

Now is NOT the time to buy. It is the time to save and WAIT as prices will continue to fall.

Why buy a home now when you can buy it next year and save an additional 20% on the price.

Better luck next time, Matt.

[thanks greenspan]

42% decline. WOOOT. Cant wait till that happen so I can get a house. Since we graduated Me and my wife have waited 3years to buy so far. We make a combined 130k a year and still werent willing to pay a cost of housing. The fundamental didnt make sense. I rather buy a house with the lowest risk of depreciation and pay a higher interest rate then the opposite. Keep falling down baby. Option resets are just around the corner.

[waitingforgodot]

Let's start the Cal fan club now. The person in the article can easily find a place to rent for under $2300. Now whether she can do so with severely damaged credit -- that's another question. She better start saving for the hefty deposit she will have to put down as a result of her poor credit.

[Ace]

First, that was solid advice Cal gave about what a rise in interest rates will do to people who bought when rates were really low. Perfectly said.

Now, what should this person do? Stop paying the mortgage immediately and find a realtor to start working a short sale. Unless the restaurant manager is going to double her income in the next month, there is no way that she can keep this house. Every dollar she pays in mortgage now is just wasted.

[peteviles]

Ann writes, "Bottom line is that the current value in only $200,000 and the neighbors need to get use to it."

Ann -- Thanks as always. Maybe I didn't make myself clear. My point is that, if the government is arranging new mortgages that cost 1/3 of what everybody else on the street is paying, a lot of those other people are going to start missing payments in hopes of qualifying for the cheaper, government-backed loan. The CBO said as much in its report on the Frank bill: some homeowners who otherwise could pay their original mortgages will manipulate their financial condition to qualify for a government program intended for distressed homeowners.

[Cal]

Kaye Thomas ,

Unless you are planning off paying off the majority of your home (as opposed to being able to pay back your debt when you sell) then everything you said is pointing to the fact that you shouldn't buy now. You are missing the point entiterly.

If, as you point out, believe rates are going higher on top of these already high prices. Then there is zero reason to buy now. We have unfavorable demographics, high yet falling prices and the most likely possibility of rates being higher in the future than are today.

That future scenario is the one you would have to sell into, higher rates mean lower prices. If rates go higher it isn't like the bank reduces your mortgage, you are still on the hook for the whole amount. The point is whether things go to 7% and you hope you can refi later at 5.75% (a scenario nobody even brought up but you) . But instead we are thinking about the other scenario.. high rates for a very long time.. The possibility of buying into a high rate scenario at a low price at least gives the possibility of refinance later. Your scenario of high rates for the foreseeable future means that a person buying today is essentially screwed.

I simply can't imagine what would happen to California real estate if we hit 7.5% interest rates.. much less 9%. And people need to think about exactly that before deciding to buy any home.

[yingyang]

Cal and Ann is totally correct in that it is more advantageous to buy when interest rate is higher. Unless that is you get caught up in a bubble mentality and don't care about what you are paying for. However, I suspect that for at least in the near future people will have to buy based on affordability (until the next bubble that is). This means the final price/payment = house+interest+tax+others = what you can afford. Might as well have higher interest since it lowers actual house price.

[Laker]

alan wrote: "...The Dodd-Frank plan must add a clause for liar loans, no bail-out for any loan done for more than 3 1/2 x income...."

alan, You got to be kidding right???? 100% of the about to be foreclosures are way out of the 3X income...
If those people really had incomes of $300,000 and they bought a $1,000,000 house, trust me they would not have a problem to pay the mortgage!
The problem to pay the mortgage is only because the loan amount is more like 8-10 times their income!!!!

So, if you put you clause, NO ONE will qualify for the great ingenious Frank Dodd plan.

[IToldu2CashOut]

Rates really need to go up right now, the only reason they are not is because greenspan got us hooked on them like a downtown crackhead. Housing is taking down the ecomony because of all the easy money for the last 7 years and now there seems to be no way out. Raising rates will make house prices go down even more, but the pressure keeps building to raise them. The banks need people to save but they also need house prices to stay low. Meanwhile China is dumping the dollar because they are tired of it losing its value becuase of our low rates. My guess is that rates will begin to go up as soon as there is any sign at all that the stock market has shrugged off the housing problems, this could happen in waves of jubilation followed by disappointment when banks continue to show losses. Lets say the worst case scenerio is rates go up to 12% or something like that because the economy as a whole turns out to be more resiliant than we imagine. If this actually was to happen it would put so much downward pressure on housing that you can use your 20% downpayment you have saved for todays prices to practically pay cash in the future and not even have much of a morgage at all. This is the way people used to buy houses, and most likely we will go back to a situation in which middle class buyers pay much more than the minimum downpayment because prices will go back to normal as will rates. This is where we are heading. Be patient and save your money now. You will be rewarded in the future.

[Inland Empire]

Already there are tons of REO properties even in relatively close IE areas like chino, corona, ontario norco & lake elsinore available for under $200,000. Large 4-2 2500 sq ft on 6000 sq ft lots too.

Whats the address of the Norco house(s) you are talking about? You might find an old fixer at that price but the newer construction won't be found there for under 200K.

[Casey]

Maya needs to walk away. If she were older and more encumbered there might be some way to rationalize toughing it out, but certainly not in her case.

Her lenders gave her a loan that they knew she could never repay, except by cashing in on a housing bubble that was already overdue for a big bust when she bought her house.

The bank loses its money and she loses her house. Fair enough in my opinion.

[Stu]

I'm surprised that the lenders haven't taken the initiative to 'generously' offer new lower monthly payment mortgages - for 40 year terms. Most owners would jump at the lower monthly payment without considering the overall cost of the loan and the greedy lenders would make a ton of money. Just sayin...

[sfvrealestate]

Waiting for Godot, please tell me you're not serious about the fan club.

[Teresa]

-------------"'I don't know what happens next,' Maya said. 'I may try and rent an apartment for around what I'm paying [$2300/month], but rents are going up too.'-----------------

That's absurd. The article does not say if she has kids, but if she doesn't, she can get a 1BR apartment or condo for FAR less than $2,300/month. One can rent a 1BR in Agoura Hills for about $1,500/month.

waitingforgodot writes:

--------------whether she can do so with severely damaged credit -- that's another question. She better start saving for the hefty deposit she will have to put down as a result of her poor credit.---------------

She probably won't have that much trouble, especially if she starts looking before the foreclosure hits her credit report. At this juncture, with so many potential tenants having bad credit, landlords below the luxe level can't afford to be too picky unless they're willing to let their units sit empty for months or years while they wait for somebody with an unblemished, 700+ FICO to come along.

[Teresa]

That's exactly what I'm talking about, E. For those who didn't click on the link, it's an ad for a 4BR house for rent, in Fontana, for $1,600/month.

This woman would be paying far, far less on rent than she is on her mortgage. She should start looking for a rental now, before the foreclosure hits her credit report.

[MyLessThanPrimeBeef]

In the world of the Butterfly Effect, Maya flaps her wings and gets her bank to re-do the loan for $170,000, instead of the original $345,000 in Fontana, and some super-rich hedge fund pig in Conneticut, thousands of miles away, with 30-1 leverage on RMBS/CDO/SIV in his portfolio, finds the house of cards he built collapsing in the midst of a credit ratings downgrade tornado and commits Harikiri.

[William Jones]

No Sympathy (above) had a good question, though I don't want to sound heartless. I don't know how much money the buyer was making when she bought a $350,000 but that is why we are here in the first place.

A person with a modest income (which most restaurant managers make) should consider a modest living place. No one has a "right" to a $350,000 house, any more than someone has a "right" to an $80,000 car.

[the problemwithcaring]

Damn.

After a year reading this blog, I think it has finally start to depress me a little.

I am 27 and this woman's sort of "self-inflicted shaft" has been offered to me and my peers in a myriad of ways over the past five years. I went to a private college graduating everything from CS engineers to public school teachers, and nearly every single one I know has been getting pushed, prodded or shoved into the real estate market. Most either bought what they could afford (meaning in the ghetto, small, condo, out in the sticks) on a 30- year fixed or bitterly, sullenly, and derisorily realized that the market was too expensive for them and rented.

It makes me a little queasy that someone in her income 1) bought a house at all 2) bought an expensive house with what amounted to a "promise of future affordability" by some broker and 3) now is somehow the responsibility of cheap people like me and my peers -- those of us too prudent or least able to afford it.

If she is reading this: You aren't 50, you aren't married, you don't have kids. RENT!lol

[Tombstone Realty]

Ah well....

Being that most of our major institutions have abandoned all responsibility for their actions, I fail to see why I should rabble and froth over someone who bought a house they couldn't afford. The whole "who has the moral responsibility" argument ended with the bailout of Bears Stearns.

I'm 35, and can barely afford rent, so props to her for getting a home out of the System for a least a few years.

[Cal]

sfvrealestate: My fan club is a pay membership but for you I will allow a one time 10% off coupon. How many years can I sign you up for?

[Charles Wilson]

Maya, don't walk away. Run away. Consider that $5,000 downpayment a forfeited security deposit.

No way is the lender going to cut the mortgage in half; if they did it for you, they'd have to do it for everyone else. If they take your house in foreclosure and then sell it for half, then it only applies to one borrower and they can convince themselves and maybe some Wall Street fools that the rest of their loans aren't worth half of what the numbers in their financial statements say they're worth.

Oh, and Maya? Stretch out the foreclosure for as long as you can. Might as well get as much of that $5,000 back as you can. At some point, you could always offer to be the caretaker once it's vacant. But only if they'll pay you to house-sit.

Play hardball, Maya. Have no mercy.

[Truth2Pwr]

Uh, unless I'm reading it wrong I don't see anything here in the Constitution about the inalienable right of a 27 year old hash slinger to homeownership (even if it is in Fontucky). Besides, who in their right mind was ever thinking it was a good idea to plant roots in the IE in the first place???!!! I'd rather burn in hell. At least I'd have more in common with my neighbors!

;-)

[LeftLA]

Charles: I agree with the first part -- walk away. But the second part is fraud -- living in a house you have no intention of paying for. If you're going to walk, leave now and get into a rental.

[Cal]

qzaki,

Matt Simmons spreadsheet is pure drivel. There are a many variables and he tries to break it down into one simple one, interest rates. It is purely a real estate agent ploy to get people to buy now. I guess MBA's are a little easier to come by nowadays.

NY Times still had the best general calculator out there, it accounted for the most variables yet:
http://tinyurl.com/2sdtvd

Buying/Selling costs, value of money costs (lost investment revenue from down payment), income tax rate, inflation, rent appreciation and a host of others. Compare that to Matts laughable spreadsheet. And still in the end I have yet to see one truely factor in buying at 6% rates today and selling at 8% interest rates tommorrow. But the NY Times does the best to capture the simple stuff.

[toby]

2,300 dollars to rent something in Fontana? Are you kidding me?

She's 27 years old...how many rooms does she need?

Here's the deal, if she would have just waited 2 years she would have been able to afford that house.

And timing is everything so I say, sorry Charlie, this one isn't worth saving.

[RZ]

Rather than focus on this as a sad story, we should focus on this as a lesson, and ask the following questions: Why is a 24 year-old on a single income buying a 3-bedroom house in the first place? How did she think she'd be able to keep paying the mortgage once the rates adjusted in the future? Did she realistically think that $5K is a decent downpayment? The lesson here is to plan ahead and to live within your means. If this lady bought a two bedroom condo for $200K instead, with a larger downpayment, chances are she'd be holding on to her property rather than considering foreclosure.

[Louis Cabeza]

Fred, your analysis regarding interest rates is correct. The Economist did a survey of the cost of owning a home (long term ownership- I cannot remember the exact duration) that showed that the initial interest rate had no effect on the overall amount paid for a home. Someone who buys at 5% and holds for 20 years and someone who buys at 8% and holds for 20 years will end up paying the same in the end.

More noteworthy is a survey of home appreciation from the 1600's to present, in the Netherlands I believe. If I recall correctly the overall average annual price appreciation was around 2% over about 350 years. Not a perfect analogy to here and now but certainly adds a historical argument to the debate as to whether a home is a great investment. Their conclusion was that renting and investing yielded a better return.

[sheila]

why don't lenders just freeze interest rates on these loans for 30 years without re-appraising? that looks like a win/win. she keeps paying $2,300, which she can afford, stays in a house she wants to stay in, and they get 7%, which is a good rate, and don't ever take a loss...

the property only drops in value if it sells at a lower value, so it's none of the neighbor's business if this workaround happens (nor do they ever need to know). in fact, it will help them not have a recent comp for $200 grand on the MLS in their neighborhood. how many times have you sat on a plane where everyone paid the same price for their same-exact-seat ticket? never. welcome to the free market. win a few, lose a few...

people on this blog always are so vicious about how these buyers "can't afford their houses" but many, many of them CAN afford the house at a regular (profitable) market rate of interest, like 5.75% - 7.5%, it's the rapacious resets (11%- 15%) that are killing them. let's just "reset" their rates to 6% fixed and move on...

[NoCal SC]

In 1997 my husband and I went looking for a house. Combined we made $130K, but only had 7 or 8K for a down payment. The bank was willing to give us a mortgage to buy a $315K house (and of course we had to pay PMI). How is it possible that things changed so much that a restaurant manager (I'm guessing she ain't making 130K, and only one income) could buy a $350K house a relatively few short years afterwards? Nuts, just nuts.

[Cal]

345k PITI @ 7%.. assuming no PMI or anything. Is 2700+ dollars. I think the issue for the lady in the story is its Interest only so she has artificially low payments whether the ARM adjusts or not.. The reset (which I have a hard time understand what index her loan is set to where its up by 50%, the indexes are very low right now) is just forcing the issue.

[Justin McCarthy]

Ok...seems like I'm being edited here, so I'll be brief.

I love problemwithcaring's post as it's so poignant. The only issue I see with her post is that she's perpetuating the idea that Brokers are responsible for this mess, not banks. Banks have been passing the blame to Brokers for obvious reasons...Let me just say that bank AE's stood to gain monetarily alomost equally as much as Brokers in each transaction..In fact, AE's would often coach Brokers on how to submit loans that would be approved by their employing banks. So it's only fitting, in my estimation, that banks should suffer some of the conseqences here. In the end, they are the ones that created the market for liar loans...Please don't buy the "babe in the woods" routine...I have way too much experience with top 5 bank AE's that flies in the face of this routine...

I'm still getting solicitations...Well here's one I got 30 minutes ago:

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[Chris b]

Poor Dulce Maya! Astonishing that a 27-year-old as well as millions of other idiots still buy into the notion that DEBT=WEALTH, and that lenders would be stupid enough to loan money to them--and in a desert to boot! Now, for a lesson in institutional memory: In 1994, at the tender young age of 38, I took out a loan for (notice I did not say "bought") a $135K condo in San Jose in 1994 at the astonishing rate (fixed, of course) of 9.45%. Yes, all you young upstarts, that is 9.45%, and the market was SANE. So, listen, all you folks who talk about the sky falling if interest rates rise: What is going on today IS NOT THE REAL WORLD. Whether you youngsters know it or not--especially those of you who believe it is your god-given right to buy into a house that will appreciate forever--need to understand that only higher interest rates than we have now--SIGNIFICANTLY HIGHER--will restore sanity and actually BENEFIT you, whether you believe it or not. Falling prices and soaring interest rates are in your best interest, and you would be a fool to buy until prices fall at least 75%, that's right: 75%. If you still do not see that from what is going on today, then you are hopelessly stupid.

[Mark]

Before you walk away, check this blog out: http://foreclosuremine.blogspot.com

[jeremy]

I'm always amazed at the idea that interest rates always come down... maybe if you wait 15 years. Interest rates in the late 70's were running 10-11% then shot up in '79 and '80 to 17%+.. yep they did go down.. to 12% and stayed there for a long time.. http://www.highyields.com it wasn't until 1991 that rates dropped to single digit rates... 9%.. The late 90's saw rates hit 7% but they did not reach the 6% or less until 2002.. Current rates are lower then they have been in 40 years.

[repo4sale@yahoo.com]

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[John Bailo]

Let us also remember that the "lenders" are you and me...it decreases our savings rates to "lend" money to bad investments.

[eh]

So she thought $5k down for a $350k house was reasonable. She's either 1) stupid, or 2) just another greedy co-conspirator who was going for price appreciation. Either way it is impossible to feel sorry for her. But the facts as presented, not only in the story but also the comments, make me lean toward #1.

[Shawn]

Unless she was earning at least $110,000 when she purchased the home; she had no business doing so. My wife and I make a little less than $90,000 combined and we know we can't afford a house for $350,000. That's why we're renting at 30 and waiting for housing prices drop to reasonable levels.

[Canada]

Matt Simmons is definetly a realtor or a seller. These are people that would tell you it's a good time to buy even if homes were depreciating by $25K/mo.

Yes, Dulce Maya has a problem. I don't know all the facts from this article but I will assume.

She has a $345K mortgage on a house that is valued at $200K today. If this is a true subprime mortgage to this point she has no equity even if the value of the home remained in tact except her for her $5K deposit. Let's say she has put $20K sweat equity/upgrades into this home over the last 2 years. That means that see has $370K into this place and paying 3200/mo. In a year's time the market value for that home will probably be $175K. It would be a much better decision for here to fire the keys to this place back to the bank and take a credit rating hit. She could rent for maybe $1200/month for 2 year and make up what she has lost in sweat equity and her down payment by 2 times. In the mean time this home will be about $150K to $175K in two years time and she will have saved $50K renting; a good down payment for a $150K to $175K which she will be paying half the mortgage to own. This is a no brainer.

This is not to say she shouldn't take responsibility for her own actions, but there are a lot of crooks in the mortgage industry down there. In Canada we would not get a mortgage like this in the first place. Maybe that's why Canadians are not in the mess you Americans are. This girl should have been sat down and told outright she could not afford this. Here, she would have been told just that. Bankers can't cop out of this one. We have other things that are happening in Canada that are just as disturbing to me. The concept of a 40 or 50 year mortgage. Another disaster waiting to happen and the banks are telling borrowers that people in Europe do this and will there mortgages to their kids and this is normal. How lovely for the banks. A cash cow for 50 years.

[Dan]

Quote: I'd rather buy at a low price and with low interest rates personally.

You get to pick one or the other, not both. Low interest rates ==> high prices. Cheap money ==> speculation.

I'd rather buy at low prices using cash while interest rates are sky high and deflation is occurring (or at least, inflation is near 0).

[Dave]

> But what people don't realize is that interest rates are often affect your monthly payment more than a lower price

It's not the monthly payments that matter. It's the total cost of the house. That's the price of the house, mortgage interest, mortgage insurance, home insurance, taxes, hoa fees, and repair/maintenance costs.

It's best to buy when interest rates are high and you have a lot of cash saved up. Remember, you get taxed on the principle of the sale, not the interest of the mortgage. You actually get a deduction for that. So it makes more sense to spend the money on inflated interest than on inflated principle.

[Eliza]

Did Maya never think of taking in renters? Back in the day my granny did that so that she could keep her house when my grandpa got sick and their income went away. She lived her whole life in that house, too.

There are three bedrooms. Maya should fill up the other two so that she can pay the mortgage she agreed to pay.

[Eliza]

Yeah, I am surprised that property tax has not come up yet in this discussion.

In California, your property tax is based on the purchase price of your home--be it $350K at 5% or $175K at 10%. And you pay that tax every year, forever.

A low purchase price at a higher interest rate is a *much* sweeter deal, once you factor in the yearly tax bill.

[Canada]

Dave;

Interest rates effect your payments very little unless there is a significant increase (3+%). A lower price is much better.

Consider Dulce Maya:

Assuming her mortgage is 25 years

If her mortgage is $345K at the new rate for 23 years she pays $3300/mo = $911K

If she bought 3 years from now and her mortgage is $200K at 8% for 20 years she pays $1656/mo = $398K

$911K - $398K = $513K difference and she has her mortgage paid off in 2031 either way.

Now consider what happens to the $200K when you reduce the "amortization":

If she bought 3 years from now and her mortgage is $200K at 8% for 17 years she pays $1780/mo = $363K

For a lousy $124/mo you can cut down the amortization by 3 years and save an additional $35K

Little wonder the bank wants her to keep on paying and little wonder they like 40 and 50 year mortgages. The longer the bank has you hooked the more interest and less principal is paid.

Weekly of bi-weekly payments help this even more.

Believe me, Dulce Maya will be healthier and happier both financially and emotionally if she flushes this mortgage and rents for 3 years. With all the unsold vacant houses on the market rents are not going up any time soon. Also, the bank trying to recover $345K from this house; good luck with that. Her $5K is a cheap lesson.

And, Charlie Wilson, that was good advice for Dulce Maya. Lenders deserve what they get for taking advange of people who may not know as much about mortgages as they do. That's like a mechanic saying to a customer "well if you don't know what is wrong with your car you deserve to be taken". Bankers are suppose to be professionals and are expected to guide clients to a better quality mortgage that fits their means. It's a moral obligation. They are in a position of trust and should be held accountable. Shame on you people for putting this lady in this position. You should have told her she can't afford this.

[fuggy]

"Yes, I believe they will (neighbor's sentiments not with standing): Bank's alternative is to spend $50k + to foreclose on a $200k home. Must upkeep home and eat payments until the house sells, which, in a dropping market, might bring a sale price of $175k - 6% agent commission. It would be a prudent business decision on the part of the bank to work with her (that's why I think they'll eventually come 'round)..)"

If my neighbor got the bank to give her money, reduce her loan, nothing would stop me from also calling the bank and suing, if need be, to be given the same deal. If I was not given the same money, then the bank can not explain giving her money and not me. There is no way, therefore, that the bank can "work with the debtor". Anybody else but her.
If there is no penalty for free money, then the neighbors would be stupid to not go after it.
Ummmm, HAI CAPITO???????

[Renter4Life]

Ahhh, such a sad story ~tears~