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.

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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.