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

[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.