All Good Things Come With A Price
It’s Friday desk clearing time for this blogger. “Randall Guerra, a veteran of the housing industry, (and) executive director of the Community Housing Council in Fresno, has resigned, saying he lost faith in the Obama administration’s loan-modification program. ‘Making Home Affordable is not working,’ said Guerra. ‘I had a lot of hope and expectations that it would deliver, but it didn’t deliver anything but more bad news.’”
“‘They underestimated it,’ he said. ‘No one anticipated how far prices would fall. You can’t help states where [homeowners] are 50% or 60% underwater. People are making a business decision to walk away from the house.’”
“‘People still need to call us and ask for assistance,’ said Elias Del Gado of ClearPoint Credit Counseling Solutions in Fresno. ‘It’s a tedious process, but all good things come with a price. You may be part of that 7% [that get a modified loan]. If you don’t try, you’ll be part of the 93% that don’t.’”
“Erlinda Trujillo says she is helping her daughter, a single mother of two children in Fresno, pay an extra $500 a month that her lender tacked on to her regular payment. Her daughter fell behind after she was deluged with medical bills. The bank initially rejected her loan-modification request, but then reconsidered and tacked on the $500 to help capture $10,000 in back payments.”
“Trujillo said her daughter agreed to the deal because she didn’t want to lose her house of 2 1/2 years, but now the lender — saying she missed more payments — wants her to sign another agreement to pay $5,000 for some of the overdue amount or they will foreclose. ‘She was struggling before this new agreement, and now is struggling more,’ Trujillo said.”
“Tishman Speyer Properties walks away from 11,232 Manhattan apartments because it can’t pay its mortgage. Tishman and its partner, investment firm BlackRock, paid $5.4 billion to buy the property from MetLife in late 2006 — right at the market’s peak. They hoped to make money by converting rent-regulated apartments into luxury condos and raising rents. Then the housing crash hit. The value now: $1.8 billion. That’s good business.”
“Rick Gilson, a college custodial supervisor in South Dakota, wants to walk away from the mortgage on his mobile home. If he does, he’ll be a deadbeat. Gilson is too scared to dump the mortgage on his mobile home. He owes $31,973, but the home is only worth about $14,000. ‘I have 12 years of money put into this property that I will never get out,’ said the 50-year-old Gilson, from Rapid City, S.D. ‘But I am still paying because this is what I have been told to do. That’s what I think is right.’”
“Christy Nameche moved with her family to Kendall County, Ill., in 2007, joining thousands of other hope-filled newcomers who made the county No. 1 in population growth in the nation that year. Like so many other families, their timing was off. Just two years later, the developer of Nameche’s new neighborhood has gone bankrupt, some neighbors face foreclosure, many lots sit empty and the long-awaited conversion of an adjacent field into a town park is stalled. Kendall County is struggling, another once-booming American locale gone bust.”
“For those who kept moving to Kendall County in the second half of the decade, ‘it was just bad luck. They didn’t know this thing was going to crash,’ said Dennis Stone, vice president of Pilmer Real Estate Inc. in Plano, Ill. ‘If they bought in the last five years, most of the people, particularly the people who went for all the mortgage bait that was out there … they’re upside down.’”
“Nameche is still happy she made the move, despite the fact that the 2,400-square-foot house that she paid almost $240,000 for in 2007 is now worth $20,000 to $30,000 less. ‘We’re a very young subdivision with a lot of young children, and we have a lot of people who have a lot of things in common,’ said Nameche. ‘I like how peaceful it is.’”
“The good news is that Central Virginia’s housing market is likely to change in the next year, which is also the bad news. ‘The challenge is to bring buyers and sellers together to determine what a house is worth. What it sells for may not be related to how much money you owe on it,’ said Ray Caddell, of Ray Caddell Century 21.”
“‘We’re seeing a big change in that people are buying for a reason: They want a shelter for their family,’ Caddell said. ‘They’re looking at what they need and are planning on staying for some time. They want a home rather than an investment.’”
“Your house is worth shit. Get used to it. The shit value of homes in Washoe County since the real estate bubble burst is not news to anyone. Here’s the part that’s hard to swallow: Your house may never be worth what it was worth when you bought it. In all likelihood, particularly if you bought at the height of the bubble, your life savings are gone.”
“There’s a simple formula disillusioned home owners are using to break it down. It looks like this (M+D-d)at=U. In other words, M is mortgage, D equals down payment, d is devaluation, a equals appreciation, t equals time, and U is f*cked. It’s that simple.”
“Mark Shulman, a service industry worker, and his wife refinanced their home in April 2008 for $319,000. In May 2009, it was appraised at $159,000. Their 30-year fixed at 6.25 loan was through GMAC. ‘I went to HUD counseling because they recommend that as one of the steps you take,’ Shulman said. ‘The first HUD counseling session, they told me to let the property go into foreclosure. … That was unacceptable counsel to me. It makes sense financially, but it didn’t set right in our hearts.’”
“‘When we finally negotiated our Home Affordable in September of ’09, the house was appraised at $157,000, and they refinanced it for $253,000 for 2.75 percent for five years, 3.75 for the sixth year, and the seventh year it was 4.75 in which it would finish out the life of the loan. ‘The program is just misnamed; it should be Making Payments Affordable,’ Shulman said. ‘It did not make my home affordable. It did not sell my home. It still is a negative, toxic asset for me.’”
“These government programs may only be delaying the inevitable by offering too little too late. Even though some people have been able to delay foreclosure, ‘the actual success rate of these mediation programs is very, very low,’ says Brian Kaiser, housing and real estate analyst for the Center for Regional Studies at the University of Nevada.”
“When Kaiser says ‘very, very low,’ he’s primarily talking about California, for which he has seen solid numbers, but he says there’s a 60-70 percent redefault rate. ‘Even on a renegotiated loan, the default rate is astronomically high because the rest of the economy is still in shambles. If you can’t afford the home, you can’t afford the home. You can renegotiate the loan all you want, but if you don’t have a job, it’s not going to help…Having seen two years of economic devastation, if I was sitting in a home that was worth half of what I owed on it, I’m not sure I wouldn’t economically say, ‘Enough is enough,’ and walk away.’”
“Reno lawyer Mark Mausert has litigated several cases related to this very matter. ‘Is it immoral? It depends. In this situation, for the average person, the answer is a definitive no. … I had a lady from Countrywide say to me, months ago, ‘You signed a contract.’ My response to that is, ‘Precisely, I did. And so did you.’ The essence of contract is mutuality of obligations. Both parties are bound. And while I was putting down a hefty down payment and making my payments every month, what was Countrywide doing? Countrywide was out writing predatory loans, loans which were intended to result in foreclosures. They wanted them to end in foreclosures because they had them backed up by credit-default swaps, up to 30 to 1. It was a giant insurance scam.’”
“But, fundamentally, does the borrower have a moral obligation to stay in an upside down house? Two wrongs don’t make a right. ‘You’re asking the wrong f*cking question,’ said the heated attorney. ‘The real question is, should we hang these f*ckers or just put them in prison at hard labor for the rest of their f*cking lives?’”
“It is probably best to leave the gods out of discussions of economic policy, but this barrier was breached in November when the CEO of Goldman Sachs, Lloyd Blankfein, told an interviewer that Goldman Sachs was doing God’s work. Most people will never have the opportunity to join Goldman Sachs’s gang of multi-millionaire bankers. However, by Blankfein’s logic, tens of millions of people will have the opportunity to do something at least as heavenly: walk away from their mortgage.”
“As many as 20 million people owe more than the current value of their homes. In most cases they have little hope of ever accruing equity in their home. There continues to be an enormous glut of housing. Nationwide, vacancy rates are at record highs. Rents are actually falling for the first time since we have reliable data.”
“Also, temporary government supports in the form of extraordinarily low interest rates and the first time buyers’ tax credit are about to end. It is virtually certain that house prices will soon resume their decline and will remain low for many years to come. This means that people who are underwater today are likely to be even further underwater five or 10 years from now when they plan to sell their homes.”
“We did calculations recently that showed that homeowners who bought near the peak in many bubble markets could easily save themselves more than $1,000 a month by renting equivalent units. This means that these underwater homeowners could be throwing out more than $12,000 a year in a desperate effort to keep up on their mortgages. Since most of these homeowners will never have any equity in their home, the mortgage check they send to the bank is money thrown in the garbage.”
“Not only would it benefit millions of homeowners to send the keys back to the bank, it would also benefit the economy. The money that homeowners save by not paying their mortgage is money that could instead be used to support consumption and boost the economy. If 5 million underwater homeowners saved an average of $10,000 each by becoming renters, this would free up $50bn a year for additional spending. This would have the same impact on the economy as a $50bn tax cut. If we assume a multiplier of 1.5 on these savings, the 5 million walk-aways will generate close to 750,000 jobs.”
“Unfortunately, the current policy from the Obama administration goes in the opposite direction. Rather than realistically assessing what is best for homeowners, the policy seems intended to do everything possible to persuade people to keep sending checks to the banks, even using taxpayer dollars as an inducement.”
“In short, homeowners who are seriously underwater in their mortgages should check the numbers. Walking away from a home may well be the best economic choice, and in such cases, it is also likely to be the best choice from the standpoint of the economy as a whole. This may not be advancing God’s work, but if millions of people walked away it might educate Goldman Sachs and the rest of Wall Street bankers about what happens when everyone plays by their rules.”
“At the Columbia Forum in Astoria, economist Joe Cortright explained to a group of around 40 people why the usual methods of revitalizing the U.S. economy aren’t going to work this time around. After a recession, Cortright said, ‘we don’t really recover the economy we lost - especially in this one. Recovery doesn’t mean we’ll get back the same jobs and industries we had before. … It’s time to lay the foundation for the new economy we’ll have in the future.’”
“And he said economists don’t know what the future economy will look like. In fact, he said, listening to an economist about what will happen next is ‘like getting driving directions from someone who’s looking in the rear-view mirror.’”
“Although in the past, the country has always added more jobs decade over decade, ‘that won’t be the case this time,’ Cortright said. ‘We’ve given up all the jobs we gained in the last 10 years. … What we saw as growth in markets was actually ephemeral; it was a bubble economy.’”
“The recession that started in December 2007 worsened with the collapse of the housing market and ensuing financial meltdown, driven largely by mortgage defaults. In September 2008, he said, when the recession should have been bottoming out, there was that one moment - the ‘Wiley Coyote’ moment - ‘when we looked down and found nothing to support our set of values.’”
“Traditional monetary policy has been rendered inept. The Federal Reserve had high interest rates traditionally and could lower them to stimulate lending and boost the housing market. ‘But as we all know interest rates are very low,’ he said. ‘We used all the economic ammunition - we already shot the bullets we usually use to stimulate the economy - and as a result we don’t have them to use now.’”
“‘We’re at a point now where we need to think about whether we have the right set of institutions for the road ahead,’ he said.”
“Economic leaders ‘put too much stock in subsidizing and encouraging people to own homes,’ he said. ‘The problem was clearly been exacerbated by financial market manipulation. … We simply let financial speculation play far too high a role in our economy.’”
“Cortright said the U.S. built a lot more houses than it needed, and now ‘we have 50 million extra bedrooms.’”
“But overall, Cortright said he is optimistic about the future under the ‘new normal,’ where people spend their time differently, buy less ‘imported crap’ and build better relationships and experiences. ‘We have a big opportunity to do things differently,’ he said. ‘To create a new good life.’”
