When You Start Getting Into The Numbers
A new readers requested some advice from you at the HBB. “Hi Ben, I recently came to know your blog and have become a big fan. I bought my condo in Walnut Creek CA in Apr 2005 by stretching myself. So the situation is that this year I will see an income loss which will be bad for both of us and our 2 year old son, my wife is a stay at home mom.”
“I wanted to apply for a loan modifcation and wanted to ask you for some help. What are the ramifications of the new Obama stimulus plan for housing and since I am under the water big time. Will they do something for us in this plan or I should just go with loan modification?”
“We are cutting down our expenses but can’t do anything with my son’s needs so I would really appreciate your help.”
From Reuters. “Stopping the housing crash is central to fixing the economy, and halting foreclosures would be a big step towards that, according to Ken Rosen from Berkeley, who is notable as being one of the economists who was suitably gloomy last year in Davos. Foreclosures cost 50-60 percent of the value of the mortgage whereas you might be able to keep someone in their house for 30 percent, he said. A house with a modified loan isn’t sold on, which further depresses house prices and errodes bank capital.”
“‘What we need is a moratorium on foreclosure while we get a plan in place. We could have five to eight million more foreclosures in the U.S. if we don’t do something about this. Banks have already written down these mortgages,’ he said.”
“Big problem however is securities and contract law. Since so many of these mortgages are in complex mortgage securities it can be cumbersome or impossible to get everyone to agree to mods. The Fed is already moving to do just that on loans it has on its books from Bear Stearns and AIG and is encouraging other owners to do the same.”
The Las Vegas Sun. “The 4 percent loans are among several housing-related provisions Sen. John Ensign and Republican leaders in the U.S. Senate are developing as alternatives to President Barack Obama’s nearly $900 billion economic recovery plan now before them. ‘How many of you would like a 4 percent mortgage?’ Ensign asked this week in floating the plan. ‘You have to fix housing; otherwise I don’t think the economy is going to recover from this.’”
“Washington’s main response to the mortgage crisis so far has been last year’s landmark housing bill, which created the Hope for Homeowners program. The program was expected to help 400,000 homeowners work with their banks to write down loans to more affordable levels. The program has fallen short. A report to Congress last month said only 300 loans were being reworked.”
“Bert Ely, a banking consultant watching the debate, said ideas for a government-run program to offer low, fixed-rate mortgages surfaced late last year. But interest in it waned once the costs were considered. Republicans were not able to provide a cost estimate Thursday.’
“‘When you start getting into the numbers, you start to realize it would be very difficult to execute and could be quite expensive,’ Ely said. ‘You’re talking about millions and millions of mortgages.’”
The Wisconsin Biz Times. “‘The American people expect action,’ Obama said between meetings with House and Senate Republicans on Tuesday. ‘I don’t expect 100-percent agreement from my Republican colleagues, but I do hope that we can all put politics aside and do the American people’s business right now.’”
“Obama met this morning with several top corporate leaders to discuss the economy. Obama was surrounded this morning by several chief executive officers who are supportive of his economic stimulus plan, including: Steve Appleton, CEO of Micron Technology Inc.; David Barger, CEO of JetBlue Airways Corp.; Greg Brown, co-CEO of Motorola Inc.; John Bryson, CEO of Edison International; David Cote, CEO of Honeywell International Inc.; Debra Lee, CEO of BET Holdings Inc.; Anne Mulcahy, CEO of Xerox Corp.; Sam Palmisano, CEO of International Business Machines Corp. (IBM); Antonio Perez, CEO of Eastman Kodak Co.; Eric Schmidt, CEO of Google Inc.; Michael Splinter, CEO of Applied Materials Inc.; Wendell Weeks, CEO of Corning Inc.; and Ron Williams, CEO of Aetna Inc.”
Your West Valley. “A leading economist told hundreds of West Valley leaders Wednesday that Arizona remains a few years away from digging out of the recession and the reason isn’t solely about money, unemployment and a housing market gone bust. ‘The problem isn’t just financial now, it’s psychological,’ Elliott D. Pollack told those at Glendale Civic Center. ‘Even those who own homes, have steady jobs, have savings, are taking a step back and deciding not to spend any money.’”
“Much of Pollack’s presentation centered on how the economy in Arizona deteriorated in the first place. The culprit, Pollack said, was the real estate industry. ‘From 2001 to 2006, the Valley overbuilt. They did 10 years’ worth of building in six years, moved four years’ worth of employment into those six years, which is why job growth continued to look so good for that time. But now we have tens of thousands of excess homes that we need to absorb,’ he said.”
“Pollack said the problem is the same across the nation. While an average of 1.2 million homes usually sit empty, now there are approximately 2.2 million. ‘If the Obama administration really wanted to help, they’d go out and buy a million homes and burn them to the ground,’ Pollack joked.”
From The Times. “Alicia Smith has been bouncing from state to state trying to find a decent place to live. Evicted from her apartment, she found her way back to Markham with her two sons, age 8 and 10. Smith knew she needed a place for her boys to lay their heads down at night and feel protected.”
“‘I didn’t have any confidence then,’ said Smith, 33. ‘ just kept thinking … what am I going to do … where am I going to go?’”
“On June 30, Smith and her family found a local PADS - Public Action to Deliver Shelter - facility. Smith is reflective of the growing number of homeless. Illinois officials suspect the numbers are expected to grow as long as the economy worsens. Smith reflects a newer trend — families seeking shelter.”
“According to a recent report by Housing Action Illinois, 71 percent of state-funded shelters saw an increase in the number of homeless. ‘There are many people who are experiencing a loss of jobs and those same individuals are having a hard time finding affordable housing,’ said Bob Palmer, policy director for Housing Action Illinois. ‘I know of some service providers who are turning people away.’”
From CNN Money. “Housing might be in worse shape than we think. There is probably even more excess housing inventory gumming up the market than current statistics indicate, thanks to a wave of foreclosures that has yet to hit the market. The problem: Many foreclosed homes and other distressed properties that are now owned by banks have yet to be listed for sale. The volume of this so-called ‘ghost inventory’ could be substantial enough to depress already steeply falling prices when it does go on the market.”
“RealtyTrac looked at listings in four states, California, Maryland, Florida and Wisconsin, and found that they contained only a third of the foreclosures it has in its database. The scope of the problem isn’t clear, but it could be huge considering that RealtyTrac has a total of 1.5 million bank-owned properties on its site.”
“L.J. Jennings, a real estate broker in Oakland, Calif., sees plenty of evidence. ‘There are a number of properties in my area that have actually been taken back by the banks, but have not hit the market yet,’ he said. ‘Once a bank repossesses a property, in some cases, it can take more than six months to hit the market.’”
“He cites a handful of examples offhand, including a single-family home in Richmond seized in early October, a condo in San Ramon taken back the same month and a four-family building in Oakland that was repossessed in July. ‘Either lenders are overwhelmed and can’t get these properties back on sale quickly’ said RealtyTrac spokesman Rick Sharga, ‘or they’re deliberately slowing down.’”
I’m only going to allow constructive comments toward the reader who is asking for advice.
On this topic:
‘Big problem however is securities and contract law.’
This is why the cram down myth is so tiresome. These people obviously don’t understand contract law. I’ve tried to point it out, but some of you guys are just deaf. It doesn’t matter what congress or the white house does. If it violates contract law, it will simply be over turned later.
And if the govt is modifying loans from failed banks? HELLO - that’s what the RTC did in the 80’s. But the thing is, it doesn’t make sense in most situations. From the SFC in the last California post:
‘Pacific Community Services in Pittsburg counseled about 900 families about mortgage problems last year, according to Thomas LeFleur, executive VP. Of those, 68 received a loan modification. Of all the clients, only three had their principal balances reduced. ‘Everybody’s dreaming of principal reduction because they say their house is worth half of what they owe,’ LeFleur said. ‘That has not started to happen.’
‘At the same time, he said, more homeowners are deciding against paying a mortgage if they are underwater - owing more than their home is worth. ‘We have clients who say, ‘I can afford to make this payment but I don’t know if it makes sense that I should, maybe I’m hurting my family by doing this,’ he said.’
I’ve said it before; many of these people are making the rational decision to get out from under these loans.
“We are cutting down our expenses but can’t do anything with my son’s needs so I would really appreciate your help.”
First off, I am very sorry for your situation. It’s a terrible place to be, and I wish you the best of luck.
Take a look at your MTG payment (including everything, MTG, insurance, taxes, and 1-2% a year for maintenance) and compare that payment to similar rentals in the area. If you’re paying significantly more then what it would cost you to rent the same property (which, you most likely are), and you can afford the rent but not the MTG; your situation is pretty simple. Sign a long term (3 year) lease and let the house go (in that order). After 3 years you may be ready to buy again, and your credit will be healed up (somewhat) from the foreclosure. Also, I wouldn’t get too worried about having a foreclosure on your credit report, the government will be intervening to make sure that you can buy a home again.
I agree with this.
Great advice. My thoughts exactly.
It doesn’t matter what congress or the white house does. If it violates contract law, it will simply be over turned later.
That’s why they want the judiciary to do it. However, judicial cramdowns are insane because you’ll have to do them one at a time.
The best way to get around the contract issue is to say that a condition of getting any further bail out money is to acccept any future judicial cram downs. Which could work IF the banks actually owned the mortgages. But the banks don’t own a lot of these mortgages, at least not directly. They are the servicers under the securitization agreements with a fiduciary duty to the owners, but they aren’t the owners. If the securitization agreements allow them to do anything other than foreclose, then they might be able to make the decision. However, if they do, they are going to get sued to high heaven by the owners of the mortgages for doing something that is in their own best interests and not necessarily in the owners best interests. Unless they can somehow prove the cram down is in the owner’s best interest - good luck with that. Oh, and the owners of the securitized mortgages have to figure out what is happening in order to figure out who to sue. Of course, a lot of the banks are the owners of these MBSs anyway, so they are all going to be suing each other.
What a fun mess!
Waiting until the Alt A and Prime backed MBSs have lost enough value to make the banks completely insolvent so the FDIC can take over and force a reorganization might acutally be the easiest way to clean things out. Which is weird, becasuse I’ve heard a lot of people say that is the best way to finish this process (from a “doing what is right” presepective), but I have never heard anyone say that it would be the easiest in terms of legal entanglements. I guess that means we need to stop the TARP money in order to get to the insolvency phase.
I’d say that a mandatory recall, like a draft, of all the former employees of the FDIC is in order, because they are going to be seriously busy if anyone thinks through this logically.
That’s right. It was sooooo convenient for the banks to sell those loans off. That’s what allowed them to throw underwriting out the door. But, as with everything in life, there is another side to that coin. Once you sell it, you can’t control it anymore.
Oops.
I’ve been following the government proposals pretty closely. What I’ve determined is that there is no way to know what any of these laws will contain or how it will be implemented. Even once a bill is passed, it will take months to implement.
Don’t count on the government to help you. They have no idea what they are doing, and what the results will be. If the Government help offered fits your situation, take it. Otherwise you are on your own.
The key is to know where you stand and to arm your self to make a fast move once something happens. Michael Fink’s advice is sound.
Above all, make a business decision, NOT an emotional one. Remember, it’s not just a house, it can be a boat anchor, too.
I just wounder exactly how forgiving US businesses, companies and the Gov’t will REALLY be with the open exchange of information on everything from the courts to FICO scores.
Remember that these are the same people, only older, that utilized the hundreds infamous of Spin Codes(SPN) that affected peoples lives if they quite live up to didn’t the Standards of their Military Contracts.
Introduction to Spin Codes
Even on an Honorable discharge, a “Spin Code” (SPN - Separation Program Number) can hurt a veteran’s chance of being hired by a prospective employer. These spin codes were put on DD 214 (discharge papers) from the 1940’s through the early 1970’s. Veterans can request a new DD 214 with the spin codes removed.
Examples of a few spin codes:
SPN 258 - Unfitness, multiple reasons
SPN 263 - Bedwetter
SPN 41A - Apathy, lack of interest
SPN 41E - Obesity
SPN 46C - Apathy / Obesity
SPN 463 - Paranoid personality
(see longer list of spin codes below
They(US Gov’t) and business personel offices Nationwide had their little secret spin codes books with from everything to indebtedness to bad checks. You may have walked away from Uncle Sam but the SPN CODE system attempted to punish forever. Most veteran’s and civilians never knew SPN until they were exposed by veterans. Many veteran never understood why they never got a job or that loan…Just a thought
http://www.landscaper.net/discharg.htm
Hey there, if you offer 4% loans for losers, save some money for me. We ’saved’ for our 20% down payment in 1999. Refinanced to a lower interest loan with NO cash out @ 5 3/8%. I want mine and to hell with anyone else. Don’t spend my tax money giving 4.2 billion to ACORN and another $93,000 to each congressman. No cram downs.
Sorry, you will have to send the wife to work…… That’s what wal mart is for one works overnight the other days to eliminate most child care costs.
I know its not fun…But a stay at home mom is a real LUXURY today. Considering your income loss. And please do not have child #2 until you are in a better financial situation.
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So the situation is that this year I will see an income loss which will be bad for both of us and our 2 year old son, my wife is a stay at home mom.”
I know its not fun…But a stay at home mom is a real LUXURY today.
For the well-being of your child, a stay-at-home mom is vital, not a “luxury.” I would do everything possible, even if it meant working two jobs, to ensure that my children got the kind of “child care” they deserve: a loving, caring parent to see to their needs, not some kiddie-kennel wage slave.
I’d walk from the underwater house and rent some place that would allow my wife to stay home at least for the first two years of your child’s life - the most critical stage of their development - and preferably until they start school. There is no more important duty and responsibility as parents than to properly attend to the needs of the offspring you brought into this world.
>a stay-at-home mom is vital, not a “luxury.”
I disagree. Juggle the work schedules and lean on your family.
My wife and I were, quite frankly, destitute when we had our first child. I started work at 530 am, attended the university after work, and my wife worked nights or as a maid where she could bring our daughter. Times were tough, but 27 years later, we have great kids who respect the benefits of hard work. My wife and I both eventually obtained degrees and rewarding professions.
Limin’
It’s not really fair to lean on your family though, is it? I can see you were in a tough situation because you had the kid(s) before getting the degree, but if a person has the option of planning it out, it’s much better to set up a situation where you don’t need other people to make extra sacrifices for you (if at all possible).
What if your job takes you somewhere where “leaning on family” isn’t an option? I’ve also seen plenty of cases where young marrieds seem to assume that grandma and grandpa just love being unpaid, always on-call childcare providers, when this may not be the case.
Well said, Big V and Sammy.
What total BS. Sorry, but Me, my Brother, and most of the people in my family had working parents. We both turned out fine, are very close to our parents, and yes, I am grateful for what they’ve done for me. Its called making life choices. This isn’t 1950’s land, and the more realistically adjusted a child is with modern reality, the more stable and logical they will be.
The single most common factor in predicting future trouble with the law is being raised by single parents.
We are not allowed to state that fact.
Just like the importance of stay-at-home parents during the formative years, many resist these truths becaus it interferes with the race for what is really important to the average person.
Stuff.
again. BS. I know PLENTY of kids who were raised by a stay-at-home- mom who wound up being rotten. It is not about “stuff”. A lot of parents have to both work because otherwise they wouldn’t be able to pay the bills. Just because both parents work doesn’t mean that the kid never sees them. In my case, my Mom was a school teacher and got off work the same time I got off school. My Dad always had a job where he got off at 3-4:00. Thus I saw my parents a lot. And you know another thing? Because my parents didn’t strain their finances by having one parent stay home, we went on LOTS of vacations together.
So if you want to claim that kids grow up better with one parent home- got for it. The 50’s are calling.
“The single most common factor in predicting future trouble with the law is being raised by single parents.”
We know several families that fit this description. The courts and lawyers end up with a good share of that second income. If stuff and vacations are important then raising a family should be avoided.
I don’t agree with sending the wife to work in order to save the house. The kid is more important than the house. It would be better to stop making payments on the unaffordable house, save up money while you’re waiting for the foreclosure process to go through, then use that money to get a decent rental. You will actually be richer for it in the long run, since you probably won’t be getting any appreciation on that house anyway.
nycdj (and all the others who propose “sending the wife to work”):
You obviously don’t have kids, and/or haven’t actually done a cost/benefit analysis for sending the second income-earner into a low-paying job.
You need to read “The Two-Income Trap” by Elizabeth Warren.
http://www.amazon.com/Two-Income-Trap-Middle-Class-Mothers/dp/0465090826
By the time you’ve paid taxes, clothing, transportation, daycare, extra food expenses, etc., many families actually LOSE money when the second earner goes to “work.”
BTW, stay-at-home parents **do** work. Again, you can’t really grasp this unless you’ve been the primary caretaker/homemaker over a long period of time. There are very few jobs that are as difficult and exhausting as parenting. SAHPs make great sacrifices to care for their children. Please, don’t belittle what they do unless you know what you’re talking about.
You must not do the modification at this time. The market is in flux and you will be chasing the price down and merely throwing more closing and commission costs into the black hole.
Offer to pay fair rent, under a lease, in exchange for an unopposed foreclosure.
If they balk, stop payment on the mortgage (if you have not already done so) and prepare to get on with your life.
Throwing money away on rent is no worse than paying property taxes to support illegals any way.
Mortgage renegotiation is a waste of time in a deflating market. Wait for a bottom in a few years and just enjoy your time now with the kid instead of trying support an unsustainable real estate fantasy-turned-nightmare.
“RealtyTrac looked at listings in four states, California, Maryland, Florida and Wisconsin, and found that they contained only a third of the foreclosures it has in its database. The scope of the problem isn’t clear, but it could be huge considering that RealtyTrac has a total of 1.5 million bank-owned properties on its site
Helloooo Wisconsin Banks and Lenders ! Been “Ghosting” Houses and commercial RE Big Time, huh, huh…and you THOUGHT you’d get away with it… didn’t ya, didn’t ya ?
In our community, around 12 to 15 failed flips by specuvestors have gone back to the lenders. Yet only six or so show up on the MLS. The average discount off the original asking price is about 25 to 30 percent.
Most banks don’t advertise their REOs on the MLS. They advertise them on their own websites, and the require the buyer to finance through them. Probably not gonna work, but that’s the best they’ve come up with so far.
“This is why the cram down myth is so tiresome. These people obviously don’t understand contract law. I’ve tried to point it out, but some of you guys are just deaf. It doesn’t matter what congress or the white house does. If it violates contract law, it will simply be over turned later.”
What about loans based on fraud? Wouldn’t a loan with any fraudulent basis be attackable in the courts? Lots of liar/NINJA/non-primary-residence garbage out there…
Yeah, drag it out by taking each individual case through the criminal justice system. How many prosecutors are on your county’s payroll?
Dear new reader,
You mentioned you are going to experience a drop in income. Well, I don’t think survival in Walnut Creek is possible without a high and steady income.
Your best bet is to get and stay mobile. The “white picket fence” concept worked fine when there was 30-year job security to pay that 30-year mortgage. Now there’s 3-year job security at best.
I would start selling anything you don’t really need, and try to arrange a short sale on the condo. If the bank gives you any lip, stop paying them, and mail in the keys on your way out of town.
Don’t wait around for the government to help you. What has happened in the past to the sons and daughters of those who waited around for the government to help them? Only you and your wife have the power to improve your family’s situation.
It’s really just a business decision. You’re only 3 years into the mortgage. If you can rent for less, walk way. It’s legal and appropriate.
While many of us here aren’t sympathetic to folks who bought houses they knew they couldn’t afford, some people who bought houses they could afford were victims of a manipulated market and paid too much money.
Rent a new place, then walk away from this one. Your increased mobility from being a renter would pay off in the long run.
+1
since california, in my understanding is a non-recourse state I would send in the keys to the bank and calmly walk away. Look at yourself as a mini LLC. walk away and hold your head high.
speaking from personal experience as a laid off engineer who got laid off in 3/2001. I paid off my credit cards but was 90 days late. that late payment is staying on my credit record for 7 years like I didn’t pay it off. If i would have known that I would have been just as well off not paying my credit cards.
do what’s right for you. The CC companies, the pols, and the banks will stick it to you every chance they get. BTW, I also believe that this a contrived economic calamity to ultimately make the USA less free.
denquiry:
It’s sure seems that way. There are far too many people at the top to claim they were ALL asleep at the switch
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I also believe that this a contrived economic calamity to ultimately make the USA less free.
new reader,
As others have said; “It is a business decision.” A well planned “failure” will leave you better off financially. That means better able to provide for your family. IMO, a loan modification in a falling market is only guarantees more future losses.
Since you started out “stretched” and are going to see reduced income, be practical and make the changes in your life to live below your means. It might be worth your while to consult a BK attorney to get a trained opinion about how to plan a foreclosure. If you stop making payments on your mortgage (and put the money aside) it will probably be nine months before a foreclosure comes to pass, maybe longer in this environment. That cash will be a nice nestegg to get you started in your new situation.
Rent a smaller place that you can afford and stay flexible in the sure to be challenging next few years. Cash is freedom. Debt is slavery.
In addition; I do not believe that anything the government will do can stop house prices from falling further.
On loan modifications:
A friend/coworker of mine has been working on getting his loan modified. He’s heavily underwater in the home (150k or so). He discussed this at length with his loan servicer GMAC, who explained they couldn’t even begin to help until he was 90 days late.
So he went 90 days late, during which he sent numerous letters, explaination of hardships, etc.
Fast forward 90 days, GMAC say they still cannot help him, and that they need to turn his loan back over to FHA (his actual mortgage holder) to help. They send him a big packet explaining this, and that they applied for (and received) money from HUD to pay his mortgage current so he could be passed back to FHA, and that his febuary payment to make him current through march will be 22$ (thats twenty two dollars, not a typo).
So he pays the 22$ and calls FHA to discuss modifying his mortgage, and guess what he’s told? “You must be 90 days past due before we can discuss modifications.”
We’ll see what happens in 3 months. He’s even taken in a renter for one of his bedrooms recently. His reasoning is even if they choose not to modify his loan and he’s being forclosed on 3-6 months down the road from now, they will have to then serve his renter a 90 day notice of forclosure thanks to the forclosure protection rules for renters. He doesn’t intend to make a payment on this house all year, or at least not until they modify his loan.
And we wonder why the banking system is collapsing. It’s boneheaded moves like this that will push the value of homes far under the replacement cost for years to come. Just take the home back and sell it out of foreclosure! It’s not that hard!
Screw that. Loan modification is playing the banksters game. Tell your friend to hasten the inevitable by mailing in the keys and walking. Every walkaway hastens the day when home values will bottom out and find their logical level. More importantly, it punishes the fecklessness of lenders and will force them to be far more cautious and responsible with future lending, which can only benefit us patient, high-down-payment, creditworthy renters.
He’s not going to jingle mail…. Look at the end result possibilities:
1: The bank finally forcloses a great deal in the future and he hasn’t paid a payment on his residence in a year (he’s been saving this money, he was stretched thin but still capable of making his payments on the underwater loan).
2: The bank finally modifies his loan, he becomes current on his mortgage at a much reduced amount (I agree this is probably not going to happen, but there is a chance). He goes forward happy, owing a vastly lower amount for his home (the reason he’s so underwater in the first place is of course his huge refinance to build a 40,000$ pool, finance trips to russia, and have a dream backyard barbeque and car).
3: He hangs on unmodified and nears forclosure a year from now, and bankrupcy rules change to allow his mortgage to be crammed down (again, unlikely but possible). He’s got a huge paper trail of attempts to work with the lenders, and their responses that he must be vastly past due before they will even consider helping. He goes BK and things are hunky-dory.
4: He mails the keys in now and gets out of his home, moving himself into a cheaper rental (that isnt on the golf course). He then proceeds to pay his monthly rent.
I can see why he’d take the options that don’t involve spending any money (rent) for the next 3-9 months. His credit’s already hit, he has nothing to lose. Add the rediculous measures the government is making to “keep people in their homes” and it’s completely possible he will come out 100% ahead on this and the proverbial hummer will still be in the driveway.
Everything I’ve read about the Federal help says you have to be current on your payments to qualify.
People really should just stop making payments and then go rent something.
Oh yeah, and he re-fi’d, so it’s a recourse loan now. I guess there really is no way to be a thief without losing something.
Oops.
The only risk is the Karmic risk which seems to indicate that what goes around tends to come back around with a particularly nasty and selective vengeance.
Walking clean would be a safer option.
Just FYI, the rules for a boarder are different than those for a renter. Not sure exactly how, but your freind should look into that further.
“”Stopping the housing crash is central to fixing the economy, and halting foreclosures would be a big step towards that, according to Ken Rosen from Berkeley, who is notable as being one of the economists who was suitably gloomy last year in Davos.”
I absolutely agree with part premise A. We need stable housing prices, at 1999 levels. That’s about where the prices should be.
However, the only way to get there is to INCREASE foreclosures and liquidate all the bad loans. We need to stop pretending that people who bought houses they cannot afford, will ever be able to afford them, except by government intervention to keep their payments the lowest in World Banking History. Even at 2%, some of those loans didn’t make sense.
The FED forcing down rates is THE PROBLEM. Cheap money leads to Malinvestments, of which we have seen oddles. ZERO interest rates have killed rational investment. Housing is not an “investment”. It is an expense, with long-term forces “savings”.
We need to INCREASE interest rates, increase foreclosures, liquidate the Banks, start new banks, and start over with the gamblers taking their losses (i.e. Goldman-Sachs, CitiBank, AIG, etc), rather than us, the taxpayers. Life will go on, and the recovery will occur sooner, rather than later. OBAMA is trying New Deal big government spending which will do just what it did the last time………..drag the recovery out for 12 years until a big war gets started.
Couldn’t agree with you more. The faster we get the prices back down to a reasonable level (where they make sense on a price/rent and price/median income ratio) the sooner we will recover. The more “plans” put in place to help people with 50K incomes in 500K homes, the longer and more painful this will be.
Many of the buyers during the boom just have intention, and no financial means to stay in “their” homes. It doesn’t matter what you do (short of cutting the loan amount by 60+%), these people are going to default. And cutting the principal (without recapture) is not something that I see the government doing, and, by God, if they do, I’m leaving for Europe and never coming back. We are supposed to reward RESPONSIBLE financial decisions, and punish the bad. Blunting or removing this mechanism will lead to the destruction of this country.
‘We need stable housing prices’
Stable housing prices are desireable, and no governement intervention has been neccessary for over 600 years. When I hear about ‘housing prices recovering,’ the first thing I think is:
Prices are recovering - down - where they have to go!
This gets back to the problem of ignoring the glaring fact of the housing bubble. Think about it; the media/govt goes on and on these days, with out really even mentioning what lies at the root of this debacle.
RE Estate Projections …2009 and beyond
You can wave Bye-bye to all of that “Pride of Ownership” sales malarkey, courtesy of Suzanne and her little friends, from the back of a U-Haul truck.
Sheriff: “That’s all folks..nothing more to see here…move along”
“Recovery” to me means to historic norms of 3 X gross annual income, with lenders requiring 20% down, proof of income, and honest appraisals. If that means a lot of greedhead boomer dreams of coasting into retirement [at the cost of some young couple taking on a lifetime of debt slavery] going up in smoke, so be it.
diogenes
We are MORE then screwed in America…guess what CC companies have been issuing Adjustable rate cards for the last few years….increase rates then more CC default too…..i cant use a 4 letter word but ya know what i mean.
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We need to INCREASE interest rates,
I think that will come to an end soon. I believe the CONgress just passed a bill that would prevent CC companies from inadvertently changing rates. The “billing” rate is supposed to be the rate that was set when you made the charge. That rate is to continue until it is paid off. Also, no 2-cycle billing to tack on charges when you haven’t used the card.
I don’t know where we are at on this, but I think it is the one good thing this Congress has done since the Dem take-over.
In fact, it’s probably the only good thing they’ve done since about 1985.
“i cant use a 4 letter word but ya know what i mean.”
Go for it, aNYCdj. If I desired a sanitized forum I wouldn’t support Ben’s blog. However, please be creative in the use of the following characters: ! $ *
Well said. We don’t have unlimited time or resources to throw at insolvent financial institutions in the name of saving households and family finances.
We need to spend our time and resources wisely if we are to grow our economy out of this near depression.
If we continue to direct most of our resources to sunk costs like insolvent financial institutions, we’ll ensure a depression or worse.
Exactly right.
diogenes, agree, this makes a lot of sense. It would be the fairest solution, rewarding the savers, the non-gamblers, and the next generations of Americans. Unfortunately those groups don’t have much say in the process.
The problem with artificially low rates is that they can only go up! Suppose they kept the rates at zero AND decided not to try to prevent foreclosures, but simply take back the houses and sell them at an honest auction to the highest bidder.
Then, when rates inevitably go up, house prices will fall again!
evildoc’s response over on the website where that bonehead posted his concern to fix the housing crash…
—
—Stopping the housing crash is central to fixing the economy, and halting foreclosures would be a big step towards that, according to Ken Rosen from Berkeley, who is notable as being one of the economists who was suitably gloomy last year in Davos.—-
What abject nonsense.
Enhancing and accelerating the housing crash is central to correcting and resetting the economy. Anything done to delay what some call a “crash”, which really is just a return of housing prices to a sane zone, will merely delay delay delay and drag out the doldroms.
When the median house in the USA, where median income is under 50k, hits about 125k, then normal affordability will have returned to the game.
Housing is NOT a “nest egg”. It is a nest that costs lots of money to maintain. Not gonna make ya rich. Only was an “egg” from the days when one lived in it for 30 years, paid off the mortgage, didn’t ever take a HELOC (home equity line of credit) and had the pleasure to pay only taxes in old age.
Houses don’t “always go up”.
“They” ARE making more land. Hah!
You don’t need to rush to get on the “property ladder”. Snort!
Don’t buy “the most house you possibly can swing”. Gad!
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Housing is an expense, a utilitarian item. Not a dream (close thing, dream, to delusion, no?)
People get wealthy by living below their means and by saving, not by engaging in national ponzi schemes, counting on ever more stupid newbies powered by national credit bubbles to buy their stick and plaster albatross for ever more money.
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Housing will fall fall fall for at least 4 years. After all, the biggest “stupid loan’ resets don’t even peak for two more years. Then flat prices for more than a decade.
Wash out all the fools who thought buying shelter somehow would make them wealthy.
Oh yeah, cities all raising the mill rate on property taxes as they go bust. That should help property values. Hah!.
Fun times.
Me? Doctor. $250k income. Gorgeous rental at $850/mo with all utilities. Saving money hand over fist. Vacations. Enjoyment. No stress. Explain to me how “helping” a $50k earner “into” a $500k house was doing him a favor.
cheers
-evil
Evil -
Regarding “Don’t buy “the most house you possibly can swing”. Gad!
In an environment with 20% down payment, mortgages equal to 3x income and normal fixed mortgages at realistic interest rates, buying as much house as you can swing is pretty good advice. The market will keep you from going overboard.
In an environment with 10x income and toxic NINJA loans, it’s a financial death sentence.
Nice!
‘At the same time, he said, more homeowners are deciding against paying a mortgage if they are underwater - owing more than their home is worth. ‘We have clients who say, ‘I can afford to make this payment but I don’t know if it makes sense that I should, maybe I’m hurting my family by doing this,’ he said.’
I’m glad that the sheeple are finally starting to wise up to this. Their MTG has 2 options, pay (and keep the home) or don’t pay (and give the home back). When the home has dropped 40%+ (and will continue to fall further), and the MTG balance is 100’s of K over the value of the home; the only option that makes ANY sense is to give the home back to the lender.
What the MTG companies were doing (although they didn’t realize it) was writing VERY inexpensive calls on home values. For 1K a month, I can get a call (at par) for an asset going up 30% YOY. That’s an incredibly cheap call (I’d like to see someone price is using the formula for options pricing!).
People who are under by 100K+ need to realize that they have this option (a put actually) to give the home back to the lender and walk away. It’s written right in the MTG contract. And many/most people who bought during the real boom should probably exercise that part of their contract. However, it’s not in the best interests of the country for them to do so; therefore we will continue trying to keep suckers on the hook and paying (not realizing that they have, and have already paid for, the option to put the home back to the bank at full loan value).
Individually, many people would be much better to walk. Even if they do a principal reduction, but then recapture it on sale (reduce your 300K MTG to 200K, but if you sell the home for over 200K, the lender keeps it all up to 300K), it’s still a really bad idea to stay in the home. The loss of appreciation/inflation protection afforded by the residence makes it a terrible deal compared with renting. Any rent/own calculator is going to tell you to rent when you figure 0% appreciation for a long period of time (which is exactly what a principal write down with recapture is; it’s a promised 0% for the life of the loan).
I’ve seen estimates that as many of 70% of people who’s mortgages are at risk lied on their mortgage application.
If that’s true, there’s a simple, just solution.
The 30% who told the truth get to walk away. Congress can attempt to pass a law so it won’t affect their ability to get other credit.
The remaining 70% should be held accountable. No tax forgiveness, criminal fines, etc. Make them liquidate everything they have. Why are the majority of Americans opposed to trying to contain the pain among those who are the most guilty?
That would be a great idea. Distinguish between those who were witting participants in the fraud, and those who were merely stupid and got in over their heads. Separate out the fraudsters, then bone and bone till we can bone no more.
The majority of Americans don’t follow what’s going on around them. They are only now beginning to admit there’s a recession, and have heard the recession is being caused by foreclosures. Because they are so naive, they actually believe all they have to do is get the government to “pay” for the foreclosures, and then the economy will be healed, thereby making them rich again.
It’s based on a lack of interest in one’s surroundings.
“The remaining 70% should be held accountable. No tax forgiveness, criminal fines, etc. Make them liquidate everything they have. Why are the majority of Americans opposed to trying to contain the pain among those who are the most guilty?”
+1 Well said, reuven!
‘If the Obama administration really wanted to help, they’d go out and buy a million homes and burn them to the ground,’ Pollack joked.”
Why joke? That sounds like an excellent idea to me!
And we could start pouring milk into the ground too. Did you notice the homeless numbers out this week? Up in almost every part of the country. Where I live, people are struggling with rent, yet hundreds of houses are in foreclosure limbo.
Just wait until the government program to put the homeless in the excess homes it gets stuck with. Obama won’t have to burn them to the ground, the neighbors will.
Just waiting for this issue to explode.
Max Rameau is an activist in Miami and is currently moving homeless people into foreclosures. I’m sure they will be great tenants, keeping the place in tip top condition, and never be late on the rent due to it being free. I wonder what the “pride of non-ownership” will be?
http://www.msnbc.msn.com/id/28002276/
Although burning homes to the ground would fix the housing market, it’s an absolutely awful allocation of resources. People need homes, people want homes, and people will buy homes at the right price. Why on earth would we want to see homes burned to the ground when there are people who want them; but not at anything that even resembles the last sale price.
This is like trying to corner the diamond market, or the gold market; yes, it’s possible. But who is helped by this type of move? Why would we want to deny people housing just to support the values of the people who paid FAR too much?
I’d support burning a bunch of bank stock certificates too, that would greatly increase the value of my UYG shares.
Michael:
Because i suspect there will be a million homes in just as bad shape as Katriana homes in places like Floriddah considering the house being closed up with no AC mold leaks vermin let alone vandalism…so 1 million useless unlivable homes should be the correct response.
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Why on earth would we want to see homes burned to the ground when there are people who want them; but not at anything that even resembles the last sale price.
If the Obama administration really wanted to help, they’d go out and buy a million homes and burn them to the ground,’………….
You guys are killing me with Anti-capitalist nonesense, as promoted by Keynesian buffoons. Let me try this again.
Under a true Capitalist system, with ever increasing ways to produce more produce with less labor, PRICES should always be getting Cheaper. Your Money is always worth MORE. High prices are a sign of Poverty.
Capitalism is hamstrung by Central Bankers who STEAL the increase in value of your money by printing and lending more money, thereby putting more into circulation than the increase in value that industry created…..i.e. INFLATION.
Inflation is good if you are leverage gambler, and the first in line to get the “new money”. With the new money, you buy up assets, and as those assets increase in “value”, you gain income from nothing. If you are working for a wage, you LOOSE.
Inflation favors the Asset Class people. High prices are NEVER good for the average person. I would like to see all houses sell for less than $100k, or even $50k. That is a sign of a RICH Country. Your money is worth a lot. You live very well on very little. Are you beginning to understand??
High prices are a sign of Short supply, of scarcity, of poverty. We want MORE supply and LOWER prices, then you can buy all you want.
The problem Amerika got itself into was Banker fraud Ponzi-scheme mentality of FREE Asset inflation money-for-nothing, without work or worry. It never works, except for the monied classes, and the political classes. And even they got too greedy.
Re-think how much you want to pay for something.
If Capitalism was allowed to work without government interference, those Million houses would have owner-occupants at greatly reduced prices.
Please re-tool your brain to more rational ways of looking at the world. Destroying valuable assets does not make one “richer”.
Burning a vacant home in California would most likely require waivers from CARB. Imagine an endless number of hoops, and you have to jump through all of them.
Burning homes - that can’t be very carbon-friendly!
Good post. So many that are first to spout the capitalist mantra say that high housing prices are a good thing in the same sentence.
There’s legitimate capitalism, then there’s predatory capitalism of the sort that owns your Republicrat Senator or Representative, and thus will continue unchecked and subsidized by your tax dollars.
They did that with produce during the Great Depression. People starved while piles of oranges and corn were set ablaze. Shameful, really.
“‘What we need is a moratorium on foreclosure while we get a plan in place. We could have five to eight million more foreclosures in the U.S. if we don’t do something about this. Banks have already written down these mortgages,’ he said.”
This guy is a ‘notable’ economist?
B.O.’s new Big-Bang BARF-2 plan due to come out next week is said to have considerable accommodations in it to freeze foreclosures, designed to put a ‘bottom’ in housing prices.In a report I heard this morning.
So what’s left for them to do? Is government going to buy up everyone’s mortgage? The deeper they get into this situation the worse the problem will get, have all of the we have to ‘do’ something people seriously lost their minds? Can’t wait to read the new fix, little Turbo Tax Tim at the treasury said it may take up to $4 trillion to fix the banking system. Oh yea that’ll fix it alright, we are being guided by fools.
“I’ve said it before; many of these people are making the rational decision to get out from under these loans.”
My brother in Hemet CA, got a $1,200.00 mo. loan payment reduction due to modification…his house: $360,000 in 2005…. identical house… on the same block… 2009: $183,000
Not knowing all the particulars…like how much money down did the family put down on the condo? It’s a condo, that screams low appreciation going forward…sounds to me like they should wait to see what happens with the Gov’t’s…. Own…to rent program now be put into place.
Did your brother stop making payments to get the workout?
Too bad I can’t get a workout. In probably the only idiot left still paying his condo mortgage
Yes, from what he told me…8 months behind…used a lawyer to handle the modification. His was a sfh, no HOA fees.
You should read the modification contract. How much you wanna bet there’s a balloon payment due in 2 or 3 years of about $300k?
I caught a few minutes of a CNN roundtable on the economy last night….lots of nervous talk about “stabilizing” home prices as the “housing crisis” is at the root of the recession. They showed a graph that home prices went up in a straight line from about 1997 to 2006, but no one would admit THAT was the crisis, not the fact prices are coming down now.
One of the panel was at least sane on the subject….said if everyone admits it was a bubble, then the way to heal the economy post-bubble didn’t involve keeping prices artificially propped up at bubble prices. A few others chimed in at that point, that yes, housing had to be allowed to settle at its own price point.
Which gets us back to late ’90’s pricing, before bubble lending practices began in earnest.
Except in the late 90’s we were still in the tech bubble and people were at least looking at an expanding jobs market. I know that personal access credit was somewhat rational, but risk taking was easier since any kid with a computer and a flair for web design could make a living, never mind the money that was being thrown at fixing Y2K stuff - it wasn’t a crisis but the problem was real and it was fixed.
We might go lower than that.
Agree with this, Polly!
Question: Does our economy look better or worse in 2008, compared to 1999.
I’d guess most of us would say today’s economy is far, far worse.
I get nauseated with all of the “stabilize house prices” crap. Not because they’re wrong in theory, but because in practice they mostly always mean keeping prices at an unsustainable level.
Yes, let prices stabilize….at early-mid 90s prices. (Although I’m certainly not opposed to the PuddyTat’s prediction of 1983 pricing!)
Invariably though, the “stabilize” comment is followed by some ramblings of government action.
For the new reader:
Michael Fink gives you a good starting point……look at your expenses NOW, to either see if you can afford your place, or compare to something to rent. I will say though that you shouldn’t wait to see if anything in Obama’s stimulus plan might help you. By the time you figure that out, it might be too late to pursue other options. You don’t say when you’ll actually start losing the income, still, be proactive and start NOW.
I don’t feel I have much constructive to offer, however I can say from experience that if you end up having to move out of the house, be it voluntarily or through foreclosure, yeah, it’s a bummer, but it’s not the end of the world. You may have to “trade down” where you live for a while. That’s life. Worse things could happen than having dings on your credit report.
What matters is doing what’s best for the little guy. He doesn’t care what kind of house he lives in or how big it is. I also admire you and your wife for making a go of her staying at home. If you can somehow keep it that way, you won’t regret it.
Best of luck to you.
Well said. Life is full of really tough choices. What matters is doing what’s best for the little guy(s).
I once had to chose between a promising career and the life or quality of life of my unborn twins. My wife went into early labor — 21 weeks. The doctor said we had to drop everything for our kids to have a chance. He added, even if they made it, there was no guarantee they would have normal lives.
The best trade I ever made. We made it to 35 and 1/2 weeks.
Oh WoW, Mrkt. That’s the coolest thing I’ve read in ages. Good for you two and your little ones. How old are they now?
Dang. Thanks for sharing that.
+1
Dear seeking advice,
Stop paying your mortgage, cry poor to the bank, hoard cash, have your wife work on nights and weekends, wait to play your card later…
I guess I should tell my wife to quit her job.
Why work?
Muggy
It’s: work off the books…….so they can reconfigure your loan with only the legal money you make. Whoo hoo
I think HHB’ers can come up with a great work around for anything the guvmint throws at us….LOL
I think it’s her choice wether or not she wants to slave day in and day out for the sake of you and your kid. Maybe you should get another job too.
“I think it’s her choice wether or not she wants to slave day in and day out for the sake of you and your kid. Maybe you should get another job too.”
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I have several questions that maybe someone can answer on the Walnut Creek condo - one - who is your mortgage with - if it’s with Fannie or Freddie then you might be able to rent it from them like I have been hearing (but don’t know the details) and two - if a cramdown or modification is done - does the CA “homeowner” lose their non-recourse status if it is their first loan and then that opens the door for the mortgage companies to come after them for any further losses if the homeowner defaults again and the property gets sold off at a loss?
Normally I just read the comments.
This is WRONG. Fannie/Freddie are NOT renting the house back to the foreclosed owner.
The only thing they are doing is if they foreclose and there is an existing tenant, they are allowing the tenant to stay on a month-to-month basis. That means the borrower is NOT the tenant.
Well you might want to read this article then
http://tinyurl.com/bta477
Or this link that talks about Feddie renting back to former owners from USAToday
http://tinyurl.com/afvxgs
As some of you know, Mom had a similar situation. After her ARM adjusted, including taxes, HOA, and insurance, she was paying near 3,000 a month. After a job loss, annual income dropped to around 40K.
She walked away, rented a larger home for 1,300 a month, then filed BK. The phones aren’t ringing anymore and she is a lot less stressed. What’s more, the rental is newer, bigger, and the neighbors are friendlier.
Great story, MM (along with the story about your twins).
New reader,
Michael Fink gave you some great advice factoring the cost of paying your mortgage or renting. If it’s cheaper to rent let the condo go. As Blano said your child won’t know the difference if your renting. What your child will notice is mom and dad are much happier than they were when stressing over a mortgage they can’t afford.
I wish you all the best.
Hear hear! I second Bay Gal’s comments. I’d also note, for the benefit of newbies, that Michael Fink consistently offers insightful and informed advice and comments in here.
I agree too, especially about the kids not really knowing/caring part. It’s more important that they not see you stress. My oldest son loved living in an apartment complex, there were kids the same age on our floor. He was very, very lonely when we moved back to a (rented) sfh.
Thinking back to the endless projects that were always going on when we owned, I was happy to get my toddler away from paint, sawdust and very busy parents. Like the original poster, our move was preceded by a job loss.
I too agree with SBG. Not to get corny, but your health - yours and your family’s, is your real wealth. Imagine your current issues and a very sick son or wife with 2K medical bills every month. Or imagine if you became ill. Count your blessings and then in that frame of mind, take action with the information you have today.
walk away and rent. I hate to say it but the longer you, and our country as a whole, drags out the economic pain the longer the pain will last.
I have a couple of questions.
Did you HELOC and spend the proceeds, or are you just stuck because you bought at the top of the market?
Is this someplace you would like to live long term?
If the answer to both is “no,” then you are in the same position many of my friends were in when they bought NY co-ops and condos in the late 1980s bubble. None of them defaulted — the lived poor for years, in a small unit with one and then two kids, and had to save up enough money to be able to sell for a loss and start over with nothing. Many were in their mid- to late-30s before they could purchase a house.
Your situation is different in two ways. First, none of my condo owning friends lost their jobs. And second, NY is much harder on people who go into foreclosure than CA, a non-recourse state (IF there is no HELOC).
In that case, the advice above — offer to rent the place after a voluntary foreclosure — is good. You’ll take a hit to your credit, but if you eventually get your income back you can live poor and save to buy the house you’ll want to live in 5-7 years down the line, rather than saving up just to sell.
If they rent at market rate, then they won’t be living poor, since market rate is always in line with market incomes.
Dutchess Co. NY update-
It’s here folks. 700 layoffs announced by the county’s largest employer, IBM. For those not familiar with the area, IBM wacked thousands back in the very early 1990’s when I came to work down here the first time. Back then in 1992, I was attempting to buy a short sale, of course at the time I had no idea what a short sale was but galdarnit, I was buying one. I was working with the listing RealTard and the underwater FB who happened to be a residential contractor gone belly up due to the local economic downdraft of layoffs and foreclosures. The bank didn’t accept the offer and of course I had no idea why but very happy with the outcome in hindsight. My $110k offer price was way too high for those days yet the bank still refused it. I can only surmise the FB owner was into the bank far more than $110k, hence the bank rejected it.
I got sidetracked with my own personal experience some 18 years ago in Dutchess county and oddly enough, I’m back here again during another recession.
It’s a deja’ vu moment in NY state. Layoffs are occurring all the way up and down the Hudson Valley including schools, manufacturers, services, IT, not to mention the bloodbath in finance in Manhattan which is commutable from here. Understand that the denial here was best understood when people would point to CA, Fl and say “it won’t happen here”. Well it’s happening. The front page of The Daily News yesterday was NYC was laying off 23,000. You read it right. 23,000.
For my homies in New England states VT and NH and upstate NY east of I-87; this spring is going to prove interesting for sales volume there. The Two House Tony’s down here are getting squeezed and I look forward watching this play out in terms of inventory back home.
Exeter,
I’d say you have a moral obligation to use your experience to help guide younger folks trying to make wise choices in today’s economic climate.
Agreed and thank you. Sometimes my adherence to the bubble mantra distorts the message at times.:)
Put it this way…. those who know me would describe me as passionate about *thinking* about mindless RE and finance mantra before repeating it.
It’s here in the western parts of NY too. Between Kodak and Corning, 10,000 layoffs announced.
Good, I’ll take my $1 home in WNY, Detroit-style. Grey, gloomy, layoffs, exactly how I remember it as a kid
“Good, I’ll take my $1 home in WNY, Detroit-style. Grey, gloomy, layoffs, exactly how I remember it as a kid”
BINGO. Yet the dreamers and RE greedheads were convinced that the long term decline was halted and it was a new economic paradigm with housing leading the way.
Vermontergal,
Haven’t seen you posting in awhile. Hope you and your family are okay.
Have seen the reports from RealtyTrac that banks are holding up to 70% of reos off the mls listings.In the area I have been watching I have noticed it for quite some time.The area I am watching is missing many of the reos on the mls .
I think its a combination of two things.They are overwhelmed with the amount.The 2nd being it would show a tremendous inventory in most areas and drive the prices down further.(Which will happen anyway).
Its my belief that the banks are holding them back and trying to move one or two, or a handfull at a time.If they sell them all at a loss in one quarter it would prove how insolvent they really are.Afterall not one bank out there will admit how much bad debt they really hold.
What are your thoughts on this?
“Have seen the reports from RealtyTrac that banks are holding up to 70% of reos off the mls listings.”
Whether its on the market at a break even/wishing price or “in limbo”, either way the bank is carrying the costs on the things. It makes little sense NOT to have them on the market. I’d agree that if inventory is being withheld, it is because banks are overwhelmed.