Doing The Right Thing?
by NYCityBoy
This is the latest in the series of the “Regular Guy” interviews. This is my attempt to hear from people in a way that the MSM would never allow.
We talk about FBs all the time. Most of the time, we talk about them with laughter and ridicule. I do not claim to be above that fray. But I think we have also admitted that many of the people that find themselves upside down, underwater, whatever you want to call it, are also just good, honest people. They bought houses thinking that this was what they should do in life. They were not looking to buy the house, slap on a coat of paint and put in some stainless steel appliances and “flip” it to the next guy.
In this world where house flippers are portrayed as rock stars it seems that it was easy to get caught up in the housing mania. But many people did not know they were getting caught up in the housing mania. They planned to live in the house they were buying. They believed house prices rising on a consistent basis, the way they did in 2002 – 2005, seemed like the new normal. They did not understand the workings of Fannie and Freddie or the process of assembly line securitization. They were being bombarded with tales of “the American dream”. It was easy to see why so many people got caught up in this mess.
As the housing bubble burst it became obvious that many people paid a price that is much higher than what their house would now fetch on the open market. For many of us that might not seem like a big deal. We say things like, “pay the mortgage. You signed it.” Or we go the other route and say, “walk away” like the house was some kind of one night stand. The question of what to do for many is a moral, financial and even spiritual question. It can impact a person’s credit score and we have been told that we are basically only as good as our credit score. It affects our monthly budget. To pay hundreds of dollars more per month than is necessary for housing seems like a huge drag on a person or family. For many it is a question of, “do good people really walk away from their commitments?” I know how I was brought up to answer that question.
The issue is not as simple as black and white for most people. I have an old friend that is underwater. He has wrestled with this very question the past few years. After getting divorced he decided to keep the house that he and his wife had bought. At the time there was no reason to believe that he would get caught up in the biggest housing bust in history. He figured he would have a brother or two move in. They would help him with his monthly expenses. If things did not work out then he could decide to sell and move on with his life.
But as we know the option of selling has been removed for many people. The only options left are to continue to pay or to walk away. For my friend there is not the option to sell since the house is underwater to the point where he would have to show up with a check that is larger than what he could come up with from his savings.
Some people would tell him to do a short sale. That is not much different from walking away. Typically to get a short sale done you have to stop making payments. That will destroy a person’s credit score, almost like walking away. Like a foreclosure, the short sale decision will hang over a person’s head for several years.
With all of this in mind I asked my friend John (not his real name) a few questions about his situation. I think it gives a good insight into the thoughts, and conflicts, that anybody that is underwater is going through.
What is the main reason that you continue to pay your mortgage?
The sense of obligation. I signed a loan. I signed an agreement. I signed a contract. I’m not the type that signs something and then just forks it over because it’s upside down. It’s probably kind of stupid. I borrowed on it. I’m not going to just walk away.
Have you given any thought to walking away?
Absolutely. I think about it every time I sign off on that mortgage payment. I think, “what is keeping me here?” I think about what my dollar could go towards in an apartment. It’s on my conscience a lot. It’s hard to shake that, especially since it’s become fashionable.
Do you worry about the negative hit to your reputation?
Yes. I do. And I know credit is recoverable. But I don’t even know what the hell I need credit for. I’m in such a different mindset. Truthfully, credit means less to me than it used to. If I ever go to another job it’s a factor. I don’t know I want that hanging over my head. It’s definitely a factor in your reputation. I guess I’d like to keep that in tact as much as anything. Probably more that than the credit hit.
What do you think about the people that still have the resources to pay but walk away?
I just think it’s irresponsible. I have the resources. I could walk away but I don’t. I know it goes through my mind. Some would argue it is smart business. It is the thing to do. I guess I see it as irresponsible.
Do you feel that the lenders are playing by the same rules as the borrowers?
No. I don’t. They are certainly out for themselves. They don’t care about people being in homes, building communities or people building wealth. Certainly with government backing and bailouts they have even more advantage. They are taking anything that benefits them. They want to get people in the house to get interest and make money selling loans.
Do you think the government should be bailing out mortgagees or lenders?
That’s a tricky question. I don’t think so. I’m of the mindset of “let things fail” instead of artificially holding them up. It doesn’t fix fundamental issues. But there’s the argument of, if you see your neighbor’s house burning you need to put it out. Letting the financial system fail would have been a catastrophic event but if things aren’t let go I don’t think we will learn our lessons.
Where do you believe real estate prices are headed in your area?
I would not be surprised if they continue to fall. I have taken the approach that they will continue to fall. There’s nothing I can do about it. There’s certainly a lot available to buy. I have no reason to believe they are miraculously going to start increasing without some fundamental change. The frustrating thing is with values dropping my taxes go down but the local government doesn’t want to give up that revenue. At this point I can only expect it to drop.
What are your thoughts on renting?
I think it’s a great thing. In this particular state of things it’s great. Until housing is fixed and stable again when people can build value at a steady pace I think you are better off renting. It gives you the flexibility of going where you want, staying where you want. I envy renters. If I was not in this situation with this mortgage I would absolutely be renting. I would probably be paying half what I’m paying with this house.
Has your attitude toward renting changed the past few years?
Prior to the housing bubble burst I was completely sold on owning. The way things were, the way home values were shooting up, it was incredibly easy to get into a mortgage. There were just so many advantages to getting into a home and owning. I was completely sold on owning. I would say since the bubble burst my opinion has definitely changed. I don’t care about making the landlord money. People say, “you’re throwing your money away”. No. You are just paying for shelter. To be able to call the landlord and say, “this is broken” is a luxury. I don’t get that luxury. I could probably rent a house similar to mine and save $500 to $600 a month. Renting I see completely differently.
What would you tell a young guy that wants to buy just because of a government tax credit?
I’d tell him to walk away. No, run away. I guess it’s going to be different scenario. When I bought in, it was the emotional piece that really drove me. (Now) I would really question it. A mortgage is a big ass commitment. It’s almost like having a marriage. It’s not something to take lightly. It is a 30 year commitment. Some people are okay with that. If you want to keep flexibility and don’t know where you’re headed, home owning is not that great. I’ve had family help to pay for marriage. Without them I don’t know…it would have been tough, by myself. I maybe would have walked.
NYCboy what would you do here?
Aug 29, 2009 8:54 am US/Eastern
This condo building on Miami Beach has gone without air conditioning during the last few days.
LaGorce Palace in Miami Beach is a 34-story luxury condo building. But Friday, it was anything but luxury. “The insurance, they [haven't paid] us, that’s why we have a catastrophe today,” Assistant Manager Mario Tortora told CBS4’s Gio Benitez.
The catastrophe he was talking about is that the elderly are forced to pack up and leave their condos because they have no air conditioning or elevators — only a very tall staircase.
“So far, we moved the most critical people, its ten families,” said Tortora. As CBS4 spoke with Tortora, one of those people walked in. “His wife is very ill, he can’t stay in the heat with no elevators,” said Tortora.
And that’s not all, CBS4 News went up that staircase and on some of the floors, we found mold on the walls and smoke alarms sitting on the carpet. Tortora blames it on the insurance company not willing to pay for full repairs when they were needed.
“That’s what you get,” said Tortora.
But the trouble began on the rooftop, in a mechanical room. The cooling tower broke. Water came gushing out, flooded the floor, and crept into the electrical system.
“The repairs that were needed after Hurricane Wilma were many. We did temporary repairs because we didn’t have the money to make the big repairs,” said Richard Alayon, president of the condo association.
“We pay a huge amount of money in association fees,” said Xiomara Ardolina, who owns a condo on the 30th floor. “It’s very uncomfortable.”
What are some of these acronyms?
MSM
FB
HBB
any others that are used here.
Main Stream Media
Effed Borrower
Housing Bubble Blog
Acronyms are the price of admission here. I’ll take mercy this time.
Main Stream Media
F***** Buyer
Housing Bubble Blog.
Read and research. All will make itself known in good time.
How ya feeling? (Heard you were under the weather…)
I hope fire season is not in your backyard, either…
Welcome New!
MSM - main stream media (CNN, FOX etc)
FB - er…fooked borrower
HBB - housing bubble blog - a place Ben Jones set up for us to communicate about housing matters. We swap recipes too!
BB - Ben Bernanke
Leigh
MSM=main stream media
FB= f’ked borrower
HBB=housing bubble blog
“any others that are used here”
UHS=used house salesperson
LBO=Lock Box Opener
NYCboy what would you do here?
JUMP!
great time to get into base jumping.
Buy a bunch of window units.
and carry them up 30 flights of stairs?
It’s been almost 4 years since Wilma hit us. I think they’d better assume their insurance company isn’t going to pay, and figure out a plan B.
Bingo! it’s time to ante up
Here in China, few buildings have elevators. I think the law that requires elevators for any building taller than 11 stories is very recent. So all furniture & A/C deliveries are carried up by hand.
When A/C is installed, the workers crawl out windows/decks and stand hundreds of feet off the ground with just a simple rope tether. Pretty risky business — and very hard bargaining the fee with them when they say “I have children too, I’m risking my life to install your A/C”.
Hey Mossy, are you still in China? I am curious whether the stock market is a matter of common concern, or do most folks on the street ignore it’s recent declines as irrelevant to their existence?
Where I am, most people ignore the stock market. They all keep their cash to start businesses. It’s possible in more developed cities like Hong Kong, there’s more stock market fever because the area is already teeming with existing competition.
Know when to fold them, know when to hold them !
Know when to walk away, know when to run.
I’m in the running category for most of the FB’s…myself included.
Could depend if you are in a recourse or non-recourse state.
I agree that there probably isn’t much difference between foreclosure and short sale, from either credit or moral point of view. In either case you AREN’T making the payments agreed to, and instead are invoking the default clauses of the contract that you signed. In some ways you’re making it easier for the servicer because you’ve successfully found a buyer, but they also have to ensure that you and the buyer aren’t colluding to reduce the price even further. And I don’t think that all appraisers whose opinion can be bought have suddenly dissapeared. It will just be different people buying them.
“…but they also have to ensure that you and the buyer aren’t colluding to reduce the price even further.”
Doesn’t the ‘beneficiary’ (lender) have to approve a short sale? And don’t they retain the right to find a buyer themselves?
I don’t understand this collusion risk you describe.
Professor Bear,
If there’s a Realtwhore involved, yes, I’d be suspicious! Truthfully, “I” happen to think it’s a lot of the reason lenders are sitting on so many REO’s.
They haven’t figured out how to do an ordely liquidation without taking it in the shorts a second time. IMHO.
I don’t understand this collusion risk you describe.
Haven’t you seen the many stories where a friend or relative of the original borrower is the new buyer at the reduced price? That seems to be the most common type of collusion.
‘Doesn’t the ‘beneficiary’ (lender) have to approve a short sale?’
I don’t know if we’ll ever understand what’s happening in the short-sale world right now. I deal with UHS all the time, and what they almost always say is, “tell the lender to get back to me, I’ve got an offer and they won’t respond.” (BTW, I have no input one way or another.)
Do the lenders think they can get more bucks post-foreclosure? Are they just overwhelmed? For whatever reason, the short-sale route probably has a success rate under 5%, at least here in N AZ.
Ben I think it’s a combination of factors. Why is it when we called to get a modification they told us that it would be no problem and then sent paperwork to the contrary? They said we’d have a fixed new payment and surprise! When the “modification” got to me they wanted a nice low payment for 3 months, followed by a balloon payment, followed by our regular monthly payment. I think it was just a ploy to get another $2,100 out of me before foreclosure.
Andy, I have no proof, but I would have guessed the banks play that game. Perhaps the servicer profits more by selling it to investors as “weeding out the frauds”. But every foreclosure I have toured is stripped bare, and every short sale has been in tact and maintained to some degree. One would think short sales would be the rational way to go, but as Ben mentioned, they make up such a small percentage of sales, even here.
We’re in a gated community and the vacant homes destroyed by the youth of our community. I would think that a bank should really want to keep you in your home. What I’ve actually found by going through this process is that they just don’t care. They are only servicing the loan and it’s the investors who are going to take the hit.
“…the vacant homes destroyed by the youth…”
Posted an article about this in San Marcos, towards the end of last night’s bits bucket…
Interesting article on the gated community phenomena, both pro and con:
http://ifpo.org/articlebank/gatedcommunity.html
For whatever reason, the short-sale route probably has a success rate under 5%, at least here in N AZ.
That is remarkably low.
I continue to be baffled by lender tactics, both pre- and post-bubble. Greed and rank incompetence alone can’t explain it, not that I can see.
I attempted a short sale in the early 1990’s although I didn’t know it as a short sale then. The bank was absolutely obstinate about the deal. My offer exceeded what the seller owed and the bank stubbornly rejected it. In hindsight I’m happy with the turnout for personal reasons. We weren’t ever able to determine why the bank nixed it.
Very strange. If you offered more than the loan balance then it wasn’t really a short sale. Wonder why the bank did what they did?
Well yes, they do have to approve a short sale. Of course what they’re doing is agreeing NOT to try and get the ballance from the borrower. After all, you need no approval at all if you pay them the upside down amount out of pocket.
But what they have to worry about is the fact that in a short sale there’s NO incentive for the seller to try to get the best price possible. Let’s say somebody offered the seller 50k less than similar houses in the neighborhood (already selling for 50k less than the seller paid) but offered the seller or the realtor a 10k kickback to “accept” the offer. The net result is that the buyer pays 40k less than the market price and the original lender gets suffers 100k loss instead of a 50k one, and the seller (or realtor) has 10k pocket money.
But what they have to worry about is the fact that in a short sale there’s NO incentive for the seller to try to get the best price possible.
However, I would contend it is possible for the seller to try to get the market price and to demonstrate this through the history of list prices, potential buyer traffic, and offers received. However, even if this is done, many lenders won’t accept a short sale offer until the borrower has stopped making payments.
Given the difficulties and hassles in doing a short sale, I think many more borrowers would be better off going the foreclosure rather than short sale route if it came down to one or the other.
Well a willing buyer in hand beats a foreclosure nine times out of ten. But if you’re not watching, a whole lot o’ fraud will sneak in that one out of ten. And during the bubble, banks got really good at NOT looking for fraud.
And during the bubble, banks got really good at NOT looking for fraud.
Why would lenders look for fraud when they were often part of the fraud?
Of course, the new lenders might want to be a little more prudent, especially if they were going to be holding the loans rather than selling them to unsuspecting investors.
I actually knew of someone who was trying to buy a house via a short sale and had the drunken current homeowner “demand” 20k to let the deal go through. I told him to start talking to the lender directly and tell him what she asked for. Apparently the current owner, even if he/she isn’t paying, has some say too.
“no incentive to get the best price”
I allowed a short sale once, maybe in 2002. I was indeed aware that the single lots in this particular mobile-home park had been falling in price. But it wasn’t a place I knew intimately, so I DID worry about “collusion risk” and ALSO about the incentive problem. Still don’t know if the price I finally allowed was OK, but I’d have had a similar problem if I’d foreclosed and tried to sell the lot.
I’m surprised to hear there are parks where you can buy the MH lot. I used to think it was a good idea, but everywhere I know of here just rents the lots out.
The Dems are just waiting for another ‘bailout’ with our grandchildren’s tax money.
From the original post come a couple of gems:
Interviewee: “Truthfully, credit means less to me than it used to.”
NYCityBoy: “Do you feel that the lenders are playing by the same rules as the borrowers?”
Interviewee: “No. I don’t. They are certainly out for themselves. They don’t care about people being in homes, building communities or people building wealth.”
From the above, I’d like to boldly go forth and extrapolate the following trends:
1. The days of easy credit, and the worship of credit, are over. At least for a generation. This does not bode well for the credit pushers.
2. Building communities? That’s coming back in a big way. I’ve just returned from vacation in Vermont. While there, I witnessed quite a push toward shopping locally. There’s a strong Local First Vermont movement, even to the point of there being TV ads that exhort people to buy locally to preserve the Vermont way of life.
One other tidbit: I spent a morning in a small town public library. Was on the lone computer and witnessed quite a lively exchange between a local lady and everyone else in the library. Seems that some guy had just rammed her car in the parking lot, then he brushed off the damage and drove away. This made the lady quite angry. The punchline to her ranting and raving? The guy who hit her car: “He’s NOT a Vermonter.”
Well easy credit is certainly dead. But like the cargo cults of the Pacific Islands, its worship will probably linger on for years….
Is easy credit really dead? Was just at my bank getting some cash. It was a large amount so I proceeded to the teller window.
The teller informed me with excitement, as if I’d won the state lottery, that I was pre-approved for a visa credit card with a $7000 limit and all I had to do was sign the little pin pad to my right.
Anecdotal, but amusing.
“lenders out for themselves”…”Local First” movements
Mais, naturellement. If I lent my money to a corporation (by buying a bond) I would certainly be trying to serve my own best interests.
Luckily, my little-people clients remain grateful, because they are NOT underwater. Some of them are trying to pay down their balances a bit faster than the mortgage contract requires. None of them expects ME to “build a community.”
Honestly, the “Local First” movement makes me want to throw up. I DO buy local produce, but the big “Buy Local” signs are not a public service, just a token of desperation.
I like the interview.. it was honest and thoughtful.
It does bring to mind two issues.
One is that “the bank doesn’t care.”
Obviously. The bank does not care. The grocer doesn’t care. The phone company, dentists and hookers don’t care. Nobody in business cares for us beyond our paying the bill and remaining a paying customer.
If i get an inkling that a business cares about me I either check to see if my wallet is still there, or I expect that this friendly, caring business is heading for serious trouble.. and may not be around long enough to honor my warranty.
—-
The other thing is this notion that things will change if we allow nature to take it’s course.
Letting the financial system fail would have been a catastrophic event but if things aren’t let go I don’t think we will learn our lessons.
Since when do we learn our lessons? What is the lesson? We can’t even agree on who is to blame, much less what the lesson to be learned is.
We will learn nothing by suffering serious financial collapse. Whatever rises from the ashes of GD2 is far more likely to be the same or worse than what we have now.
The other thing is this notion that things will change if we allow nature to take it’s course. Letting the financial system fail would have been a catastrophic event but if things aren’t let go I don’t think we will learn our lessons.
Since when do we learn our lessons? What is the lesson?
Even if we learn a lesson and make necessary changes, we eventually seem to forget why we made those changes and eventually make similar mistakes again.
Based on what’s happened so far this time, I’d settle for punishing those that have caused the greatest harm. In addition, making changes so we don’t suffer another financial meltdown so easily would be high on my list of other things we should do.
..punishing those that have caused the greatest harm..
At best we will find a scapegoat and try to punish them…because it is we who caused this, imo.
We were conveniently, blissfully ignorant of the loan terms offered us. We were naive enough to believe the various sales pitches. It was we who had a foolish disregarded of the basic rules of personal finance, or didn’t bother to learn them in the first place.
Can’t even blame govt, because we elected them.
I don’t see how any of it could have happened without our cooperation.
Maybe this is why we never learn anything. We’re in a perpetual state of denial about our having any responsibility.
“Obviously. The bank does not care. The grocer doesn’t care. The phone company, dentists and hookers don’t care. Nobody in business cares for us beyond our paying the bill and remaining a paying customer.”
Businesses can’t care, but their employees can. I’ve found small businesses tend to have people that will go beyond what is required to best meet the bottom line. Individuals from larger businesses can care as well, though the corporate cultures often crush such tendancies.
Anyone remember ( pre-bubble ) going into a Home Depot? When they had well groomed and helpful employees that we’re actually engaged w/ the customers?
“I” do. What happened? Well, The Boom held the promise of such easy riches ( and guaranteed endless flow of Flippers ) they didn’t -have- to be nice any more! Pay UP sucker!
The pre-bubble Home Depot experience still never matched that of the local hardware store. In fact I’m lucky to still have one of those near me. I pay on average about 10% more to shop at the locally owned hardware store with employees who treat me like a human being. To me it’s worth it.
I’ve got a local hardware store (part of a chain, but local owner and attitude) where I frequently get offered help. I ask questions and get answers that make sense. For some reason I keep going back.
The Home Depot I go to has lots of well-groomed employees ready to help. I used to have to struggle to find someone to assist me, but now they are standing around waiting and looking for someone to offer assistance or directions to. In fact, when I ask where something is, they usually walk me to the place and help me find whatever it is I need.
It is possible that there is some sort of local competition going on between Lowe’s and Home Depot.
I was at Home Depot a lot in last month, as the tenant in our rent house moved out after 6 years - lots of repairs and make-ready. The main thing that I noticed was that the young guys tried to help me, but usually couldn’t. The geezers, on the other hand, were awesome!
The difference was probably that the geezers had more experience with older houses - living in them, fixing them up, fixing things for family, working as tradesmen over the years. I was looking for basic replacement items and parts and they found them for me or told me which supply store to go to.
The young guys had less experience outside their HD training. For example, a young guy trying to be helpful points me to a $40 outdoor light “that’s for rentals” when I was looking for a $2.99 screwable glass cylinder for a backdoor light. I was trying to explain what I wanted to young guy when a geezer swooped in and got one for me.
Someone here pointed out months ago (or was it years?) that in the distant past, when all businesses were locally owned, that you had to care about your customers. They were people you knew personally or had contact with in the community. Giant corporations, like Home Depot and Walmart, took away the need to be a responsible and decent business person.
If the beating is severe enough, the lesson is lasting. It took us ~50 years to forget the lessons of the Great Depression.
If the beating is severe enough, the lesson is lasting. It took us ~50 years to forget the lessons of the Great Depression.
Presumably there’s some amount of pain that should be sufficient to force necessary, lasting changes without leaving one financially debilitated for decades.
However, we seem to be mostly on the denial path this time, much like the obese patient with a clogged artery that opts for blood thinners rather than more lasting diet and exercise changes. It’s just not sufficient to do short term fixes with little pain.
Joey….. I just can’t buy your opinion that this fraudulent
Housing Mania was everyones fault . You act like just because the Public elects Politicians ,that entitles those Politicians to sleep on the job or be bought off by the lobbyist .You act like fraud and
bad faith in business is something that the victim should of been able to prevent ,so it’s their fault .
The Big Boys fired the first shot, and in their greed created
easy money and fake ratings on mortgage paper in the biggest loan ponzi-scheme in history . Wall Street provided defective loans to the market place that would only work if the ponzi scheme continued ,while they breached their duty to underwrite the loans . The REIC breach their duty in the real estate transaction also and set the people up for fraudulent loan
dealings knowing very well that they sold the borrower on a bogus loan and investment idea The Public got a steady dose of bogus PR from the Advertisers ,that was paid for by Big Business.
In truth there should be a class action lawsuit against Wall Street ,the Rating agencies, and all in business that set the Public up .
Yes ,any borrower that knowingly engaged in loan fraud is part of the problem ,but you have a lot of people who did not commit fraud who are now the victim of the crashing market . In fact ,you have millions of people who are victims of this greed that knew no bounds and came about in part because of de-regulation of Big Business and Wall Street .
No way can you lump me in the pile with the rest of the creeps that were willing to sell their fellow man down the tube or the Country down the tube .
And what is also sad is the same greedy entities that created, or allowed this credit scheme ,were the same entities that sold out this Country to cheap labor World wide ,which was part of the problem to begin with .
The parasites that feast off the common folk are evil ,do you understand me ,EVIL . There is such a thing as fair business practice Joey . Stop trying to make evil good ,or black white .
If anything is evil, it’s this popular insistence that we “common folk” are all just innocent victims.. ignorant, weak peasants who can never be held accountable and are absolved of all blame.
True slavery is not our current condition, but if we continue down this road it surely must be in our future.
Joey ..The Politicians , REIC ,Wall Street , Rating Agencies and the Lenders ,were the professionals who were suppose to protect the deposits of the Nation .You can’t be serious that these parties were not under
a higher obligation to not conspire in this loan fraud . While I agree that many people jumped on the
bandwagon of this fake investment mania ,the parties that were suppose to cop the beat failed to do their job in every
way . The confused public went along with the easy money and the proposed scam from the industry .
Joey ,you know that I don’t go along with the borrowers that
became greedy themselves and committed loan fraud ,but
it’s absurd to say that the Loan industry wasn’t sitting people up
by their breach of duty and off the chart greed . It was the duty of that industry to police those loans and appraisals ,not become criminals themselves .
“Obviously. The bank does not care. The grocer doesn’t care. The phone company, dentists and hookers don’t care. Nobody in business cares for us beyond our paying the bill and remaining a paying customer.”
I suspect that hookers care more than bankers. But that is admittedly my subjective bias showing…
How come this comment nested below the level that previously said it wouldn’t? Am I missing something here? In any case, the last 2 comments were excellent, and I can’t decide which one is right. True fence sitter, me.
‘But I think we have also admitted that many of the people that find themselves upside down, underwater, whatever you want to call it, are also just good, honest people. They bought houses thinking that this was what they should do in life. They were not looking to buy the house, slap on a coat of paint and put in some stainless steel appliances and “flip” it to the next guy.’
My twenty-something SIL and hubby plan to soon buy a house. It is not just that they think this is what they should do in life, but they also are in a hurry to capture the $8,000 first-time-buyer tax credit before it expires. I guess it never occurred to them that the credit could end up largely or fully capitalized into the purchase price (even possibly upwards of 100 pct), especially given the possible effect of stimulus-generated bidding wars amongst like-minded buyers?
“What would you tell a young guy that wants to buy just because of a government tax credit?
I’d tell him to walk away. No, run away.”
I am going to tell my wife to read your post. She can decide whether to tell her sister to read it.
I can’t understand why first timers are rushing in for $8K when $15K is still on the table. If $15K doesn’t happen, they can simply lower their offer accordingly.
I went to a couple open houses this past weekend. Traffic seemed down from what I had previously observed, not unexpected given we’re at the end of the selling season here.
We looked at a 3/2.5 asking $500K, a ridiculous amount made even more ridiculous by the fact that a slightly larger 4/2.5 with a bigger garage, 5 or 6 doors down, same age, same builder, same features, sold a couple of weeks ago for $435K. Bye, bye comps!
There are some angry people in neighborhoods that haven’t entered acceptance or capitulation. Each lower comp is a death knell for their dreams.
I read “death kneel for their dreams” and snorted.
The guy John should “walk away” now. Why wait? Sometimes the best thing to happen is to fail early. You recover before everyone else and move on with other opporitunities.
Also considering the magnitude of the bust… probably can work with employers about your credit.
Its a ruthless time and it calls for ruthless action. Probably the best thing to do is stop paying and work the system to delay forclosure as long as possible. Get cash saved up some place that isn’t easily found. Like a safety deposit box in Mom’s name or a safe. That way the bank can’t go after it.
If you are real lucky, you can save up for a year before the bank gets around to kicking you out. Should be able to save up at least 10K or more. Plenty to rent for a year.
Also no harm in renegotiation with the bank either. Get them to write down the principle and give you a low rate that makes it worth it.
james,
Well said. I’ve never been an advocate of JustWalkAway.com ( scumbags ) but we need to keep in mind, many of the people now asking for mods ( and likely getting them ) are realtors and MB’s etc!
So… we’re all supposed to stand around w/ our hands in our pockets ( clinging to what’s left of our post-bust dignity?) while reic-ster’s get a lower cost basis for having no class to begin with?
Many here have said, for a MB to claim “he didn’t understand the loan documents” really IS a cold slap in the face, but you watch, I’ll bet theywork the system just fine.
“Probably the best thing to do is stop paying and work the system to delay forclosure as long as possible. Get cash saved up some place that isn’t easily found. Like a safety deposit box in Mom’s name or a safe. That way the bank can’t go after it.”
Is it really legal to opt to stop paying your mortgage in favor of hiding savings in a safe deposit box, while living payment free in a soon-to-be foreclosed home?
“Is it really legal to opt to stop paying your mortgage in favor of hiding savings in a safe deposit box, while living payment free in a soon-to-be foreclosed home?”
I don’t know about a safety deposit box per se, but retirement accounts and certain college savings accounts are untouchable in bankruptcy. Thus it would seem there are some legal variations of “the safety deposit box”.
I’m not trying to give legal advice here. I am not a lawyer.
My belief is this is legal. Not advocating a crime here.
It would be a good time to talk with a bankruptcy lawyer though.
Well, it’s one thing to not be able to pay your bills and need to walk ,but it’s another to rig the game to get additional money out of the bank . It’s one thing to walk from the property and it’s another to destroy the property on the way out, as many are
doing .
Thats the problem these days ,everything is based on who gets the last lick in . Everybody walked and the Banks showed you guys ,the bought off Politicians ended up giving the money back to the banks and you end up paying anyway somehow. The people who game the corrupt systems are getting rewarded the most and it takes a piece out of everyone . Yes, Banks should be trying to correct their
bad faith toxic loans ,but they are hard to correct when the
borrower beefed up their income by 500 % .
The whole Mania was corrupt ,fraudulent ,and crazy , and
the fall out is producing the worse possible behavior and its ongoing ,and it will be ongoing until correct action takes place .
If you’re going to scam the bank, don’t put your money in a bank in Ca, put it in Nv. The Nvers won’t recagnise a Ca levy. However your accounts are not protected by bankrupcy (even IRAs and 401ks) from the fun guys at the IRS.
Sometimes the best thing to happen is to fail early. You recover before everyone else and move on with other opporitunities.
I once failed in school. I was in a PhD program in physics at UC San Diego: the department and I just didn’t get along at all. I made the best of a bad situation by sliding sideways into the math department, who offered me a TA ship, and taking an MA in applied math.
I took that degree and got a decent job as a digital designer/systems analyst in the defense industry. Many of the guys who stuck it out in the PhD program never got a tenure-track position or a job that was any better than what I got.
Fall back, regroup, and attack. One of life’s little lessons.
“Well, it’s one thing to not be able to pay your bills and need to walk ,but it’s another to rig the game to get additional money out of the bank .”
Right. That stinks almost as much as banks who took TARP funds, made huge losses yet still managed to pay top managers massive bonuses.
A good site to explain the tax credit for the uninitiated: www federalhousingtaxcredit com/2009/faq.php (periods removed)
Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.
If you have a refund or 0 net taxes, you will get a nice fat check for $8k in addition to the refund…
” I guess it never occurred to them that the credit could end up largely or fully capitalized into the purchase price (even possibly upwards of 100 pct), especially given the possible effect of stimulus-generated bidding wars amongst like-minded buyers?”
We have a Home Renovation Tax Credit going on here in Canada for 2009. The credit is 15% of money spent on renovations, up to $10,000 but not including the first $1000 (so max $1350 credit). I’ve pointed out to a few folks that the HRTC will pull business from 2010* and make contractors very busy, thus increasing their quotes. In other words, the credit will be priced in. Next year they’ll be hungry. I’m planning on leaving a fairly major renovation until next year, when I expect lower quotes will more than offset the lost HRTC. Everyone I’ve mentioned this to is amazed by the logic, including the financial advisor who works at a bank.
* Today going into work I saw bundles of shingles being dropped off at a house. Looking at the roof they had just started pulling up, I’d say there’s at least another 5 years of life to the shingles.
I actually have quite a lot of empathy for someone in their 20’s trying to make this decision. Essentially their entire adult life has been framed by the insanity of the bubble. Unless you were extraordinarily well-educated about housing (and being related to the good doctor might qualify), it would seem nearly impossible to make a cogent decision.
This article describes a lot of what I went through and my process. I had a FICO score of 800 when I stopped making payments on my house and had never missed paying anything. After 6 months of non-payment my score is around 600 now. For me it was simply a dollar amount shortfall that made the decision for me. I put $0 down on the house and it dropped 65% of its value in 2 years. I had planned to stay in the home for at least 10 years when we bought it, but now it is clear I’m paying $2000 more a month than I should be paying. I’m by no means wealthy, but I could continue struggling to pay the mortgage, saving none of my income in the process. This was clearly a game set up where many benefited and I was the ultimate loser. I have no moral qualms about walking away given the dollar amount involved. I would have stayed at up to a 30% drop but at 65% I have no real hope of ever recovering the money I’ve lost.
DG,
Thanks for your candor and I have NO designs on judging you in any way. Firstly though, mind telling us roughly where you’re at?
We know of many markets that have taken severe, harsh hits but at least “I” am not aware of any that suffered to ‘that’ degree?
It’s also incredible to me that it can take years and years to build an 800 Fico ( but only a couple of months to totally screw it up! ) Something is definitely not right there, especially when health or marital issues are involved?
So what are your designs going forward? Have you even tried to get a Loan Modification? I hear some lenders are easier to work w/ than others.
HAAHAH, Havent posted in a while. I’m agent in Stockton CA since early 90’s.
I see property all the time now selling for 20% (and less) of top bubble prices. The worst are the new (then) crap stapled together at the top.
Laughed when I saw a horrible KB home sold at the top for over $650K now listed at $120k with no action at all. Horrible area now, broded up, burned out, etc. Like a 3,600 foot two story with no yard at all.
We are now selling 1950ish $950/mo rentals for $50k plus fix up.
Sounds like you and I are in the same boat. Only difference is I bought a distressed property at what at the time was a fire sale price and put a reasonable sum down. Still, houses are going now in that neighborhood as low as $70,000! Compare that to the $225k ish that I paid and you can see why I don’t mind walking from my down payment.
Bad Andy,
But what I don’t understand is why the lenders aren’t fast tracking more loan mod’s? Simply allowing the property into FC etc. just -assures- they won’t have so much as a tenant?
Not to mention all of the prop. tax & maint. issues. Isn’t it better to do the mod, have someone ‘else’ foot the bill for Maint./taxes and move on?
I fought these guys for months. The last straw was that “modification” where I had the massive balloon payment at the end. Negotiations over!
Sorry…forgot to say at the end of the 3 month “mod” period they wanted a balloon payment of over $10,000!
Bad Andy,
Sorry to hear that. If you don’t mind my asking, who was the lender?
See, this is where “I” may ( do ) differ from many posters here. Personally, I think it’s a disservice to one’s self to at least not ‘try’ to get a principle reduction. I really do.
Unless you’re a 3rd gen. MD w/ a wife that works as an Admin. for the state, “I” think you should throw your hat in the ring and apply. If not, you’re leaving money on the table. IMHO.
How were you the “ultimate loser”? You traded six months of free housing for 200 points on your credit score. Its business.
Yes, you’ve lost your “reputation” (aka credit score) but somebody (lender? bond holders? Bank Shareholder?) lost actual MONEY. It’s all just money, but you have exorcised your ability to NOT be the bag-holder. And I don’t have large amounts of sympathy for the banks, they knew what the rules were, they wrote the contracts.
I think the point was he avoided becoming the “ultimate loser” by getting the six months of free housing instead of continuing to pay.
I’d like to trade my credit score for some extra cash. I have so much untapped credit and so much cash, and yet can’t seem to make any more. Is there a way to make money now that doesn’t involve long-odds gambling and criminal fraud? My perfect credit and education sure as heck don’t earn me anything.
Excellent question, my friend. BTW, I resemble that remark.
Ouch, sounds like Merced to me. You did the right thing.
Good for you!
I don’t buy it.
You state: I had planned to stay in the home for at least 10 years when we bought it, but now it is clear I’m paying $2000 more a month than I should be paying.
You are paying the exact amount you agreed to until your payment stopped. You “should” meet your obligations- but I agree that you “should” walk away, too. But just because someone else got a better deal does not mean you should retroactively get the better deal- unless you are dealing w/ a 30 day price match, unlikely in RE.
NYCityBoy,
Great questions and good intervieing skills. Thanks to your friend as well!
Here’s what “I” am seeing, most folks today ( particularly those nearing retirement ) are wanting to play a “split hand”. Oh sure, they’re as cautious as ever w/ their cash/stock investments, but when it comes to real estate ( they smell blood in the water! )
So, the question for ‘them’ now becomes, how can I get at those better, cheaper priced homes when I’m saddled to an Albatross NOW! Wha’t happening in many cases where they own multiple homes is that they’re not even agonizing over their home in Bend or the OR coast. Not-one-minute! ( As evidenced by the waves of FC’s in Bend? )
So they’re trying to get to cash fast. They also… realize that even though their FICO -will- take a hit ( it doesn’t matter b/c so will everyone else’s! ) So it’s all relative in ‘their’ minds. I don’t see anyone pulling their hair out over their damn Fico any more? This is about survival now.
So, the question for ‘them’ now becomes, how can I get at those better, cheaper priced homes when I’m saddled to an Albatross NOW!
I think you’re right, but among the people I know, there’s still an almost-entitlement mentality where they’re putting the current house up for sale and wondering why it won’t sell — “Sure, we know the market’s bad, but our house is cute and reasonable (we knocked off 10%!). We’ll just deal with the two mortgages for awhile.”
Last friends who took this route: one year with two payments.
Some other friends are re-locating to Louisville soon, and taking the same approach.
“So they’re trying to get to cash fast. They also… realize that even though their FICO -will- take a hit ( it doesn’t matter b/c so will everyone else’s! ) So it’s all relative in ‘their’ minds. I don’t see anyone pulling their hair out over their damn Fico any more?”
I’ve talked about this a lot with people. I talked about it with my friend when we did our phone call. There are a lot of jobs that require people to have access to sensitive information. If you have two people qualified for such a job and one has a foreclosure on their credit report and one one doesn’t, wouldn’t that impact your thinking? Both of us agreed that we would look at these two people in a much different way.
I know that many people are saying credit score won’t matter much. I had thought that for a short time. But I have rethought that. A pristine credit score may have more value than ever, when it takes more than just fogging a mirror to keep your credit score looking good.
A good credit score will indicate a person that is a good planner and doesn’t just run with the herd. I think he is wise to consider his credit score as an asset. Sadly, he is paying a high price to protect that asset. It’s not an easy decision to make.
If you’re applying for a job that requires a security clearance, you can bet your sweet bippy that financial history — which includes your credit — will be checked to the nth degree.
I hope I didn’t come off as saying it was something that I was advocating? Like you, I’m struggling to understand their mentality? And of course employment is the one fly in the ointment I didn’t bring up.
Still, this is the feedback I’m getting. ( They’ll worry about their credit scores later! ) Right now I’ve “got to get out from -under- this “thing” and I’m not concerned about the short-term consequences!”
This is a stark contrast to just a few short months ago when everyone obsessed endlessly about their Fico being “the key to their future!” Now I think people are connecting the dots from where they stand ‘this minute’ and that means Great FICO=More Debt ( and that’s the ‘last’ thing they need right now )
Para que tienes ojos?
“Some people would tell him to do a short sale. That is not much different from walking away. Typically to get a short sale done you have to stop making payments. That will destroy a person’s credit score, almost like walking away. Like a foreclosure, the short sale decision will hang over a person’s head for several years.”
Yes, but I’d offer a couple of points for consideration: I think that before this shit-storm is all over, bankruptcies will be as common as tattoos. If this happens, the stigma will be minimized. The 2nd thing is the restriction of credit for 7 years after a bankruptcy. Think about the ramifications- with 70% of GDP resulting from consumption- of a significant number of our population being FORCED to live within their means and without credit for 7 years (now, here is the punchline…) BY THE BANKS!!
(John Lennon’s ‘Imagine’ begins playing softly in the background…) Oh, the irony of such a world…
Which is why this is going to last a loooooooong,
looooooong time and the bottom is still a long way
away. Look for a completely new financial
paradigm coming down the pike.
“I’d tell him to walk away. No, run away.”
I haven’t posted here in a long while, but I am happy to report I am no longer a fencesitter as of 4 months ago. It was not just an economic decision, my wife was driving me nuts in the rental and now is happy in her “dream home.” As for the economics, I got in at the absolute bottom for this neighborhood in SoCal, 45% off the peak. I also got a nice 8k check from Uncle Sam. And according to Zillow, etc the recent feeding frenzy has pushed prices up about 3% already.
This was AFTER getting outbid at least 10 times, with several of the buyers paying all cash. My poor sisiter has been bidding for months to no avail. These are just the facts of what I am seeing. I have to thank you to this blog for giving me the education and fortitude to wait it out an extra few years while this bubble deflated. Good luck to all.
Good for you. If only we could have had as meaningful a price correction as early in the cycle up here in Portland, OR? At the rate we’re going, 2011 looks about right.
Glad it worked out.
Thanks DinOR. You maybe right. Each market is different. I’m not deluded into thinking I will have tons of equity anytime soon so people can afford to wait it out quite a while longer. The 8k in free money is what pushed me off the fence.
IEFenscesitter,
I never imagined… that SoCal or other markets ( where they have actual employment… ) would ever see the kinds of corrections they did, as soooon as they did?
I watched on in horror as my in-laws attempted to offer up my eldest daughter and their own son as a sacrifice to the Equity God by getting them to buy one of their failed specuvestments. In ‘our’ case here in Oregon, the “upside” was stalling them in their process long enough to where credit was shut down and they no longer qualified for a FOUR HUNDRED K LOAN!
So that’s one of my great victories in all of this. Just this past weekend we finished the paining on their modest ranch that started ove a YEAR ago when they were hot to get it sold! So now that there wasn’t any FU ( Flipping Urgency ) the project got dragged on forever. Well.., better that than seeing burried upside down forever and a day?
ditto for northern va. we were kinda late to the party.
I’m not sure you’re wrong, but certainly Calif RE prices are widely expected to decline further, despite possible temporary bounce from stimulus checks, tax credits, foreclosure moratoria, etc.
Maybe the IE really won’t decline any more, but I wouldn’t take a 3% rise in Zillow as evidence of anything at all.
I definitely understand the part about your wife driving you nuts.
Believe me I understand that sentiment. Zillow doesn’t mean squat in the big picture and I truly believe prices will stay level for a long time. BUT I am a big believer in “gut feeling” and “common sense” as well. Prices in the IE are back to the point where anyone with a moderate paying job can afford the “nicer” neighborhoods in town. There’s a reason I was outbid so many times and all of the foreclosures in my neigborhood are now gone. It reached that point where it didn’t make sense to NOT jump in.
Does it really make sense to buy when by your own words everyone else is also buying? Is that really a normal market?
Actually, everyone buying is a normal part of the recovery. If everyone of a normal income is no longer priced out by the 45% drop… Go ahead and buy. There are neighborhoods where price/rent has dropped to the point where its worth buying even if you think the home will be worthless in 15 years. Assuming… you live there 15 years.
But for many neighborhoods, including where I want to buy, that 15% of CA mortgages not being paid is about to go through. Think about it… we’re past 1 in 7 mortgages not being paid.
I’m waiting to buy in a neighborhood that now takes a large down payment. Sometime in this fall/winter we run out of cash buyers. What happens then? The market was at a median down payment of 10%… The market is down > 25%. Hmmmm….
But that is where I want to buy. Other markets are near a bottom. Just watch out for Las Vegas. That market has the greatest downside potential as far as I can figure.
Got Popcorn?
Neil
Maybe not for everyone. For me, yes. I had the aforementioned wifr and kids to worry about, and we are not getting any younger. We wanted a home to enjoy that we could fix up the way we wanted, which we have. Financially, we had saved our downpayment, we got the 8k free money, a nice tax write-off and so forth. And I truly believe we’ve reached bottom in my market. Barring an international financial catastrophe, prices will stay level or start to rise slowly. Either way I made a good choice (for ME and my family).
Barring an international financial catastrophe,
4 hour commute to moderate paying jobs, unless you are in porn or meth.
I have 2 sets of close in-laws going through this very thing. One is likely to walk (their business tanked and went under during the housing crash), the other seems to be set on hanging on, but their house has lost 50% of its value and they have an adjustable rate, so that may change in 2 years with the recast.
If they can get a modification (unlikely based on what I’ve see), I would see no harm in keeping the house. If not, 50% underwater on an adjustable rate is just plain insanity. Take the hit, move on.
“Do you worry about the negative hit to your reputation?
Yes. I do. And I know credit is recoverable. But I don’t even know what the hell I need credit for. I’m in such a different mindset.”
This is why it will be years and years before housing even “stabilizes.” Think of all the under-water mortgage holders. They are either stuck in their current home, or if they walk, their credit score won’t allow them to buy again for a while. And they may well have zero interest in “owning” a home again anytime soon.
The MSM is full of “where are the trade up buyers?” blah blah. The trade up buyer is becoming extinct precisely because so many are stuck where they are or have walked away, but heaven forbid the MSM label “homeownership” a negative.
The MSM is full of “where are the trade up buyers?” blah blah. The trade up buyer is becoming extinct precisely because so many are stuck where they are or have walked away, but heaven forbid the MSM label “homeownership” a negative.
An entire generation of buyers has been destroyed. Many will not buy again much less be trade up buyers. Those that have walked away or are upside down are not trade up candidates. Efforts to prop up still too high prices will delay many potential first house purchases further delaying the day when those new purchasers might one day trade up. If trade up isn’t extinct, it’s at least in extended hibernation.
However, there still seems to be a chunk of speculative buyers who are buying second or third houses on the idea that housing is now cheap and will soon go back up. I wonder how many are ready to become long-term landlords and bleed cash each month for years on end?
We have such a spec buyer right in my neighborhood. Folks across the street are having a hard time dealing with the hard-partying tenants this spec buyer keeps renting to. Said spec buyer purchased in ‘05, tried to flip in ‘07, and started renting to crummy tenants after the flip attempt failed.
Just want to comment on the credit factor “Truthfully, credit means less to me than it used to. If I ever go to another job it’s a factor”.
I have had numerous background checks done on me for my work and while this applies to CA. I suspect there’s little variation. Unless you work in Finance, child care, security — its unlikely that a credit check is done (not to say it can’t be), but all my checks have been criminal, SSN and education.
When corporations “walk away from a factory it is good business sense and their stocks go up. When a person does the same thing is it irresponsible? Don’t get it, business is business, you know nothing personal. I would walk away in a minute if I had gotten caught. Remember this sense of obligation that you might have isn’t something you caught like a cold, it is a sense instilled into you by the FICO and others, would they pay for something underwater? Doubtful. Besides when you sign up to someone else’s game they have all the rules, balls, bats, and bases, and can remove or move them at any time. Think it is still fair? Nope you are a carbon based work unit and when you become not profitable to the corps away you go. Call it downsizing, or offshoring, or just RIF. But whatever you call it, it isn’t in YOUR best interest. So walking away and squirreling away a few bucks might seem irresponsible until it starts to rain and you might have a tent, without the bucks no tent. Simple yes, but it will devolve into that sooner than you might reckon.
Letting someone else set your parameters is another form of slavery. Learn to think and act for your own best interests without harming others. This economy is based on smoke and mirrors. Look up bucket shop in the early 1900s and then look at what congress did when they passed the bill giving these credit default swaps immunity from state law. Or litigation. Think they were thinking about the millions of FBs coming down the road? Guess again. Politicians are the lowest form of life on the planet and the sooner you figure that out the better we will all be.
In an obviously rigged system, many actions of ordinary people which might otherwise appear immoral are entirely rational and necessary.
“A mortgage is a big ass commitment. It’s almost like having a marriage. It’s not something to take lightly. It is a 30 year commitment.”
With housing getting “cheap” again, hopefully a mortgage will become a 15 year commitment (or less) for many people, as it will for me whenever I buy.
My take on contracts and morality.
If I look someone in the eye and shake their hand on a deal, I am honour bound to make good on that contract.
If I sign a contract in 5 different places, a contract written by a large organization with legal staff and all, I am honour bound to do the absolute best for myself within the legal limits of that contract.
Agreed. But the way I read a mortgage goes something like this. “If you don’t pay we take your house”. Fair enough.
Exactly. Every single mortgage contract provides for default.
“If I look someone in the eye and shake their hand on a deal, I am honour bound to make good on that contract.”
Exactly. With a mortgage its pay or they take the house.
Bad Andy notes, the contract provides for default. Its up to each FB if they wish to excercise that option. Its a very clearly written option: 3 to 7 year hit on credit and the ‘loss’ of the house.
I see absolutely nothing wrong with walking away from a corporate mortgage. This is also why I still see larger down payment requirements coming down the pipeline. When everyone needs a down payment to buy in… it suddenly isn’t as cheap to walk away from a slightly under-water home.
Got Popcorn?
Neil
$4,000 a month payments , $3,500 interest $500 principal, plus a $750 a month property tax bill,
total deductions from income taxe 4.250 x12 , about $50,000 tax deduction,
In Cal tax rate, fed 31%, state 11%, 42% total, time $22,000 tax savings. divided by 12 =$1800 a month less on taxes.
You would have to rent for less than $2,200 per month to save money!
Am I wrong?
Jack
I think you forgot to add cost for customary repairs and HOA if any. Based on your above assumptions I would put rent at less than $2,700 to save money. Additionally, homeowners have less ability to pick up and move.
If you are at the income level that can support a $4,750/month house payment, you’re probably in the realm of being subject to the AMT, in which case you will loose some of that mortgage deduction.
also…if your income level is high enough…itemized deductions start to phase out.
isn’t your equation also assuming zero appreciation.
i think housing will still go down where i live…by alot.
The math gets more complicated if you consider standard deduction (5700 single, 11400 married). If state taxes is greater than standard deduction, then a simple FED+STATE on the entire $50K works. If not, then subtract out standard deduction from the $50K and add back in state taxes but only at the FED level.
Add another 1.1% for maintenance & insurance.
Add in the opportunity cost of the downpayment.
So if you stay in this house for 30 years, the rent number is $2400/mo at 31%/10% tax assuming you put 5% down versus a renter who puts that same 5% into savings. Invested Vanguard Total Bond Index, the number jumps to $3200/mo.
Is it possible that John is confusing the ethics of marriage with those of mortgage?
I had a 30 year marriage once. Now I’m a runner.
What about the ‘Standard Deduction’? Shouldn’t this be deducted from the $22,000 annual tax savings?
we have been told that we are basically only as good as our credit score.
Frankly, I don’t believe credit score is all that important.
Anymore.
It is a controlling influence that is or can be ruinous for many, ie: health events etc.
For those who have exemplary credit. Good for you. I don’t. Due to life events, mine took a hit. I was disturbed by it, but there is no way out.
IF you own a home, buy a car on credit, have cc’s you can make it back.
If you rent, own your car free and clear, have no cc’s. The only way to make it back is to pay your utilities on time. Big deal. That history can take forever and won’t get you to that upper echelon of credit “worthiness”. There is a hidden hierarchy in the fi co system of paying certain bills on time.
Psychologically is the only real need for high fi co scores, sort of like hoping you get a smiley face on your homework to brag about.
It is one thing to have worked hard to make and keep your fi co score, but we didn’t need that fi co score 40+ yrs ago. Local banks helped us out long before and they knew what kind of person you were or not. Not the manufactured fic o system.
I believe that what the rigged/manufactured system has done is lead Americans to buy buy buy buy buy and so on. I don’t know the original start date of that credit scoring system, but I would venture to say, the ppl who originated that idea, also were the beginning of the end.
Especially after learning so much via hbb, self reliance is back to our core beliefs and foundations. Not contrived mechanical, mftd, “beliefs” in a credit system.
desertdweller,
Couldn’t agree more. There was a time ( when we had hoped the Housing Bubble would -remain- just ‘that’, a HOUSING Bubble ) that I thought having a great credit score would be oh so sweet to do some bottom fishing on real estate!
Pffftt, now, I couldn’t care less. Timing the bottom at this point only means you got a reasonable deal, even w/ flawless timing, we shouldn’t be expecting any bankable ( read sustained ) “appreciation” perhaps in our lifetimes.
I was actually almost at a point where I could have considered myself “self banked” but that’s been pretty much whisked out from underneath us all now hasn’t it. So since I don’t ( at age 50 ) have any desire to go ‘further’ in debt, I guess I really don’t have any further need for a spiffy fico score any more either?
So since I don’t ( at age
5054 ) have any desire to go ‘further’ in debt, I guess I really don’t have any further need for a spiffy fico score any more either?It, the spiffy fi co score won’t do much but get ‘you’ further in debt or tempting you to buy/spend what is a ‘want’ not a need.
Yup, Dinor!
So, you’re a deadbeat eh?
Just kidding! 
“I was completely sold on owning. I would say since the bubble burst my opinion has definitely changed. ”
We’re renting, despite the fact that we have the resources to buy (for the reasons everyone here will be familiar with — and this is in CA).
My parents and my In-laws (all 65+), all intelligent people, still have a complete blind spot about the supposed benefits of owning. I’ve explained our reasons for waiting a dozen times, but their faces still go blank. “Yeah…but… aren’t you going to feel more secure when you’re in your own place…?”
I love the blog. The argument about being an owner or renter is too black and white. I decided to own years ago and bought a house that was older(40 years) and was not modern (no dishwasher or jacusi). It was not a gated development or anything. I took out the 15 year mortgage and the payment is 12.5% of my income. Taxes are $400 per year. It was an easy decision.
I would just advise people that want to buy to just look at cheaper houses and mabye you will find one you like. Don’t just look at what a realtor says you can afford. Be “house poor” but feel rich.
Never be “house poor” but feel rich.
Been there done that, got the tshirt.
Everything was supposed to be rosy.
Things change.
If it/total cost isn’t way under renting, don’t do it.
I have my days of housing desire, but
then I count my saved $.
As a former homeowner in So Ca for 23 yrs, and now a renter, owning is a better lifestyle. Renting has no roots. It has no end. Buying and having the “pink slip” is much more secure.
If you own outright, the winter of your life is much easier financially. All my older family members live in a paid off home.
We’re paying cash for our final home.
Wipeout:
YES go for it….the home you will die in. Right now its the only serious reason to buy.
And who knows maybe your kids/grandkids will NEED a cheap cheap place to live after you go.
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We’re paying cash for our final home.
awaiting wipeout,
Well.., I’ll prefer to say it makes the “Indian Summer” of your life easier, o.k?
Yeah, but, this is why aging boomers chasing easy profits and 3,500 s/f homes made absolutely no sense. You knew ( even w/ a hefty down payment ) there was no way they were going to be able to pay-it-off!
In fact, in many ( most ) cases, even the loss of one spouse’s job meant they wouldn’t be able to keep it. Nothing sustainable about that?
Yes, we’ll be paying cash for the next home also.
Here’s one boomer who took his profits. The new dilemma: House vs. Savings. Never want to be a “house rich” position again.
Thanks you guys. The negative to owning is the mobility issue, but I’ll tell you, our monthly nut will be cut by 2/3rds -property tax, insurance & maintenance factored in.
What the heck happened to the time? Just yesterday I was 39. Now I am planning for old age? WTH*ll.
And your ‘rook mahvelous!
ala Billy Crystals imitation of Ricardo Montalban.
I love the 40’s song “Baby It’s Cold Outside” by Frank Lesser. I was surprised it was Ricardo Montalban (of all people)& Esther Williams who sang it in Neptune’s Daughter (1949).
Here’s my situation. 2 or 3 years ago, based largely on the views on this blog, my wife and I advised my mother-in-law to sell her condo where she lives. She could’ve got $300k for it at that time (she paid 120k for it and had no mortgage). We showed her a spreadsheet illustrating how her HOA (275), property tax (400) and maintenance could be replaced by a rent payment of about $1000 for a comparable place, perhaps even something nicer. She would have had a fat, positive cashflow every month given her modest living expenses, allowing her to save for travel, etc.
Well, the plan was vetoed by my wife’s sister, an accountant by training, who could only see that 1000 > 275+400+x, and could not comprehend the income provided by 300k at 4% interest (at the time). She also insisted that her mother “needed a roof over her head” and of course, that she would miss out on the gravy train of appreciation.
My MIL, on the other hand, chose to call various relatives (siblings, nieces) in other parts of the world, as well as her friends, who all told her not to sell. In short, we did not have a chance, even though ours was the only argument based on available liquidity, easier and more comfortable lifestyle and assured returns.
During the process, I asked my MIL what she would do if her condo value dropped to 150k. She gave me that smug look (we sold in 2003 and have been renting ever since, and for years had to deal with condescension and faux-sympathy) and laughed arrogantly that it would never happen.
Today the property is worth 145k. A few months ago the owner of the unit downstairs sued for damages because a pipe broke in his wall and it turned out to be a pipe supplying hot water to my MIL’s apartment. Cost about 3-4 grand (and much headaches and negotations for her and her two daughters, not to mention yours truly) to get THAT mess settled.
Still my SIL doesn’t want her to sell. Of course, it’s not as much of a slam dunk as it was 2 years ago.
Then, early this year, the real bomb dropped. My MIL had invested in what turned out to be a Ponzi scheme (which was sold as a “leasing” scheme), earning 9% interest for about 2-3 years. Again, my wife and I had said from day one not to do it, and my final advice was that if she wanted to do it to put the minimum possible amount (my policy is always, high risk with small amounts, laddered down to 100% safety with your largest chunk). Again, we were ignored, and her entire capital was put into this scheme. In March, the owner of the scheme committed suicide and my MIL lost her entire principal of about 115k.
So now my MIL has lost 270k which she would have still had if she had only listened to us. I feel angry, insulted, frustrated and helpless. My MIL’s actions I take as a personal insult, and an affront to all the brilliant minds on this blog. In hindsight I suppose we could have tied her up and sold her house for her and forced her to withdraw from the Ponzi scheme. But in the end we relented and let her choose her own destiny.
As recently as last year we advised her to exit the Ponzi (of course, there was no proof at that time that it WAS a Ponzi). This was immediately after Madoff was caught. My reasoning was that if someone like Madoff could do this (high returns) and it turns out to be bogus, what makes her think that her scheme was any different? She could have easily withdrawn even then. But she trusted her lifelong friend who got her into the scheme (her friend had been in it for many years and also incidentally lost everything). She asked me what she would do with the money if she withdrew it. When I told her she could earn 2% in a savings account she refused, saying she needed the 9% to maintain her lifestyle.
In the 2005-2007 period I advised about 6 or 7 people (relatives and close friends) to either sell their homes or not to buy. Nobody heeded my advise except for one friend who sold 1 year too late and still made 500k profit. One guy paid 650k with nothing down for a 1BR SFH that is now worth 450k. My SIL herself could have sold for over 700k but can probably get only around 550k now. Another friend could’ve got 900k at the peak but would be lucky to get 750k now.
All that doesn’t matter. My finances are not tied to those of my family and friends, EXCEPT when it comes to parents and parents-in-law. In my culture, parents’ money is no different from my own. In short, I feel like I just lost 270k. We will not allow my MIL to go homeless or suffer in any way. She had a clear path to a comfortable retirement, without being a burden to any of her children. She blew it.
This is just so frustrating for my wife and I who have always been adamant that we will not be a burden to our kids. Neither of us received anything from our parents by way of inheritance (although my wife had college paid for), and I’m self-made with a significant 401k and Roth as major components of my net worth. We were logical and sensible, to the extent of foresight of the impending crash (thanks again to this blog).
Now we find ourselves responsible for my MIL’s financial well-being, and having to cover her monthly costs (she is about $500 in the hole every month after deducting her meagre pension from her basic living and healthcare costs). The best solution I could come up with at this point is for my MIL to sell her house and live half-half with the two daughters (who live 30 mins apart). It ought to be a workable arrangement. I’m even fine with weekdays at our house and weekends at my SILs. She’ll have about 125k to generate some income and will have no rent payment, HOA, prop tax or maintenance fees. Her kids get free babysitting and breakfast in the mornings, her 4 grandkids (2 at each house) get to spend time with their grandma, and everybody’s happy, right?
Wrong. Turns out that of the 2 daughters and 2 sons-in-law, I am the one who has the least issues with my MIL (I have no problems with her in the same house). My SIL is afraid that she will break up her marriage, and refuses to have her live in her house for even 1 day a week on a regular basis!
Yes yes, I know. What I would *like* to do is to tell the SIL to take FULL responsibility for any financial shortfall my MIL might have. Not easy.
SIL’s current plan (which seems to be heading towards execution because, why don’t we continue to leave the decision-making to the people that have no idea what’s going on? Sound familiar?) : have my MIL take in a renter. A RENTER. In a 1 BR CONDO!! The renter will get the bedroom and share the bathroom and kitchen. Where is my MIL going to live? In the living room, of course! It’s a 700 sqft condo. There are 2 candidates at the moment: a 20-something gay female, and a 20-something straight male. Both working students. If either of those isn’t a recipe for disaster I don’t know what is.
SIL’s plan B: my MIL should get a part-time job. She’s 70.
My wife and I are opposed to both plan A and plan B.
I am considering plan C, which is for MIL to sell the house and live with us permanently, and my SIL cover all additional costs to us. But my wife has a bit of a problem with that unless she can get significant doses of time on our own (ie, without MIL) on a regular basis (which means mum volunteering on weekdays, or us taking day trips on the weekends. The latter of which isn’t exactly my cup of tea (I like to spend leisure time at home)).
There’s an auxiliary issue with Medi-Cal. MIL spends $600+ per month right now for regular health insurance which can be avoided if she signs up for Medi-Cal (which she is now eligible for since she lost all her money). The catch is that her house will be claimed by Medi-Cal when she dies (assuming she continues to live there). This is fine by us, but not by MIL who wants to leave something “for the grandchildren”.
So the next idea is for her to sell the house, give $13000 tax-free cash gifts to each of us (8 x $13000 if that is allowed, if necessary spread over 2 years) and then sign up for Medi-Cal while living with either or both of her daughters. I have to double-check with a tax guy about this.
Sorry for the rant. I am asking the board for advice. I’m on good terms with all involved. What is my best course of action here? I suppose I should be grateful that my wife and I are pretty much on the same page and there is no danger to OUR marriage because of this!
NO can DO lesser fool
The state looks back 5 years to this kind of transaction…tell her to face it the house is gone to the state instead of forcing her to get a part time job.
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the next idea is for her to sell the house, give $13000 tax-free cash gifts
Oh I forgot Lesser fool:
You could tell your MIL to die quickly and cheaply, no heroic measures, since medi-cal only wants to be paid back for the money they lent her against her assets (house). Its the law. Any money left over is yours to keep…
If your MIL gives away the proceeds from the house as tax free gifts over 2 years to escape paying for medi-cal, I wouldn’t be surprised to see the State of California come after you guys for the proceeds.
Oh one more thought DO NOT put your name on her deed…NEVER
If she ran up big bills they could come after you even if they sell the house….It would be considered joint property and you could be paying for it long after she’s gone.
Great advice guys.. thanks!
“They also… realize that even though their FICO -will- take a hit ( it doesn’t matter b/c so will everyone else’s! ) So it’s all relative in ‘their’ minds. I don’t see anyone pulling their hair out over their damn Fico any more? This is about survival now.”
What bothers me is one’s credit rating being used for insurance, job applications, etc. I have my credit frozen because I have no debts, don’t plan to get any, am worried about identity theft, and don’t like getting 100 credit card solicitations a week.
I tried to change telecom providers, and was given a hard time because the new provider couldn’t see my FICO. What did they have at risk? A month’s bill for $60? Geez. Next thing the guy at the coffee cart will ask for the dollar before handing you the coffee, not the other way around, unless your FICO is high enough.
FICO scores are easy to keep high. Use less than 10% of the credit available, and pay if off each month in full a little earlier. Mine is at 825, and I carry no debt. Actually, I never charge over 1%.
I agree about the abuse of a FICO score for insurance, a job, etc… Our privacy is gone.
You can remove yourself from solicitations for credit cards, by signing up at The Direct Marketing Assoc. website or writing them. They have an opt out list.
Doesn’t the insurance company have to have your written authorization to check FICO? Mine sent me a fax asking me to sign to authorize a credit check that “could save me money on my monthly premium.”
Yeah right. I refused and haven’t sent it back. They get the money direct from monthly deduction so I’m not sure what they need the credit info for…other than to RAISE my rates.
A mortgage contract is a business agreement. By “walking away” you are indeed honoring your agreement to return the collateral (house) in the event you cease making payments.
I don’t understand the moral dilemma here. It’s a business contract. Can’t make payments? Then fulfill your contractual obligations by returning the collateral, and leave the lender wishing they had instituted responsible lending standards.
6 months? I’m already at 9 months and the bank hasn’t even filed an NOD on my property yet. The credit implications obviously do bother me, but I made a pretty well calculated decision that the credit loss was worth it when the shortfall hit $200,000. We are now well past that point and while I do believe the prices have probably stablizied finally I will gain $220,000 on top of living rent free for potentially 18 months at this point. I guess if I do lose my job it will be worth struggling a little harder to find another one when I am saving that much money. Finding a job and finding a place to live are the only things that scare me as far as the credit goes. I could care less if I never get another credit card as long as I live.
You lucky dog….why was is i stupid to rent…it looks like you hit the timing jackpot…we has posters here sayong some people are living 3 years for free in FloorRiddah.
In my experience the many banks do not want to short sales and use many tactics to kill the deal when offers come in. It would appear for many banks they know they will get about the same money from the sell whether it is a short sale, or foreclosure. So why the the borrower off the hook for something they signed for.
Of course the real estate and mortgage get rich schemes fuel the massive deception of the consumer into purchasing real estate that was not worth what they were paying.
Banks, agents, mortgage brokers, wall street and some even say the government participating in the deception. All in order to make record profits. And after the bubble burst the smart ones were so well insulated that they will never have to return a dime of the money the swindled from the consumer.