Wednesday, June 18th, 2008 at 12:35 PM
Acceptance
In the last post Jason was grappling with the choices – does he hang in there with his two over-encumbered houses, or consider letting one (or both) go back to the bank?
What are others doing?
You can check out Oceanside, California, which may be leading the country. Look at a street like Thunder Drive. Of the 122 properties on the street, there are 7 NODs, 6 NOTs, and 7 REOs. Over 16% of Thunder Drive has defaulted.
Think it’s just Oceanside, or other lower-end areas?
Whip into Carlsbad, and check out La Costa Greens, a newer tract of large luxury homes with high HOA and Mello-Roos fees. Looking at the section built by Pulte Homes, you’ll see that the vast majority sold over $1,000,000 when new – and a number of them over $1,500,000.
Currently there is only one REO, but behind it are more coming. There are three notices-of-trustee-sale filed, and six NODs. Only one of the nine in default are on the open market – most go down with the ship these days. But there are another 11 active listings asking $1,095,000 and higher. So there are a number of homes either on the market currently, or coming soon. Can they afford to hold out on price? What about the remaining homeowners, will they be pressured into thinking like Jason?
A random review of 100 houses showed that only 36 had loans under $1,000,000.
If almost two-thirds of the homes have loans over $1 million, what will those homeowners think about the sales under $1,000,000?
They’ll be in the denial stage, thinking that it’s a distressed sale, and it doesn’t count. But when there are nine others following right behind, soon the distressed sale will become the norm in La Costa Greens.
Here is the REO currently on the open market:
6861 Citrine
4 br/5.5 ba + guest house 4,745 sf
$1,192,500 SP 9/05
$989,900 LP (unsold)
100 days on market
HOA = $273, MR = $141 other = $56
Buyers don’t like this one at the current list price – how much lower will it have to go? You can bet that the other properties that go back to the beneficiaries will be considering this as a valid comp.
What about the other recent sales – don’t they mean something?
They do to the sellers, and fuel more hold-outs through the summer.
Here are the last five sales:
$998,000 4/2/08
$1,345,000 5/1/08
$1,150,000 5/13/08
$1,895,000 5/19/08 cash
$1,047,000 6/3/08
We covered the high sale here earlier – buyers will conveniently ignore that one. With bookends of $998,000 and $1,047,000, most buyers will be thinking sub-$1 million from now on, with maybe a premium for a great golf view. But how many are comfortable enough on the fence that they’ll expect the view for free? Plenty.
Jason – you aren’t the only one. There will be entire neighborhoods that will provide spectacular fireworks as this mess rolls out. In the coming years having a foreclosure on your record probably won’t be much of a hitch – there will be thousands like you. I have already heard landlords say they don’t mind a foreclosure on a tenant’s crdit report, as long as the rest is clean. And you’ll be able to get a mortgage in 4-5 years as long as you can fully-qualify and have a decent down payment (probably 10%).
I’m not a proponent of getting foreclosed on – but when confronted with the choices, many will decide it is the best move.
Accept it.
Posted on Wednesday, June 18th, 2008 at 12:35 PM in Foreclosures | 30 Comments » | 
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Great post and good advice. Jason should immediately stop paying and start putting the amount of money he would pay in mortgage payments into a savings account. Prepare to walk away now. Accept that you made a mistake and move on. Remember the lender was also an accomplice to the problem. This is not to downplay your bad decisions, but the fact is that you must move forward and conserve your fiscal and emotional capital.
Mike M | June 18th, 2008 at 7:37 pmNicely put, Jim and Mike.
Everybody makes mistakes, it’s only money, and no one died. Learn from it, move on and get on with life. In 100 years, we’ll all be dust anyway.
Mistakes were made by all involved: borrowers, lenders, government regultors, realtors, you name it.
We are where we are. Let’s help each other out and get on down the road.
I think that’s about all of the cliches that apply here. But boy do they apply!
jb | June 18th, 2008 at 8:06 pmExactly, it’s only money.
Think of the benefits to Jason:
1. Lighten the load, financially.
Jim the Realtor | June 18th, 2008 at 8:10 pm2. Lighten the load, mentally.
3. Get ready to get back in 4-5 years from now.
4. Rent, with no homeownership concerns (lawn, etc.).
I really appreciate the input on both posts. Thank you.
Jason | June 18th, 2008 at 8:36 pmJust a few minutes at LAX before boarding for Seattle. Made the reservations a whole 7 weeks ago and no letting a little thing like bypass interfere with vacation.
I think we are entering a sweet spot for defaulters. There is no stigma attached anymore and as of yet there is no outcry against it.
When there’s a big wave bearing down it is better to get out in front and surf rather than get churned into the reef.
Rob Dawg | June 18th, 2008 at 8:39 pmWell here’s a landlord (me) that says foreclosures DO matter. It would be foolish to make a blanket statement that I refuse to rent to anyone with a foreclosure on record. However if you are willing to walk away from a mortgage, I have to assume you would have even less trouble walking away from unpaid rent. Depending on the circumstances, I might refuse to rent entirely, or I might require a larger deposit, higher rent, or 1st and last month’s rent in advance. Recently I have also come to the conclusion that leases benefit the tenant far more than the landlord, so I am considering abandoning leases entirely. So don’t be lulled into thinking that foreclosure is not going to have any affect on your ability to rent.
Also, I require my tenants to maintain the property, including the lawn. If I have to hire a landscaper to cut the grass after getting complaints from the HOA, the tenant gets the bill.
Mr Landlord | June 18th, 2008 at 8:58 pmFor some reason, landlords tend to act like tenants are serfs rather than consumers. I get better treatment at McDonalds than from the person collecting my well over $3k per month. This does _not_ mean there is no cause in some cases. Tenants can be bad too. But the comments by Mr. Landlord above are a long way from "the customer is always right." One undocumented culprit in the recent housing bubble may be a rising psychological gap between "owning" and renting. I just get better service and satisfaction when I "rent" other goods.
Rational expectations | June 18th, 2008 at 9:39 pmA decision to walk away from one’s mortgage should not be made lightly or as an emotional response. There may be legal and tax ramifications to doing so beyond just taking a severe multi-year hit on your credit report. The decision is a personal one depending on factors specific to the situation and the borrower’s personality.
One "rational" way to approach this is to ask the question: How much money would I take to have my credit record trashed for years and experience the stigma and consequences of walking away and the headache involved with taking an aggressive negotiating position with my lender?
Once that question is answered, calculate the present monetary value of the cash you will save by walking away, and perhaps add a number for any piece of mind/reduced stress you will get by letting go. Is this more money than your answer to the first question? Not an easy analysis to do, and the answers may well be different for two people in the exact same financial position.
Kingside | June 18th, 2008 at 9:53 pmKingside – can you expand on those ‘legal’ ramifications? The lender’s remedy is to take the property – if there is a deficiency judgement available, then they could pursue that too, but either way the borrower owes the money. It’s just a matter of whether the lender will pursue them for it via a deficiency judgement.
What other legal ramification could there be?
Jim the Realtor | June 18th, 2008 at 10:06 pmWhat happened to personal responsibility? You signed the dotted line on your own accord. I can understand if there’s dire circumstances such as divorce, illness, job loss but it hardly seems fair to just walk because you gamble and loss.
If there’s still debtor’s prison I am sure a lot of people would’ve thought twice before buying multiple properties, or cashing out for frivolous spendings. How about 1 month jail time for every 10K default.
That would surely make a lot of folks work harder to keep up their payments.
housebuyer | June 18th, 2008 at 10:29 pmJason,
Westparker | June 18th, 2008 at 10:39 pmBefore you give up the properties, I would call your loan servicer and see if there are any options besides foreclosure. I am hearing more and more cases of loans being modified and principle reduced in order to keep owners in their property. One case in particular, I heard GMAC wrote down the balance on a HELOC from $96K to $9600. The home owner was still underwater on the home, but saving $800 a month made it much more affordable. My advice is to decide, before you call, what it would take for you to keep the properties. If your servicer can make it happen, great, if not, all it cost you is a little time.
housebuyer said:
"What happened to personal responsibility? You signed the dotted line on your own accord."
———————–
I’ve always been a "law and order" type, and have never been late on any payments (unless refuting a bill — always won). However, what about the responsibility of the lenders, **especially the originators**?
Too many times, over the past years, I saw people who were given loans that the could clearly NOT pay back…not even a sliver of a chance. IMHO, the lender is at fault for not verifying the borrower’s ability to repay the loan. In the past, everyone had to qualify for a mortgage, if the lenders/originators decided to stop underwriting the loans and verifying borrower information, whose fault is it that the borrower defaulted? Oftentimes, when the borrower expressed surprise at the amounts the lenders were willing to loan, the lenders (strongly) convinced them that they had nothing to worry about.
The borrowers were often naive and had no idea what they were doing. The lenders were supposed to know EVERYTHING about the loans — it’s what they did every day. I fault the ones who should have known the obvious consequences of their actions. While the borrowers are not blameless, the lenders are the ones primarily at fault. Now, they get what they asked for…
CA renter | June 18th, 2008 at 11:01 pm"What happened to personal responsibility? You signed the dotted line on your own accord."
As did the lender and the contact clearly defines the penalties for the borrow walking on the mortgage.
If the lenders don’t like the penalty for the borrow walking – change the contracts or *shock* demand a downpayment sufficient to ensure the lender is protected.
I see no moral conundrum here at all – Jason should feel free to do whatever makes best financial sense to him – this is just business.
Uncle_Git | June 18th, 2008 at 11:08 pm"What other legal ramification could there be?"
Jim, not an easy thing to answer in the abstract, and the stuff you have posted previously from CAR, although outdated, does adequately address most of the issues. But here is a back of the envelope nutshell synopsis that no one should rely on for legal advice. Individual situations should be addressed to one’s own advisor:
If financing was provided by a seller carrying back, regardless of type of property or occupancy, no deficiency.
If financing provided by third party lender for purchase of 1-4 owner occupied dwelling, no deficiency.
If financing provided by third party lender for non owner occupied dwelling, or refinance of any property, possible deficiency if lender chooses to go judicial foreclosure route (As a practical matter, lenders are not going the judicial foreclosure route presently).
The analysis gets trickier when you have the 80-20 type refinance loans, or after purchase HELOC seconds. If the first takes back the property through non-judicial foreclosure, and wipes out the second, the second has full recourse against the borrower on the now unsecured note. I predict within a few years, these wiped out seconds will be sold at a discount by Wall Street to specialty collection firms. Walking away from these could lead to a surprise.
HOA dues, late fees and interest are generally full recourse.
Property taxes and mello-roos are non-recourse.
Cancellation of indebtedness is generally taxable as ordinary income, unless the indebtedness qualifies as "acquisition indebtedness" on owner occupied properties. California may have a different view.
Again, no one should rely on this information as legal advice.
Kingside | June 18th, 2008 at 11:12 pmI do think that a foreclosure will make one a less attractive candidate for a rental. So it may be a bit tough to find the really nice rentals — the one’s where the landlords realize they should treat tennants as customers and for many customers without which they landlord would have no way to pay the mortgage. But I doubt it will prevent someone from finding a rental. The real issue may be if you are used to living in a place you really could never afford, when you look at rentals you will be forced into the place you can afford and it will likely pale in comparison to what you have now. But you can’t focus on that….you have to focus on the fact that you are solving your problem and giving yourself a chance to move on and make better decisions in the future vs. suffering for years for your past decision and inability to move on.
I think if I were in this situation I would talke Westparker’s advice contact the lendor and see if they will modify the loan. If not, I would then call good legal counsel and get some legal advice on if and the liklihood of the lender going after me for a deficiency judgement.
Assuming the counsel says walk, I would then walk from the property. Yes you could say he is breaching his contract, but if we had a prison for each company, LANDLORD, and other who breached a contract, I dare say we would have more people in jail than not. I know two landlords who blatantly violated the crystal clear CA law on rentals and the only reason they were not sued by me is it is not worth my time and effort for the small portion of the deposit they took. In fact one submitted a false invoice for cleaning — and while it would have been emotionally great to see her go up on charges of fraud, the liklihood of a judge doing so even in the face of clear evidence is slim and again would not be moving on from the problem for myself.
And I do believe that when you realize you made a mistake, the worst outcome is to try to hold on. What I typically find for those who do try to hold on is that they end up diing from a slow painful financial death. Admit the mistake, rationally list and evaluate your options, and then pick the best one for you. We still live in the free market and that is ultimately one of the guiding principals of a free market — each person makes the decision at the moment that is best for themselves and if they do so, usually, markets tend to correct quicker and with less total pain.
Bob | June 18th, 2008 at 11:24 pmThanks Kingside for the review, and I agree that the banks will be selling all their bad notes to collectors for pennies on the dollar before long.
We should start a collection business – it’ll be huge money!
Jim the Realtor | June 18th, 2008 at 11:38 pmKingside is on it with the pertinent question for those who have ability to pay but are considering their options – "how much is my credit rating worth?" Every man has his price. Credit for sale is a key concept moving forward.
If I could achieve a net monthly positive in the thousands, wipe out 6 figures of inverted equity and go positive many thousands by foregoing mortgage payments, all in one fell swoop with no recourse, I would probably do it. After 3-4 years, the credit rating is shaping up and I’ve got a ton of cash stashed, so I’m ready to play again as the market drags along the bottom.
A clarification regarding Kingside’s informative post regarding legalities – if a purchase money 2nd is wiped out by a foreclosing 1st, the 2nd remains non-recourse despite its sold-out status. That is why there is much chatter regarding the strategy of stiffing the 2nd once the property value drops enough to wipe out the loan’s security and then hardballing for a short-pay for pennies on the dollar.
Regarding sales of sold-out junior leinholder debt to investors, this is already well underway guys. The main collection problem is that the debt is unsecured and therefore susceptible to a BK. This dovetails into Kingsides point regarding credit for sale – how far will someone go to wipe out the debt? If a guy has a $200K recourse HELOC that’s been turned into a judgment, a BK may look like an attractive option.
Great thread going here.
RSS | June 19th, 2008 at 12:50 am"As did the lender and the contact clearly defines the penalties for the borrow walking on the mortgage.
I see no moral conundrum here at all"
- If it was the actual lender getting hurt with the loss, I’d be with you. Unfortunately, that’s not where the losses are. The losses are in your pension fund, as they are in my Dads pension fund, all the way over in Germany. In December of last year the Landesbank Sachsen went belly-up, and hundred of folks lost their jobs. Why? Because Jason and others over on this end of the world bought houses they couldn’t afford.
Borrowers signed, lenders signed. But then they sold the pot of garbage down the road to investment fund managers who had no clue how risky the loans were. That’s what enrages me about the whole situation.
simone | June 19th, 2008 at 2:23 amYou probably know that Countrywide had built their own machine, selling what they called ‘private-label MBS’ to investors on Wall Street. How they presented to investors the risks and rewards on their loan packages was where the most dubious conversations were had.
Countrywide wasn’t happy enough to just sell their loans to Fannie and Freddie – they cut out the middle man to reap more profit, no doubt, but to also take the product direct to the buyers themselves. Domestic investors like Bank of NY and US Bank gobbled them up, and foreigners like Deutsche and HSBC couldn’t get enough.
Jim the Realtor | June 19th, 2008 at 2:32 am—
Borrowers signed, lenders signed. But then they sold the pot of garbage down the road to investment fund managers who had no clue how risky the loans were.
—
I agree this was a huge debacle that never should have happened. But doesn’t something strike you as a bit odd if professional fund managers entrusted with millions (or even billions!) of dollars are profoundly ignorant of what they are doing with your money?
Consider for a moment that people like Jim here, or bless-her-heart Tanta over at Calculated Risk, or Professor Piggington, or — heck, for that matter — me, have seen clearly for several years that the madness was unsustainable. Was it really so hard for professional money managers to check the same information and come away with a little more caution?
Deliberately misleading some poor minimum wage sod who had dreams of buying his first ever house and has little idea what’s going on is horrible, and plenty of that happened. But those well paid, presumably financially educated, professional money managers got greedy, took a big risk, and blew it.
I’m not picking on you specifically. The biggest question of this whole bubble was why so many people in the financial industry were asleep at the wheel. Mass hysteria? Herd instinct? Rampant stupidity? Not caring whether you sold crap, if to a foreigner? I’m amazed this question has not gotten more attention. People act as if the collapse of a completely unsustainable market was totally unexpected.
Dwip | June 19th, 2008 at 2:57 amBonuses.
It became all about hitting quotas, and making bonuses.
When the lenders only had to worry about buybacks in the ensuing 12 months, they figured they could handle a few. We’ve suspected all along that lenders were making payments on behalf of borrowers just to get them past the 12th month.
It seemed like it was risk-free to them.
Jim the Realtor | June 19th, 2008 at 3:28 amDwip, you are absolutely right. But professional money managers often (not always) don’t see past tomorrow. Especially in mortgage investments, it’s a "what have you done for me lately" business. They made a ton of money in a short period of time, and now walk away rich.
Have you read "Liar’s Poker" by Michael Lewis? It’s a great read about trading mortgages in the early 80′s right after the S&L debacles. It’s tremendously funny and there’s some parallels to the current lending crisis. It’s also quite hilarious. (I just happen to mention it because I’m reading it again after a few years and your comments make me think of it.)
The Blur | June 19th, 2008 at 3:36 amJim,
Let me see if I have this straight (there are some knowledgeable posters here and it might be getting over my head trying to understand all this) . . . If I buy I house I can’t afford and still have, let’s say, $100k in the bank, and I get foreclosed on – is my $100k safe???
The Blur | June 19th, 2008 at 3:43 amYes, your $100,000 is safe, as long as:
1. It’s your primary residence.
2. You didn’t refinance.
3. You didn’t commit fraud.
4. You didn’t devalue the property
You are off, scot-free, regardless of income, money in the bank, or if you are otherwise capable of making the payments.
Jim the Realtor | June 19th, 2008 at 4:05 amThanks Jim. The info is great (though sickening.) I guess I can’t blame people for walking on their mortgages if it makes the best business sense.
In the end, I’d have to say the companies who bought these mortgages (Deutsche, US Bank, Citi, UBS, etc.) and their sharelholders are the ones left holding the bag. Irresponsible buyers won’t truly learn the lesson they should IMHO. I feel bad for individuals like Jason, but as a financially responsible individual (again, IMHO) I think they are getting a break. It’s not like their deficit just vanishes into thin air.
I think the banks and their shareholders are getting screwed far worse than the irresponsible buyers, but maybe it’s their fault for backing these things. If you’re an investor, you have to know where your money’s going, right?
Even so, the real-estate market will be affected. Overnight rates can’t really get any lower, and jumbos are still around 7.5%. The investors want risk premium, and (I gotta think) full docs on loans going forward, and reasonable down payments. As rates go up, which they must, this will only get worse.
The Blur | June 19th, 2008 at 4:53 amThanks for the pointer, Blur, sounds good — I’ll check it out.
Dwip | June 19th, 2008 at 5:28 amThis blog’s comments today have been a real education for me.
If anyone is still reading this, the point of this story was the $1MM home sales and pending losses on the horizon. My impression by what I monitor here in Cardiff/Solana Beach is that the $1MM homes often require a year to sell in any case.
Mozart | June 19th, 2008 at 3:38 pmJason – if you’re still reading this and haven’t already mailed your home keys to Countrywide yet, here’s some advice;
Rent both of your places and rent another place for less. Don’t buckle! This will turn around.
Mozart | June 19th, 2008 at 10:57 pmI am still reading. Thank you Mozart.
jason | June 20th, 2008 at 3:11 am"Rent both of your places and rent another place for less. Don’t buckle! This will turn around."
That is great advice. In fact, I know someone who’s doing just that. Rents out her home in C-bad and rent a similar one in Vista. Lives off the difference (AND still carts her kids to the Carlsbad school!). She didn’t even sacrifice on home size, just lives off the difference in neighborhood prestige. If you were willing to downgrade both in size and in neighborhood for a while, you could be ok.
Simone | June 20th, 2008 at 2:02 pm