DLCU2

LOL, you still don't get it. You talk about keeping your car payments up and such and maybe renting out a apartment somewhere with your $4,500.00 (ooou thats alot of money and really worth fcking up your credit history and life btw...real smart). What happens when your car dies, and you need to take out another loan for a new car? Where are you going to get the money when bank's no longer have the ability to lend? You're going to ride a fcking bicycle THATS WHAT!...

And if you are still so fcking clueless to not see the bigger picture of this, why dont you take NSXNEXT's suggestion and try it. I really want to see how well this works out for you...if it does, then we would be the ones that look like idiots....IDIOT

TzarChasm

Well the sad part is that some people are going to try this, and that some of the people who try it will get away with it. Greedy, unethical people are everywhere.

Of course that still leaves it as pretty much the same as the robbing the bank scenario. Some people will do it, and some of those will get away with it.

There are going to be a large number of people in both of these cases however who think they are going to get away with it, and wind up screwing themselves instead of the bank.

NSXNEXT

iTrader: (2)

The moral of the story is there's a difference between being desparate and being stupid.

This applies to both the mortgage holder and the mortgage lender.

Fibonacci

Bing, bing - we have a winner. I'm sick of hearing people talk about homeownership as an investment. In reality -- it was always historically a forced savings plan which kept up with the rate of inflation.

MR1

A house was, is and should be primarily just someplace to live. Over the past few years lots of people got that twisted. You are really supposed to buy what you can afford and is acceptable for your needs. If it maintains its value over the course of your ownership you have come out OK.

I think I'm far from 70 but I've been in this house 18 years. The market value over that time increased 400% at one point. Since then, it has fallen by at least 50% from that high. We could really care less at this point. I'm not planning on moving and we can afford the payments and upkeep. I also know many people here and in the midwest my age or younger that have also been in their homes for an extended period.

Occassionally I sell homes. It's amazing that almost nobody wants what they can afford, they always want more.

airjam21

Well said. I wish all of the people "investing" in RE would understand this.

Fibonacci

Normally I'd say suck it up, cut spending and repay your debt. But not if you're going broke.

http://www.newsweek.com/id/177749


Surprising to see someone of her caliber writing an article like this, but suppose its a sign o' the times...

DAROCK

it's a wake up call for America. I foresee us going back to the good ol' 20% down payment in the future. If you buy a 500K home and you're putting down 100K, you'd be hard pressed to walk away from that money. BTW, this not only ensures that you will not easily be upside down in a house but also blocks people from buying a house they can't truly afford.

NSXNEXT

iTrader: (2)

Fib,

Good article, but I think we're comparing apples and oranges. The OP was specifically talking about someone who could afford to continue paying their mortgage but chooses to just walk away.

Those in true financial trouble should do what's best for them.

ludachrisvt

iTrader: (2)

I'm having real issues getting good renters in my investment properties. The storm clouds are gathering. I talked to my accountant about some financial planning and he mentioned some of his other clients who can pay are starting to say they won't just to see what happens.

TzarChasm

Ouch. That seems awefully short sighted, but I guess kind of predictable.

People is dumb.

Fibonacci

http://economix.blogs.nytimes.com/20...at-depression/

NSXNEXT

iTrader: (2)

I have a BIG problem with reducing the principal amount. Unless you are absolutely forced to sell, why should we do anything to help a homeowner that purchased an asset that was not guaranteed to increase in value?

We sold our home at a loss (our choice) knowing that we'd make it up on the next house.

Those that took out exotic loans? I say Sorry but the excuse that no one told me what I was signing is getting rather old.

We're all big boys and need to start taking responsibility for our actions.

thunder04

iTrader: (1)

hornyleprechaun

But that's just not fair!

Professor

In all seriousness, what can a bank do if you decide to walk away? They have their asset back (which they should have done due diligence in valuing its worth v. the loan). I guess they could try to put a lien against your paychecks, but if you are unemployed then what?

MR1

Next time loan them your crystalball.

At the time the loans were made, the consensus was that the values were accurate. Why did people buy overvalued houses?

What can the banks do? Very little one on one. They don't want your asset (their loan security) back, they want the money that was loaned on the promise of return. Do you really want to contribute to the complete destruction of our financial system? If you become unimployed that's another story than just making a bad deal.

doopstr

The reasonable person in me would agree with NSXNEXT but when the government can pump in billions to save the likes of AIG and C, why not the little guy? How come the "pros" that are supposed to know what they are doing can have the government save them?

Costco

Can't really add much else, but the first page (55/page format) is gold. Subscribed

Professor

Sort of along the lines of gaming the system, when (and if) I turn 80, I'm getting every bit of credit I can and max it out and head to Vegas. If I live to see 81, I'll be in a socialized nursing home in Canada.

Not worried about the kids, because when my uncle passed away, he just bought a Cub Cadet on credit. I followed the probate laws to a T and advertised his debts for claims against his estate. After 90 days (even with me telling the credit card company that he died and they have to file with the county probate to collect) they did nothing. And the probate court said the estate owed them nothing because they didn't follow the law. So on Saturdays I chum around on the Cub Cadet.

Point of story: I'm not going out of my way to do another person's job to get their money from me.

BubbaMarkTL

Perhaps strategic defaults are exactly the sort of things the administration should be promoting. The industry dug its own grave promoting mortgages that were unaffordable to buy houses that were overvalued. They are the ones who should pay the price of this housing bust, not homeowners who were sold a hill of beans about housing values always increasing. Paying off one's inflated housing debts might be the "ethical" thing to do, but it's not the smart thing to do. Foreclosure shouldn't be seen as a punishment, but as a perfectly valid contract option that can actually benefit the borrower.

As in business, people will walk away from a bad deal. The idea of a high credit score or access to easy money is misguided. If the loan of any kind including mortgages, credit cards, lines of credit, student loans, installment debt etc produces little tangible value for the debtor and requires too much sacrafice then a "strategic default" is the best course of action.

Commercial loans are defaulted on every day, and it's considered business.

I understand about the huge deleterious effects on everyone if every homeowner who is underwater mails in the keys and walks away. But the problem is, there is no real moral difference between families doing that, and businesses doing that. for many individual homeowners, only a crystal ball would have allowed them to avoid their predicament.

Professor

Perhaps, but the banks loaning out money for individuals would pucker-up so tight that nobody could get money. I own a second house free and clear and wanted $20K for upgrades in an equity loan. Couldn't get it even with pretty good credit. Banks in my area are not lending. So I don't want to go to 'Fat Tony" the loanshark. What do I do?

I think bankruptcy laws have a purpose, and if you walk away from a loan, you assets should be seized to cover the loan. If that's not enough you go into Chapter 7 or 13. Just think if the government decided to not honor the dollar under the full faith and credit of the United States. I guess it Farmville for everyone.

LaCostaRacer

Wow, you're portraying yourself as a poor sole who was duped into buying an inflated house. Come on, who are you trying to fool? You bought your house because you thought it was going to go up. Now that it's underwater you feel compelled to bail and think of it as a business BQ. But your house is not a business- it's a home that you live in. People like you went astray thinking of a house as some sort of get-rich-quick scheme.

I actually blame the FED for promoting such low interest rate loans and terms because that attracted people to a market that they probably couldn't actually afford homes in the first place.

My guess is you did not put much or anything down because anyone who put 10% or more down would never consider this idea. That's why I blame the banks in this scheme for allowing people like yourself to buy homes with nothing significant down. The increased demand caused by nothing-down folks caused the prices to spike- things would have been much better if that didn't happen. Believe, it probably won't happen again so you'll need a down payment the next time.


Back when I had a loan and was underwater (1993-5), I would not have even considered walking from the house as a strategic default. I understand the concept but it's pretty slimy and something I couldn't stomach doing myself. The house has since 2.5x in value even at today's weak prices and is now paid off. Real estate is a long term investment and not like going to Vegas hoping to make a quick bundle. In fact, as soon as you see and hear people doing that stuff you might want to sell into strength in the market in you're so inclined.

I'm sorry if this comes out strong, but strategic defaults affect everyone adversely. I think it's BS that someone like myself with a 800+ credit score can't get a decent loan for an investment property. I refuse to pay 6+% for a loan when owner occupied is closer to 4% and won't play games mortgaging my personal house to refi an investment property to take advantage of these low rates we have had. I'm stuck with a 5.875% loan instead taken out in 2005. I blame that on people like the OP and that is coming out now.

MR1

I agree 100% LaCosta but 5.875 isn't really all that bad. I'm in about the same situation on a few properties. Just glad they continue to pay for themselves.

NSXNEXT

iTrader: (2)

************************************************** ********
by Plagiarism

I was suprised how well that was written until I did a search. Wow dude, you should at least quote other people's comments.

Man, your entire post is copied and pasted from the link below.

http://community.nytimes.com/comment...rt=recommended

CocheseUGA

gatrhumpy

iTrader: (1)

As someone very wise used to say, "Interesting. Interesting."

Gen7Milan

iTrader: (1)

I feel silly for posting since none of the previous post made much of a difference to the OP's way of thinking. But let's look at this another way. Say that the economy is really chugging along, you've got more money coming in then you know what to do with, the real estate is again a seller's market and house price are going up.

Say you paid $50,000 for your house when it was a buyer's market. Now that everything is chugging along, unemployment is low, houses in your area are sellng for $200K+. The banks say to themselves, hmm...we're getting hosed. We're only receiving payments for a $50K home when it's worth 4 times that. From a numbers only view we should increase the loan amount. Sure it may not be the moral thing to do but it makes sense when you look at the numbers. I mean, banks gotta feed their familes too right? Fuck the little guy.

Makes about as much sense as the topic of this thread no?

Izzy-Type-S

iTrader: (1)

These are the people that increase foreclosure rates. I am a licensed realtor and I see MANY cases where the people gave up at the first slight hint of a problem. I had an appointment with one client once to help him fill out his financial statement for the bank to show what his monthly expenses are...he's running 5 minutes late and pulls up in a brand new Escalade! Another got a brand new 4 Runner and the family just took a spring break trip to their homeland of Honduras.
Point is people like this make the interest rates go up for us who are working our azzes off doing everything possible to make things happen or cutting back when needed. Some would rather screw their credit and keep all the toys and luxuries rather than doing what is stated on all their mortgage docs that they signed at a closing. Most of the people with this mindset either should not have owned a home in the first place or are way over financed anyway because of the quick-solution, not caring mentality. Yeah an extra $2,000 for me per month would be nice but what's even nicer is saving my good credit and enjoying my home.

LaCostaRacer

I know 5.875 isn't bad but it's not 4.5% like I was able to get with owner-occupied. Back in 2005 the spread was about .25 point now it's 1.5 or more and that's what I'm complaining about mostly is this spread. The banks are now overly cautious on good loans- ones that would have a 50% LTV even and have a long track record of generating income with full documentation.

For such an old thread, this has generated a lot of activity. I have a distant relative that is in the process of a strategic default and I have had plenty of time to base my opinion on this subject. Here is their profile:

- purchased 2007 for 550K
- 2% down
- interest-only / variable rate loan
- house down at least 25% from when they purchased it (Salinas CA)

Now with those terms, why would someone not strategically default once the house declines 25% in value? They were fully planning on living in the house for 6 months rent-free as well while they are defaulting. In fact they are still in the house now as I write this. Jeez, a short-sell has more honor than intentionally defaulting and then waiting to get booted out of a house. For that reason, I would never ever loan those people a dime and glad I don't see them much.

My point is that a 2% down and interest-only loan is a default waiting to happen in this real estate environment. Loans like this should never have happened and that's why I blame the banks for these issues. This is like giving a Corvette ZR-1 to a 16 year old- it's not likely to end pretty.

If this distant relative had 10% on the hook or 55K and actually paid some principal each month, I'm sure they would have thought twice about the idea. They would be down maybe 15% at the moment and that's a lot different than 25% psychologically.

svtmike

If the person could only put 2% down, and couldn't afford to pay any interest on a $550k house, they shouldn't have bought a $550k house even though someone was willing to lend them the money.

I learned a long time ago to ignore the "ratios" (27% of income for PITI on house and 35% for total debt) and figure out for myself what I could afford.

That has always meant limiting my housing and total debt payments to much less than the ratios.

LaCostaRacer

^ Indeed, they should have never taken out the loan if they were realistic about their ability to afford a home of that cost. The point is that loans were available and banks let these people have a loan like that. Just a 10% down payment and higher monthly payment would have scared off those folks from buying a house like that.

gatrhumpy

iTrader: (1)

My interest rate on my house is 6.625% for 30 years. Do you think any bank would help us considering the market dropped so much that we're somewhat $50 upside down on our loan? No. We pay our mortgage on time every month, and we're the ones getting screwed. We can't refinance because we're upside down on our loan.

TzarChasm

While it's true that giving a ZR-1 to a 16 year old would be dumb, if they kill someone, would you then criminally charge the person who gave it to them? Sure the banks should have been more diligent, but the REAL blame lies with the driver IE the homeowner.

svtmike

Unfortunately a lot of people aren't into holding themselves accountable for their own bad decisions.

Moog-Type-S

$50 upside down or 50%?

LaCostaRacer

I wasn't thinking about if the 16 yr old kills somebody or not- guess I should have been more clear. How many banks do you know would actually make a loan on a ZR-1 to a 16 year old using a 'stated income' variable rate loan? The 16 yr old living at home probably has a better chance of making the payment with a reasonable job than some of these people taking out home loans as interest only, variable, and little to no down-payment. The analogy was from the bank's perspective of making a loan and not if the 16 yr old crashes the car. There is a high chance of a crash happening though so the 16 yr old better have some good insurance.


On a related note, today CNBC Squawk box had a poll regarding if Greenspan was partly responsible for the bank related financial issues we have now. The results are in and 79% of the poll results indicated he was which supports a viewpoint I also have In fact, 40% thought he was fully responsible while just 39% thought he was partially. I didn't get to vote but my vote would be fully responsible. Here's the link for anyone interested: http://www.cnbc.com/id/36213175

Peter Schiff wants to debate Greenspan on his economic policies and why they were insane- I would pay money to attend that one!

Silver™

From the banks perspective the house was an appreciating asset and fairly safe, the car is a depreciating asset.

Banks, like nearly all of us, thought the decline in housing that we have seen was virtually impossible.

hornyleprechaun

Could it have been that the bank managers were still getting huge bonuses and therefore didn't care if people were foreclosing on homes? Or that there were bonuses or incentives tied to certain type of loans?

I had a friend who used to be an underwriter (I think this was his title) and he said they would push certain loans even though he knew it was a bad idea.

Silver™

There is not doubt that the banks were far too loose, hell I probably didn't deserve the loan I got on my house

And I think we all know people that were in the real estate/mortgage industry who were making far more money that they deserved about 5 years ago.

But the mentality then was that a house loan was a fairly safe bet since house prices never declined so the bank could get their money back for the most part. We now know that was not true, but it seemed to make sense then.