The rapid rise in foreclosures has led to much speculation about why so many people have stopped paying their mortgages. In December, Kenneth Lewis, head of Bank of America, told the Wall Street Journal there has been a change in social attitudes toward default.
Here’s his key quote:
“We’re seeing people who are current on their credit cards but are defaulting on their mortgages,” Mr. Lewis says. “I’m astonished that people would walk away from their homes.”
The implication of his remark is that some folks find defaulting on a home loan the best way to get their finances in order. (By the way, hat tip to Calculated Risk blog for following this issue.)
Intrigued, I called Natalie Lohrenz of Santa Ana-based Consumer Credit Counseling Service of Orange County. She said, yes, some O.C. residents are paying their credit cards and not their mortgages.
“I don’t think it’s necessarily socially acceptable,” Lohrenz said. “My feeling is it’s hopelessness.”
Lohrenz said she has observed a desire among consumers to pay what they can afford to pay, which sometimes is just credit card bills. She says it makes them feel like they are at least doing something.
To get another take on the issue, scroll down to blog posts and read the interview with Susan Wachter or just CLICK HERE.
And to read the Wall Street Journal piece, though you may need a paid subscription, CLICK HERE.
Best “layman’s terms” description of something very few Callifornia homeowners are aware of and something they better understand before they rush to refinance. The reality is that if your property is already upside down, there is no refinance option available, but if there is still equity the distinction is important to understand - before the refi (assuming it was your original purchase loan) the bank cannot chase you for the difference if your property goes upside down and you walk away, but after the refi, the debt can follow you beyond foreclosure an you may wind up making payments on a home you lost in foreclosure years before. Debt obligations should not be taken lightly, but if you are in a market where prices are falling you should be aware that simply refinancing to avoid a reset can converty your loan from non-recourse to recourse, with very different consequences if you have problems making payments later on.
Not really surprising.
Without getting 1099′d from the bank (thank you idiotic Congress) why would someone want to pay for something they can’t afford anymore?
I mean, they get rid of the $600K leash wrapped around their next. Duh, you just made it easier for them to get out.
Foreclosure is the Only Best Option. Mortgage Slavery for the next 30 years.
Bankruptcy laws changed in 2005 making it harder to walk on credit cards. Not everyone can get out of the 1099 when they walk on their homes….loans have to be “purchase money” not refis/helocs (you need to read everything in the bill and not ASSume.
It does make sense to walk on your under water home, especially if your in any type of skyrocketing ARM such as the neutron bomb of a Neg-Am.
Why continue to shovel money into a gaping hole with a market that is collapsing. It’s simple economics…….let’s watch as prices continue their downward spiral throughout 2008.
Hopefully the banks will still be in business.
It’s a contract pure and simple: don’t pay your mortgage, bank takes the house. A business transaction that’s spelled out on the loan note.
There should be no stigma with walking away from your note, just as there is no stigma when musicians walk away from their record contracts - they just lose certain rights that’s spelled out in the contract.
A homeowner willing to lose his home has made a business decision that’s no different than giving back a car they can’t afford.
So Katie says: “Why continue to shovel money into a gaping hole?”……..because you signed a f”ing contract!!!!
Real Estate has always been a long term investment as well as a place to live. You want to talk about wasting money on a bad housing deal? SEE: RENTING.
In five years from now, when housing recovers (it alway’s does) I hope these dirt-bags are never given a mortgage again without 20% down and a interest rate that reflects their history.
SoCo Surfer:
How many houses do you own? Got caught in the middle of a flip?
Myself I’d rather be renting than trying to hold on to a rapidly depreciating asset.
Say a person has a $3,000 month purchase money mortgage payment and his house is upside down regarding value. The load lenders are carrying now in respect to their foreclosed properties is at an all-time high. The lenders do not have the man-power to administer to all these back payments in the normal timely manner. Many are not starting the default process until 6-9 months down the line. With another 4 months to go through the proceedings, it can easily be one year without payments to the lender. Homeowners look at this ($3000 x 12 mths. = $36,000) as a chunk to walk away with, especially when there is no equity in the home. Yea, it will bang up your credit (a foreclosure), and it use to be years before you could buy a home again with a foreclosure, but you wait and see, Congress will pass another law that let’s ex-homeowners who went through the great housing depression of 08 and 09 get financing even with the foreclosures…..it’s all about money.
SoCo Surfer: “Real Estate has always been a long term investment as well as a place to live. You want to talk about wasting money on a bad housing deal? SEE: RENTING.”
SoCo Surfer, if prices get too far out of line compared to rents (which they have done) then renting is a better deal. Period. This is a matter of simple arithmetic, and the bubble is ending because people are finally figuring this out. Appreciation must be sustained on more than ‘expectations for more appreciation”.
If, by housing prices are going to “recover”, you mean that they will return to the inflated levels of the Great Housing Bubble of 2005-7, well, I got some news for ya Sunshine. It isn’t going to happen.
As for signing a contract…. businesses make the decision to walk away from contracts (and take the lumps specified therein) all the time. Why should a homeowner act any differently?
Warning - this is long:
Lots of anger and unfortunately some financial ignorance from what I am reading in these responses here…that along with the high level of foreclosures is very sad. Of course there’s no way for most folks to know what the REAL state of things are because they have to rely on a media that seems bent of reporting only select negative information…I am here to help right that balance. Do yourselves a favor and read the following:
First, rates on ALL ARM’s are DROPPING and NOT “skyrocketing”! Let me repeat that: Rates on ALL ARM’s are dropping (plummeting is more accurate) so unless you are a sub-prime borrower with a margin above 4% making any drops in rate almost irrelevant anyway, or your ARM adjusts once a year and it hit it’s first adjustment period prior to August of 2007, your rate is dropping EVERY month…in the cases of those with LIBOR or Treasury ARMS with margins of 2.75% or less (most all Prime non-Option ARM loans), your rates are or soon will be (upon next adjustment) in the 5’s percentile range…basically you will have refi’ed without haveing had to refi! For those that don’t understand ARM’s, you add the margin (which is fixed) to an “Adjustable” index (most indexes are either Treasury rates or LIBOR or interbank rates…both are in the 2’s) to get the final rate…. if you say had a 1-year Treasury ARM with a 2.5% margin, you very soon will have a rate in the 4’s!!! So I must ask, what’s the problem???
Similarly, the dreaded “MTA Option ARM” is currently in free-fall with regard to it’s back end rate. Since it is a 12 month average of the 1 year Treasury, it still has a few months to go to fall to near it’s current baseline but should by August carry an index of around 2% or LESS…so unless you were saddled with a margin of 3% and aboev, you will monthly see a drop in rate until you are in the 4’s! Keep paying the neg-am payment and keep bleeding the equity OR start paying the P&I option which will soon be LESS than what you would pay should you be able to refinance into a conventuional 30-year fixed. If you have a Jumbo loan (soon to rise from $417,000 to approx. $700,000) you already have a BETTER rate than what you could hope to get on a refi and one which will continue to drop for the next year or MORE based on Fed policy in response to the direction of the economy.
Next, the banks don’t want your houses…and they are willing to do just about ANYTHING to keep you in them…IF you are willing to work things out. I know LOTS of people handling “Loss Mitigation” at the big banks…I have heard stories of them dropping rates from 11% (sub-prime loan) to 5% on loans in default. That people don’t understand they can reduce their payments on homes they would otherwise keep is the fault of the big banks as well as homeowners for not keeping up with the news….this has been splashed all over the news lately…if the banks WON’T work with you and you can’t pay, what else can you do? BUT if the banks are willing to reduce your payments allowing you to keep YOUR home, why wouldn’t you do it? Look, if you can’t afford it you can’t afford it but how are you going to afford rent on a similar home if you can’t afford a workout payment?
Finally, lets get this out on the table: Homes are NOT assets! They are liabilities. If they were performing assets, they would pay YOU a rate of return. They are homes meant to live in OR in the case of REAL investors (not flippers who are like day traders) to generate revenue from…otherwise they are liabilities JUST like renting but with three vital differences: 1) The government allows you to dedust a portion of their yearly cost from your personal income taxes; 2) For the most part, if you want to add to or change your property in any way, you can because well, YOU are the owner and not someone else; 3) unlike a renter, the property CAN gain in value and that gain is yours not your landlords. From reading this board and others, it is clear to me that many people have forgotten points 1 and 2 to the exclusion of point 3. Homes are only “assets” if you generate revenue from them (ROI) OR you sell them for profit, OR you use their equity to purchase OTHER performing assets. For the average homeowner, they are liabilities until paid off…then they are just an “nonperforming asset”. This is why reverse mortgage are such great products: they take an nonperforming asset and make it a performing one. People need to understand that their is more at stake than just the dropping value of a home…heck, there is a ZERO value to a property that is being rented and you are out on your butt if the owner/landlord wants you to be for ANY reason with notice.
I can always tell the flippers and lifelong renters on these boards from such comments…anger and bitterness is not a long term financial plan.
Darren is right…if prices get too far out of line compared to rents then renting is a better deal. What is happening now though is that the gaps between the two are closing faster than I think many people realize. As people stop buying and are renting instead and people who have lost their homes are thrown into the rental market, rents are rising! And I mean quickly. With home prices on the open “for sale” market (as opposed to short sales and auctions which are 10-15% lower) at 2004 prices and dropping, the spread is getting quite small. I looked at rental ads for 3 bdrm 2 bath SFR’s in Mission Viejo this weekend and saw a range of $2,400-$2,800 a month. With the avg. price on such a home in MV now sitting at about $475,000, at current rates the monthly payments even with Taxes, insurance, PMI, and HOA figured in are only about $400-600 a month apart. When tax benefits are figued in as well (which they must be for proper comparison) the spread per month drops to maybe $150-200 a month. Still higher but dropping quick…I would argue that buying a home at auction or through Short sale today in OC is a BETTER deal than renting since you are getting a discount of 10-15% below the open homeseller market. And it won’t be long before most homes priced with today’s low rates to be a better deal than rents…probably by late 2008 to early 2009. The deals are going to be incredible just like in the mid-90’s when I bought my homes for the low 200’s because people are in full scale panic mode about the market and will likely panic-drop the prices well below the rental market…investors with cash, as they always do, will clean up on the financial ignorance of the masses…very sad that most people don’t need to go into foreclosure with all the help available to them from the banks and the gov’t but they listen to people whom don’t know what they are talking about or were never a homeowner themselves. The sheep always are getting fleeced because they follow the flock rather than learn the REAL facts and options available themselves.
SoCo Surfer - If the question was directed at me, no we’re not flippers. Our first place on a 10% down, 30 yr fixed was a townhome which we sold when we built our house. We originally had our house on a 30 yr fixed but when rates dropped we refi’d to a 15 yr fixed which is nearly paid off. We live in the Dallas Fort Worth area which hasn’t had a housing bust (so far) and which didn’t have a boom. Our home is in a great neighborhood with great schools and is a lovely place to live and raise our family, but it’s not an investment. Over 16 years, the price has steadily increased at the rate of inflation to $85.50/sq ft and that’s it.
I’m worried about my brothers and sisters in CA. I know that at least two bought second homes in 2006. If they were mugged on their mortgages, I’d say walk.
Millions of hardworking people are being hurt badly by the greed, corruption and miserably poor business decisions of brokers, lenders, realtors, appraisers and investors. I see it as part and parcel of the rape of the middle class through regressive taxation, moving jobs off-shore, moving corporate headquarters off-shore, destruction of retirement plans, stagnant income growth below the wealthiest 5% of Americans, obstruction of unions, and so on. Wholesale greed inspired destruction of the middle class is very dangerous for our democracy - think of Germany in the 20’s, Cuba in the 50’s and Venezuela in the 90’s. I fear for our country.
Larry P: “Homes are NOT assets! They are liabilities. If they were performing assets, they would pay YOU a rate of return. ”
Larry, I do not think this is correct. A house does pay you “a rate of return”…which is equal to the rent you aren’t paying because you own a house! This return is even tracked in GDP statistics as “Owner’s Equivalent Rent”. Your house is “producing” “Housing Services” which you are consuming. It’s an asset.
Darren,
If that is tracked by the GDP, then it is no wonder our GDP has shown so much growth the last few years! What a crock!
To me, I suppose there are two types of assets: performing and non-performing. Performing are those that PAY you a rate of return. Non-performing are “paper” assets…they can go up OR down in value but they NEVER have a real cash value or ROI until redemption which in the case of real estate is upon sale equity is converted to cash for other asset purchases. Until a house is somehow PAYING you, you are merely paying on it…which by definition makesz it a liability.
CathyG, you are obviously very intelligent and educated. I would just like to point out to you that the people who now hold these horrible mortgages are not the same people who originated them to the borrower and they are as horrified by the situation as the borrower is. What needs to happen is the borrower must contact the current owner of the loan (or at least take the call from the overworked lender) and then throw their cards on the table and do a work-out to adjust the interest and principal to be no more than 1/5 or 1/3 of their income (for primary home) and, if justified, to also erase any recent late payments since their loan unlocked. Too many borrowers think everything is black and white and shutdown thinking their only option is to walk and go become a renter or move in with parents or go join the circus…
OC Register, please put up a box on the home page of ocregister.com that advertises “Click Here to Save Your Home” and links to a page with lists of non-profit orgs and articles around the web to help them do mortgage work-outs and save their homes and credit. You should also post a statistic on that page that shows how many people have viewed it since you set it up. You’ll save thousands of potential newspaper subscribers and they’ll never forget the help they heard about by reading your newspaper.