ThePhoenix

Renting a Piece of the American Dream

Nicely done article by the Wall Street Journal and good point outs by Tim. Based on some comments, it seems this stings for some people to see this happening and blame becomes a big part of it. My Father, a simple man for the most part always had some great advice related to investments. "Make your best loss your last one. " As as a kid I use to say "huh?". Today it makes sense. No matter what moral compass you apply to the situation, from purely a business perspective, the homeowner has made a bad investment. If they continue to pay their mortgage payment which is double what they can rent for, they are continuing their losses. That is foolish from a business perspective, plain and simple. While it is equally foolish for them to go rent and take their monthly savings and start spending it on vacations and such, society benefits because they are putting the money back into the economy that creates jobs and increases output. No matter which way this gets spun, walking from the home makes much more business sense and makes their best loss that last one. I acknowledge, that most likely will not be their last loss ever. But... related to that investment in the house, it will be their last loss to that house.

Does this hurt the financial institutions and their investors? Sure. A glaring reality exists... they already lost that money. That 400k loan is only worth 200k, plain and simple. They are expecting (albeit begging) that homeowners will NOT do the right business decision and walk away but will instead take their moral obligation serious and keep paying thereby shifting the financial institutions loss to the homeowner who has a long history of making bad business decisions.

American Dream 2: Fun with Dick and Jane Deleveraging

That is an absurd notion. Take yourself back to the 1930's and the brilliance of the California legislature. Banks were making loans to consumers like they did in the last 10 years, hybrid products like interest only and when the economy went south they foreclosed on the homes and then got deficiency judgments and took every dime they could from the consumer. Consumers could not feed their families and a bigger social problem emerged. The legislature stepped in and pass the anti-deficiency laws. As a result, banks incorporated more responsible lending practices. They have done it again by being too loose on their lending and they come to the government with their hand out and want to blame all the consumers. They got their bargained for exchange in their mortgage, a promise for a promise in which the remedies were known. The lenders know that if the borrowers default, they know their remedies. Now, you suggest the remedies should be changed now that the market has tumbled and the borrowers are subjecting the lenders to the risk. Makes no sense. Borrowers have a moral obligation to support their families, they have a contractual obligation to make their payments or face the remedies of default... that is not a moral obligation, that is a business one. When the FDIC takes over a bank or GM files bankruptcy, you do not see anyone crying moral obligation there! Its just business.

With that being said, the sad element of this is we are creating a societal change that is bad. The bad lending behavior and the failure of loan modifications has created a fast past path to teach consumers what their remedies are and for the most part people are not stupid, they are weighing their risks and taking them.

Maybe the better choice is to make the consumer pay back for the rest of his life and not be able to support his family??? Oh, there is a remedy for that too... its known as suicide. No thanks, the system we have now is just fine.


On Dec 10 04:58 AM TERN wrote:

> Only in America! People legally walking away from their obligations.
>
>
> The States where this is possible now, need to amend their legislation,
> so that at least it will not happen again in the future.
>
> This just-walk-away option has aggravated irresponsible borrowing.
>
> To make the unethical legal and even "normal" rots the moral fiber
> of society.

Existing Home Sales on a Sugar High

I think Tim does a good job even if I do not always agree with him. As for real estate being a good deal, it isn't. That kind of comment has caused many people to buy over the last year and half and see their down payments disappear. As with all market driven assets, there is a time when it is not a good deal. We are going through a correction and this correction must take place. Buying the last year and half, despite the hawking of great deals by the real estate industry has been bad advice and continues to be bad advice. I would agree that once the market correction is finished, real estate will be a good investment again for the long run. Now that all the first time homebuyers came out and bought thinking the tax credit was going away, watch this market tank. There are not enough buyers and with 25% of the owners under water, that is not going to improve anytime soon.


On Nov 24 04:45 PM battman wrote:

> Tim, I don't read all of your articles but I have chosen to stop
> following your consistant whining and negativity. Please say something
> other than the obvious with a negative spin.
> Real estate is the best investment you can make (especially your
> own home). It may never be the most lucrative and may not give you
> the quickest return, but it will always be there, and in with the
> way things have been these past few years, that is more than can
> be said about a lot of other asset classes.

Existing Home Sales on a Sugar High

The CFO at a hi-tech chip packaging factory once told me that wrapping a dollar bill around each product that goes out the door appears to keep the doors open but eventually the doors will slam shut. All of these numbers are created by wrapping dollars bills around each house sale or by each car that was sold. None of this is sustainable. It kind of feels Jim Jonesish... lets all drink the Kool-aid.

More than 100K Mortgage Modifications Per Month

Lets see, and for the 3Q09, RealtyTrac is reporting 937,840 homes went into foreclosure or were sold at a foreclosure sale. Compare that to the statistics above 937,840 (in foreclosure) v. 343,805 (accepted trial mods), we see that we are only addressing about 1/3 of the trouble and even more important, the success rate of the trial mods has been traditionally low. Not looking like any real success here. Sadly, poor policy is teaching consumers to just walk away which will have a social impact for decades to come as the stigma of foreclosure and bankruptcy diminish.

Option ARMs Still a Gaping Hole

Its better than that, taken together, sections 726, 580a, 580b, and 580d of the California Code of Civil Procedure constitute a comprehensive statutory scheme that specifically protects defaulting borrowers from being taken advantage of by overly aggressive lenders who may care more about making loans than protecting borrowers. If they do a non-judicial foreclosure in California, on non-purchase money, the one form of action rule kicks in and they cannot pursue a deficiency judgment as well. Where the problem lies is a sold out junior that is non-purchase money, they can pursue a deficiency. But so what, that is what Chapter 7 bankruptcy is for.


On Oct 30 03:09 PM Russ Wetherill wrote:

> These loans are the main reason I still haven't bought a home in
> California. The Option ARM is operates as a five-year leasehold agreement
> with the remainder to revert to the lender upon nonpayment. It will
> take many more years for these loans to work their way through the
> system. Fortunately, there are a lot of really nice low-priced rental
> houses out there.
>
> Many of these Option ARMs were a very good deal for the 'owner' since
> no money was required up front and 'rental payments' were far below
> market value. There was also the potential for great profits if the
> wager paid off. No real down side except for impact to their credit
> score. But, when you have bad credit to start with there really isn't
> a downside, is there?
>
> And in California, thanks to California Code of Civil Procedure Section
> 580b, defaulting purchasers are not liable for a deficiency judgment,
> provided they don't refinance:
>
> "No deficiency judgment shall lie in any event after a sale of<br/>real
> property or an estate for years therein for failure of the
> purchaser to complete his or her contract of sale, or under a deed
> of trust or mortgage given to the vendor to secure payment of the
>
> balance of the purchase price of that real property or estate for
>
> years therein, or under a deed of trust or mortgage on a dwelling
> for not more than four families given to a lender to secure repayment
> of a loan which was in fact used to pay all or part of the purchase
> price of that dwelling occupied, entirely or in part, by the purchaser.
>
> Where both a chattel mortgage and a deed of trust or mortgage have
> been given to secure payment of the balance of the combined purchase
> price of both real and personal property, no deficiency judgment
> shall lie at any time under any one thereof if no deficiency judgment
> would lie under the deed of trust or mortgage on the real property
> or estate for years therein."

Wow: Judges Now Nixing Lenders’ Foreclosure Claims Entirely in Court

In non-judicial foreclosure states, the note is not needed to foreclose. In anti-deficiency states, if the foreclosure is complete, such a pop up would not allow them to collect. That would all be much to do about nothing. In judicial foreclosure states, it may have some relevance as a delay but does not confer any right to have the note abolished all together. In deficiency states, they would be required to produce the note to prove they can collect a deficiency. At least that is how I understand it...


On Oct 26 02:22 PM User 428779 wrote:

> If the lender cannot produce the original note, how does the consumer
> know it hasn't been sold to someone else and this someone could at
> any time pop up with a legally valid note in his hands?

Wow: Judges Now Nixing Lenders’ Foreclosure Claims Entirely in Court

I think all of this is an oversimplification of reality and reading way too much into both cases. These two cases will have very little impact on a nation wide basis. Our firm is heavily litigating mortgage related issues in Northern California and I want everyone to know, this is a very very heavy lift. I read an analysis like this and realize how all these lost note theories and forgiveness stories get started. In the end, the appellate courts will overturn these onesie twosie rulings that are completely inconsistent with contract law and how 99.9% of the judges are actually ruling around the country. Also, lenders are fighting to the death. Cases are being appealed and the average consumer does not have a chance winning overall in this David v. Goliath fight. Forgiving the entire loan and getting a home free and clear from the debt is just not believable. Even though our firm represents consumers, representing, even remotely, that type of outcome is negligent.

A Deeper Look at the Housing Data

Nicely done article. Generally, data always gives a cleaner insight. Our law office has been deep into litigating mortgage issues and we a trend emerging that we feel will have a bigger impact than foreclosures... folks are throwing in the towel. They have grown tired of dealing with the mountain of promises and paperwork related to loan modifications and short sales to see that it is not really helpful. As we see more and more throwing in the towel, bankruptcy options are being more thoroughly explored. This sentiment is not measured in any data. Even litigating is becoming less significant as consumers just say none of this is worth it. This is the risk of the policies that have developed and as those policies "educate" the consumer, the long term effects will be very harmful.

Banks and Delinquent Borrowers: The Chickens Are Coming Home to Roost

Great article and gutsy for telling the truth on this. One more very important point is missing. Loan servicers and their investors acting like they are in a powerful position. Truth be told, they are the losers in this proposition. When that underwater homeowner walks from their home, the lender will lose immediately in real dollars. In many cases this is tens of thousands of dollars to even hundreds of thousands of dollars. The homeowner? Well, credit is tanked for a while and they may have to rent but they can buy again FHA in 2 years. The business decision for the homeowner is easy, it is best to walk. For the lender, as more and more homeowners walk, their losses will continue to mount yet they will have lost the public relations campaign because no one will care.

Elizabeth Warren Highlights Washington's Losing Housing Battle

Your comment: "The individuals who are capable of making their payments need to accept the moral responsibility that is embedded in a contract." Morality is a religious concept and best left there. Contract law is promise for a promise of which the breach of that promise has legal consequences. Advocating that the legal consequences be modified is exactly what was done in 1930's when legislation across the country limited the impact on consumers by lenders who lent carelessly and then attempted to extract everything from consumers using deficiency judgments and take hard working folks paychecks that were used to support their families.

Truth is, the lending institutions made the rules on lending standards and consumers entered into contracts with those rules in place. They were motivated by profit and the banks were motivated by profit which caused them both to enter into contracts. The consumers and banks knew the risk of default of the contracts. Now, the profit is gone and consumers are weighing the risk of default on those contracts with the knowledge of the legal remedies and they are making the business decision to walk. You are suggesting that the rules be changed, i.e. legal remedies, now that the banks and government do not like that consumers are making these business decisions.

Sounds like what is going on here is the banks want all of the wins on the back of the consumer, which is not fair and what they tried to do in the 1930's. No changing the rules. As more consumers walk from their homes this will give incentive to lenders to properly balance the risks that they have. Their lending of money is not risk free.

Looks like 1930 all over again, risky lending... except the laws are different, the risk is known. This time the banks wants more risks to consumers for their risky lending practices... what? You want judgments against their earnings so you can take food away from their children again??? Was not a good choice in the 1930's and not a good choice now.

Gains in Home Prices Off the Bottom; Cleveland Up 11.4%

So much for the tax credit benefit to buyers... seems the tax credit has benefited the sellers... oh yeah, those are the banks. Are we seeing a trend here??? More tax money for the banks.

Is the Tax Credit Deadline a Dead End for Housing?

The tax credit has been a "pig and a poke" affair. I could make a great case that most of the sales I have seen recently used the tax credit as a way to create "urgency" in sales and the poor unsuspecting buyers bought the home for more than the $8,000.00 tax credit gave them. My neighbor just closed on his house and the seller got him to pay him a check outside of escrow for 5k to accept his offer over someone else. The tax credit merely creates a false market "pop" that does not benefit the buyer much because it is a pop not a normal market force. Buyers would be best served by having no incentives and negotiating with seller without any undue influence. Buying because the house is a great deal is much better than buying for a tax credit that transfers the tax credit back to the seller by an increase in price because of the urgency of the tax credit expiring.

Housing Market Bottom Talk Intensifies

Your comment, "This is clearly a resurgence of the real estate frenzy of years ago, albeit at much lower prices. Of course, after the last two decades of monetary policy, the fact that people are now "trained" to expect another bubble to follow the one that just burst - this doesn't help the situation.", pretty much sums it up. Bubbles are bad. Slow, solid growth is good. Regardless of this short term blip, Mortgage Bankers are reporting record delinquencies, approaching 14% of all loans, foreclosures are up and the round of layoffs related to government has not really take hold. Add to that this blip is mainly fed by investors and first time home buyers, is it sustainable "normally"? You really have a small inventory of investors and first time home buyers who have bought. This is not a market and most people that make up the market are underwater owners who are overextended and cannot move if their situation changes (job change, divorce, upsizing). In a normal market the low end buyers improve at that jobs, buy a bigger and better house and make that entry level home available for the entry level buyer. Now, the only way they get out of that home is through foreclosure, short sale (dumb) or mailing in the keys. Tim is also right that every past recovery was a fairly long period of flatness. When the true inventory normalizes... i.e. the foreclosures in the shadow market are really on the market, we will stay flat and these attempts my the real estate industry to promote urgency because prices are going up will stop this stupid bubble which can only harm the buyers who are misled.

Questionable Stories of Life After Foreclosure

One more point, the first incident, the DiBacco's, did a short sale. I thought the whole point of doing the short sale as promoted by the real estate industry is the credit impact was not as harmful as a foreclosure. The second situation illustrates that the consumer was able to rent despite their foreclosure. These situations further illustrate that there is no difference in the harm to consumers. It is a "society responsibility" to tell the truth about these situations. Short sales create sales for real estate agents and have little to no benefit to consumers, however, if they are going to lose the home, as in the second circumstance, the consumer would contractually be able to live in the home through the foreclosure process without having to make any payments during the process. While the debate on this issue is more on moral grounds, the truth remains, contractually, the breach would allows consumers to stay during the foreclosure process but a short sale does not... and the impact is the same... credit is impaired almost equally.