Bad Advice to Owner: Don’t Walk Away
Anon writes:
Incredible must-watch clip.
This is a clip of a borrower calling the show questioning why he should continue to pay for a home for which he owes so much more than it is worth. The guy bought the home for $600k and put a 50% down payment on it. Now he owes $350k due to neg-am but the value has dropped from $600k to $270k. This guy has been destroyed losing $300k cash. He wants to stop the pain. The loan adjusts soon and his payments will double.
The hosts gang up on this guy relentlessly essentially blaming him saying a) you made a contract that you must repay b) even if you have to give up your kids education you made a commitment c) you will drag down all your neighbors value d) you will not be able to ever buy or rent d) you are getting ‘value’ by staying in the home because its a place to live e) you have to take responsibility for your action f) you likely lived beyond your means and now you have to sacrifice g) pay extra to principal to make it up. etc
The homeowners do not stand a chance against thinking like this. As we exit the ‘Subprime Implosion’ and into enter the Alt-A, Pay Option, Jumbo Prime and Prime implosions presently happening simultaneously in various degrees, this will be the primary reason people default. I am afraid this is just a little taste of the type of attacks we should be prepared for.
The fact is — with $300k down this is one of the good guys. He was duped into buying a $250k home for $600k because of the high-leverage, risk taking of the financial insti’s that allowed people with zero money down, terrible credit and no jobs to bid up this neighborhood making it appear the home he bought was really worth $600k. He likely is not saving much money because the lion’s share is going out to this massively depreciating asset. In all likelihood it is a good financial decision for him to walk and rent the home down the street without all of the other ‘joy’ of homeownership expenses that come along with owning. If we walked now the pain goes away. His credit is hurt for a while but if he keeps everything else current if won’t hurt him for long. His credit will recover quicker than the house will recover in value. His loan is a purchase money loan so there is no recourse if he exercises his right to foreclosure. Suggesting that the he dips into his kids college education to make up the difference is a crime. This man has already paid with his life’s savings.
March 4th, 2009 at 9:57 am
Couldn’t watch it all. My advice to this guy is stay there til the rate resets. Then walk away. Screw everyone else. That attitude will become more pronounced as things get worse.
March 4th, 2009 at 10:06 am
Heartwarming story about CW sleazoids finding another way to skin consumers. I bet they write recourse provisions into the refinancings. They buy the homes at 40% from FDIC, revise the note with the same principal amount but lower interest rate. They mention a 3% interest rate but thats like 7% to the lender if paid 40% and bills based on 100%.
So the home would have to appreciate 150% from the current market value of 40% of the note, if there is a recourse provision added then this mistake is even bigger than originally buying the house, the lender will strip every asset off this poor soul.
http://www.nytimes.com/2009/03/04/business/04penny.html?_r=1&hp
March 4th, 2009 at 10:10 am
Why is there an implied ethical obligation ina business transaction on the side of the consumer — but not the company that made this sleazy loan ?
March 4th, 2009 at 10:14 am
I think the banks are doing a good job of shifting the blame. However, the numbers don’t lie: the total outstanding mortgage debt in the country is ~$11T. The amount of money spent bailing out financial institutions so far is $9T. If the problem was mortgages, it would be solved. The problem is leverage, CDS and other sorts of financial wizardry. Over extended leverage is the balloon; the mortgages are simply the needle, don’t blame homeowners.
March 4th, 2009 at 10:15 am
LOL, i thought form the blog post title, it was gonna be GE walking away from CNBC so they could raise $ to stay in business!
March 4th, 2009 at 10:22 am
BR: I believe the word for that phenomena is called hypocrisy.
March 4th, 2009 at 10:23 am
“He was duped into buying a $250k home for $600k because of the high-leverage, risk taking of the financial insti’s that allowed people with zero money down, terrible credit and no jobs to bid up this neighborhood making it appear the home he bought was really worth $600k.”
HE WAS DUPED???? He was a dope in sucking up the crap that was being peddled. Fiscal responsibility is disappearing in this modern world. As we bought houses years ago, we were also told, “Real estate always goes up; don’t worry.” We replied “Sure, sure…”. as we made sure we didn’t put ourselves into a position of just buying a house to compete with those around us as we overextended.
March 4th, 2009 at 10:26 am
Can you imagine this conversation three years ago? It seems like hosts were looking at this mostly from the ethical point of view–how quaint. Given the bailout of Wall Street and Detroit, times have changed.
March 4th, 2009 at 10:35 am
Barry – just a heads up but Google Reader is displaying the author’s name, as well as his closing (private ) paragraph to you requesting anonymity. Not sure if there is an easy fix for that once Google has grabbed it, but I thought you should know.
March 4th, 2009 at 10:52 am
“Why is there an implied ethical obligation ina business transaction on the side of the consumer — but not the company that made this sleazy loan ?”
Caveat emptor: “Let the buyer beware”. Just because a loan is sleazy, doesn’t give the buyer the excuse of not having to understand what he was getting into. If the price was inflated, DON’T DO THE LOAN. Rent and quit trying to compete in the number of toys you own in competition with your neighbor. We are developing a world of people that have a bad credit record, but will just say, “Well, I am just one of those screwed by the realtors and lenders and my credit record should not be held against me.”
March 4th, 2009 at 11:16 am
deanscamaro-
you are starting to figure it out.
Five years from now, if you are running an apartment complex, you will either accept as tenants people who were foreclosed on in the past, or run an empty complex. And yourself go bankrupt….hmmm.
There will be no serious consequences to people who walk away from homes like this, because those people are good credit risks in a world where Greenspan is not trying to pump up a housing bubble.
March 4th, 2009 at 11:31 am
It makes perfect sense to walk away. The walk aways are not really the biggest problem. The real problems are the people who have money but decide to stop paying their debt figuring the load of foreclosures is so high they can get away with saving 6 months of payments until they are finally evicted. These are the people who ultimately cost the mortgage servicers so much more money, eating up whatever is left after the sale. Additionally, the situation that this guy is in is a great example of an acceptable default, he just can’t pay it anymore. This is why we don’t do debtors prison, because sometimes people really just need to walk away. Mortgage holders need to accept the risk, that’s why they get paid interest!
March 4th, 2009 at 11:38 am
I would hope this is a case where there would be a reworking of the loan. Sadly we’re going to see way more of these soon as the Alt-A loan resets hit, sigh.
Maybe financially looking at it makes it easy to say just walk away, but when it’s your home, and you really bought it as a home and not an investment, there’s a lot more to it. I think what most of these people want is just a way to not pay those inflated reset loans they are getting stuck with, and banks should make it easier to rework these crappy loans.
March 4th, 2009 at 12:16 pm
I don’t know if this is one of the “good guys” or not, but putting down 50% of the purchase price and seeing it all disappear has to hurt. The guy could probably rent out the foreclosure on the next block and have much lower payments — maybe even enter into a lease to own.
But if people like this who put down large amounts of money on overvalued homes have to rent in the future, the question from landlords won’t be “Why didn’t you keep paying?” It’ll be “Why did you keep paying so much for so long on something worth so little?”
March 4th, 2009 at 12:25 pm
To blame realtors and lenders is silly. There’s only one place here where blame lies. That’s like me blaming my teacher because I didn’t study and couldn’t pass the test. Or buying some piece of high tech equipement right after it comes to the market, and then blaming the retailer six months later when the price drops 25%. We all need to take responsibility and be accountable, something that’s not cool these days.
Also his credit will be hurt, and not just for a while, but for a long time. A foreclosure on your credit report is a nasty thing and it will affect everything else he does credit-wise. Walking away does little for him. At worst he can do a short sale and his credit won’t be hurt as badly as just simply walking away.
Since he is facing a huge increase in his payments, if it was me, I’d default and then seek a refi with a long term fixed mortgage and stay in the same house.
March 4th, 2009 at 1:11 pm
Rather than walking away, he should walk into foreclosure. With the speciousness of the interest-only negative amortization of the loan origination the chances of anybody still having the paperwork to actually evict him and take legal title of the home are just about nil. He should be spending part of his mortgage payments on a lawyer and saving the rest for his kids’ education.
March 4th, 2009 at 1:35 pm
Totally agree, bolddan!
I have a daughter and son-in-law who for years didn’t worry about paying bills on time or just plain let them go. Within the last three years, they have tried to straighten out their lives and tried to get things in order. Their poor credit rating has haunted them wherever they turn. The latest problem has been the economy collapse, which almost made a pool maintenance business he started to improve their lives, just about disappear. They are now living in what I would term a “hovel”. Do you think they wish they had handled their debts better? YOU BET! What I worry about is people, in one way or other, walking away from a stupid mortgages (ARM ’s or whatever) they couldn’t afford to begin with and being forgiven because they are the poor, mistreated recipients of actions from those mean old financiers. These guys made a killing in a business where people let themselves be suckered into a corner they headed for like lambs.
March 4th, 2009 at 1:40 pm
Please don’t accidentally advise people that purchase money mortgages are non-recourse. I believe they are in California for sure and in some other states but that is absolutely not the case in all states, it sure isn’t the case in New York, and there is no guarantee that the lender will not pursue a deficiency action, particularly if its a regional that kept the loan on its books.
March 4th, 2009 at 4:53 pm
He was duped? I rarely disagree with the posts from this blog but buying a 250k house at 600k is asinine.
If the guy had done his homework and checked historical prices, he would have known he was buying into a bubble. You would think someone about to write a 300k check would know better.
Just one more example of a guy who watched too much HGTV and swallowed the NAR’s mindless propaganda. When will people learn that we live in a country that allows people to lie to us to sell us stuff.
Bravo to the person who sold the home to this guy… he or she is probably a trader!
March 4th, 2009 at 5:12 pm
This brings to mind one of the points made by Roubinin in a recent post on his site:
http://www.rgemonitor.com/roubini-monitor/255816/the_rising_risks_of_a_global_l-shaped_near_depression_and_stag-deflation
In the post he mentions the thinking by many of the better economists (altough he does mention that Bernanke holds the view also) that the general problem the world is facing is the imbalances in trade and capital flows. The exporting countries like China and Japan have been saving too much, while we have been consuming too much. All though savings in the exporting countries got funneled back here in the form of loans that are now going bad. Until America savings rates get back to historical averages, we are going to continue to have problems.
Charts have recently been showing that America’s savings rate has gone up significantly in the past year.
Roubini points out that the charts do not take into account the enormous decline in assets of many households like the subject one. It’s the flip side of those who told us that we didn’t need to save because our houses were increasing in value. So, our savings have not really increased as much as we think and real savings rates will not go up until value of houses and stocks stop going down.
March 4th, 2009 at 6:26 pm
I find some of these comments disturbing. People make mistakes, they make poor choices and they will likely make them again. However, who is more to blame here: the person who made decisions above their capability to comprehend the risks of that decision or the organization that intentionally entered into contracts with a complete disregard for the consequences. I agree that we’ve become a nation of whiners but this guy is owning up to his errors and cutting his losses…any smart business or investor would do the same thing so bully for him for getting it!
March 4th, 2009 at 10:01 pm
Agree with you totally barry. If it was so obvious to everyone that his house was over-valued 2-3 years ago, then why did he buy it? Well its easy to say stuff like this in hindsight. But picture the guy back then, his wife is bugging him to buy thier dream home, and the longer he has been waiting the more expensive it has gotten. So he puts down 50% and figures the worst that happens is that is house price stays flat for a bunch of years. Remember even the biggest subprime shorters out thier like paulson etc didnt base thier trades on home prices declining 50%, and i dont think anyone really did. it was a possibility but not a given.
Give this guy a break. He messed. He bought Nasdaq at 5000. Now let him take his loss. He should do what is best for himself, that is true capitalism.
March 5th, 2009 at 9:13 am
It’s not all that clear to me he should walk. In the clip, the homeowner says he’s living in his dream home and he can afford the payments. We don’t know his mortgage structure, but if it’s one of the nastier teaser rate ARMs he’s probably looking at LIBOR+3.5% and a 25 year amortization at the reset, which would put his payment around $2,000/mo with a $350K balance. I’m not sure what his dream home is like, but how much could he save renting a decent single family home? Looking at it another way, if he bought the house down the street for $270K and put 20% down ($56K) and got a 5% fixed rate loan, his payments would be $1,160/mo on a $216K mortgage, so his payments would go down less than $1,000/month. Investing $56K in a declining market to save $1K a month does not seem like a shrewd move to me.
My point is you can’t make a walk/stay decision without working the numbers and looking at the alternatives.
March 5th, 2009 at 10:53 am
BR,
You are right, we should be prepared for a lot more of this especially in 2010 and 2011. Those are the big years for Alt-A and Option ARM resets. If we keep losing 600k + jobs per month that will be a disaster.
And for those above that think these homeowners should sit down and “run the numbers” well,
If they had the energy, knowledge, or desire to do so, they probably would have never done these mortgages in the first place so lets not expect that to all the suddent start happening. Most of them are just going to walk away, easy come, easy go.