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jimmy57

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I've noticed that a striking number of our friends and acquaintances are now considering the option of voluntary mortgage default (mostly on 2nd homes and investment properties).  These are not people who can't pay their mortgages -- they have sufficient income or net worth -- they simply bought at or near peak prices and are coming to see these properties as losing investments that are money drains.

This is becoming a subject of common discussion at informal gatherings.  I sense that many people are just now in the stage of "testing"  this concept to re-check whether or not it makes sense financially, and whether or not it will be validated on moral grounds. So far, the answer from accountants seems to be "well, it does make sense" and from peers "I can see why you'd do that."  By in large, these are people who don't need to care what their credit rating is, or can certainly weather having a poor one for several years.

I wonder whether this class of future defaults is on the radar of policy-makers,  If it is,  how can they accurately estimate the size of this issue?


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May 19 - US
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Guy I work with has stopped making payments on his investment property.  He's looking to get a principal reduction or other form of mortgage rework, however, he's fully committed to walking away... and why?  Cuz he went 0% down, he's out nothing other than a credit rating if he walks.  If he keeps paying as is, he's out over $200K at the moment.  Of course the property never cash flowed...well until he stopped paying the mortgage that is.  He's still collecting the rents..  And he's yet to get a NOD...  talk about incentive to stop paying mortgage!

Oh... and yes, he certainly has more than enough income from his job to make the payments.

As an aside, these zero down (or for that matter 3.5% down) mortgages are literally like the bank creating an under priced put option on the house.  If the market goes up, they keep making payments and/or sell at profit, if the market tanks, they have a guaranteed sale price -- the loan balance and a hundred points knocked of the credit score.  Now the idiot policy makers are continuing to find ways to socialize the zero down mortgage.
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May 19
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In many areas here in California if you bought in during the bubble, you could have put down the traditional 20% and still be underwater now.  I think that many buyers who weren't over-leveraged are now realizing that they wildly overpaid at the time of purchase, and nothing will fix that.

I think the moral rationale goes something like:
"I risked my down-payment, and that equity is gone now... and that's all the loss I'm going to accept.  My lender assumed risk in this deal too, and they'll have to take their losses too.  I'm out."  The villainization of the banks and "Wall Street" by politicians and the MSM  just makes this moral argument go down easier.

I don't think we're prepared for the numbers of defaults that will coming from the "un-distressed" buyers who will be bailing out in the coming months/years.

"he's fully committed to walking away..."
My landlord is another one.  He might keep paying if his lender gives him a particularly sweet modification.  Otherwise he'll walk, he's said so.

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May 19
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BMFPitt

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The villainization of the banks and "Wall Street" by politicians and the MSM  just makes this moral argument go down easier.

I think the moral imperative to pay your debts evaporated as soon as TARP was invented.  I would have no moral problem with squeaking every last day for free rent from a bank, taking the copper with me, and leaving a few cats behind if I had a loan through Citi or anyone Goldman owned.
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May 19
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sunnyview

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So true. It has to be hard to look at the billions that the banks took and look at your own 100K underwater mortgage balance as you keep faithfully paying. The banks got a pass. I feel sorry for the people who did overpay and put money down to buy in. Most are not eligible for a modification and will not be able to sell for a decade depending on how far under they are. God forbid if they lose their job or have to move. The mortgage is far more than rent for most. The mortgage will sit there for the next 5,10, 20 years and if any financial bump in the road happens, the owner will be in deep with no modification offered at that point. BTW the terms that I have seen on many mods would make me walk as soon as I saw them. Some are really outrageous. I mean who would agree to stay 100K underwater, have a payment set at a lower price for the next 2-3 years and then accept a mortgage rate of 8.5% on years 4-30. I wouldn't. No house would be worth that to me even if it was my mistake in buying. I want to be able to honestly tell people try to work with your bank on a mod, but from what I can see many people are better off walking even if they can pay. The bank certainly won't be there to hold their hand or help them 5 years from now when they still can't sell for what they owe.
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May 19
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TunaFish83

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The more / quicker people realize this, the sooner we reach bottom.
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May 19
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Has anyone heard of anyone getting a loan modification for a second home, or an investment property? I haven't.  In any case, as sunnyview suggests, lenders would just be asking buyers to sign on to a different losing deal. 

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May 19
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Roberto Ribas, "azrob"

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funny, I wrote that people would do this TWO YEARS AGO on zillow, and got roundly beat up by all the agents on here. "if you can afford the home, you won't let it go..."  I said that 100K underwater and tons would walk, even if they can afford it.

I see people all the time now, buying a $100K home, and when I research them, they already own a smilar home bought 3 years ago or so for 300K...
If their income is strong enough, they can qualify for another home.
If their new wife/husband isn't on the other note, they buy it in the spouses name.
Or the brother/cousins name.

Another huge wave of foreclosures coming.
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May 19
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BTW the terms that I have seen on many mods would make me walk as soon as I saw them. Some are really outrageous. I mean who would agree to stay 100K underwater, have a payment set at a lower price for the next 2-3 years and then accept a mortgage rate of 8.5% on years 4-30. I wouldn't.

That might make me stay for about 2-3 years, which is pretty much the purpose of offering those mods - to delay the inevitable.
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May 20
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I guess you're right about delaying the inevitable. I think as a person I am responsible and fairly honest, but I do not know if I could take a deal like that. If the mod buys me 2-3 years and my market starts going up like clockwork at 3% a year at 100K underwater, it will take me over a decade to get back above water again equity wise not counting my own payments to the mortgage. Essentially, with a loan mod I would be agreeing to support the "banks" house for a decade hoping for the best for more time than it would take a bankruptcy to drop off my credit report and three times as long as it would take for me to buy another house FHA. I also feel that the rates offered at about 8% are outrageous. It's like the banks saying "take it or leave it, you want to keep you HOME right? So just sign the deal."
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May 20
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The way I see it is that being that far underwater, you are renting from the bank.  It then falls to whether or not the new payment would be competitive with renting a similar house.  And in 2-3 years when you find yourself down $150k, you just go back and let them know you'd like to renew your "lease" on similar terms or you'll walk.  The banks are just hoping that the bubble will have reinflated a bit by then.
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May 20
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Yes, it is renting from the bank, but at a price higher than rent in most cases. The tax benefit, financial stress level and maintenance costs on the "banks" house do not pencil out unless you believe your market will bounce back high and fast. As renter, you would have no repairs, no taxes to pay and no worries if you need to relocate or downsize due to job or health issues. I see it as just another way to give the banks money on the backs of other people. I want a benefit from homeownership in exchange for the stress of weeding, repairing, paying taxes etc. The banks don't need any more help. They need to pony up with reasonable deals for homeowners who want to try to do the right thing.
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May 20
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NTETS, "Caveat Emptor"

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yeah, well morally you wont come out smelling like a rose, but as far as i'm concerned... banks used fraud to create the bubble and push prices up... they deserve to take the loss more than your friends who paid "market"

i have gone back and fourth on the issue though, this seems to be just my opinion of the day
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May 20
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If I were in that situation, I would be morally conflicted. If the bank was nice to me and reasonable, I would probably keeping pay like a fool. If they yelled at me, treated me like a nonpaying deadbeat with a modification letter at 8.5%, I might tell them to foreclose out of pure spite. Honestly, I don't know what I'd do. I think my desire for justice would color my decision, more than my desire for personal prosperity. I am grateful that I don't have to choose and understand why the choice has been so difficult from many to make.
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May 20
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From my observations (not statistics, just what I have seen) many have defaulted in order to get a loan mod. The ones that are still able to afford are definitely there, but are just trying to get a better deal on their loan. The investors doing such definitely will walk if it it hits the right neg. equity with no future benefit. Although I wonder how this will affect the default to foreclosure rate, and the redefault rate. My guess would be if they get a loan mod they are happy with, they will keep the house. This would flaw the numbers for forclosures in the pipeline.

If these defaults dont turn to foreclosures, it will throw off many people waiting for the market to go down further, expecting a large supply to soon come....or those that are just "testing the loan mod waters" could be a very small amount that wouldnt even change default to foreclosure ratios. This will be interesting to see.
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May 20
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"..many have defaulted in order to get a loan mod."

Yes, I know a couple of people who have defaulted in order to get the attention of their lenders (who don't seem interested in discussing load mods otherwise).  And walking is Plan B.

But I also still find people who don't have any concept of what sort of loan mod their bank would agree to, and seem to imagine that some magic deal might let them continue indefinitely with their original(low) payments.  These are often the same people that still imagine that their home's value is going to rebound into bubble ranges within a year or two.
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May 20
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Roberto Ribas, "azrob"

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I spoke with a title agent who was doing this.. "we aren't paying, because the bank is being ridiculous, and won't drop our loan value by half since we are current." Um, you have a good job, your husband has a good job, why should the bank modify your loan at all, let alone drop half the debt?

There is no modification of the type desired for the numbers who want it, unless we want a 3 or 4 trillion dollar bank bailout.

I'm still very convinced this 'bear housing market rally' ends badly, with price drops far below what even I expected a couple years ago.
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May 20
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Yes I think you're right, azrob.  I'm having trouble seeing how it all could resolve itself otherwise.

We might have a bit of a false bottom this summer, but more and more people will be catching on that the government is over-promising help for bubble buyers.  Walking will come to be seen as the smart move, and perfectly acceptable, morally.
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May 20
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NTETS, "Caveat Emptor"

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on the one hand, yes in your specific case, you borrowed money and you should pay it, there really is no reason that the bank should even have to collateralize the loan... but they do.

but then on the other hand, the very real, blatant other hand, the banks systematically broke each and every barrier to home values skyrocketing... they refused to work with ethical appraisers, incentivised their LOs to make loans that were so phony that the glue wasnt dry yet... they offered payments so low that anyone could afford them... even less than the interest they charged on them. they brought in more money to make it even easier to get a loan and created competition for the paper... the list almost never ends...

so you know what? why should i feel morally obliged to pay up, when, by all accounts, the moral dillema would be moot(and my mortgage affordable) had the banks allowed the market to function normally?
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May 21
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There is no reason I see how a homeowner with an investment property should be able to walk from the mortgage on the investment property without jeopardizing their primary home.  You cant have the best of both worlds....remember..part of the problem is that people committed themselves to these loans...If you walk on one property it should essentially put you into full bankruptcy...hence affecting your personal home.  Not every purchase we make is a good decision...however we cant only be responsible for the good ones...thats wrong.
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May 21
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NTETS, "Caveat Emptor"

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actually in full bankruptcy you can name your creditors, and keep your primary residence, if you so choose...
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May 21
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but then on the other hand, the very real, blatant other hand, the banks systematically broke each and every barrier to home values skyrocketing... they refused to work with ethical appraisers, incentivised their LOs to make loans that were so phony that the glue wasnt dry yet... they offered payments so low that anyone could afford them... even less than the interest they charged on them. they brought in more money to make it even easier to get a loan and created competition for the paper... the list almost never ends...

so you know what? why should i feel morally obliged to pay up, when, by all accounts, the moral dillema would be moot(and my mortgage affordable) had the banks allowed the market to function normally?

I have no moral problem with any of that.  The market should have punished them for those mistakes.  But the second my tax money went to reward them for doing so, those banks became my sworn enemy.
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May 21
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"Banks are my sworn enemy." LOL I think that would make a good T-shirt.
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May 21
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Not all of them.  I'm a big fan of the banks that avoided the whole mess and didn't need to take any TARP money - and are now being punished by the government for their responsible actions.  I just wish the welfare banks would die in a fire.
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May 21
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You are right. Perhaps saying all banks is too harsh. How about TARP banks instead?
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May 21
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It's all good fun to argue whether it is morally justifiable or not, but that's just academic, isn't it? 

I'm more interested in which actions borrowers and lenders will actually take, because that's the real world I'm trying to anticipate. I think azrob is on the right track--- there's some point, 100K underwater, or some-percentage-of-annual-income underwater, at which many people will abandon the ethical ideal of paying their debts.  

And back to the OP, some people (arguably, some of the most sophisticated and successful) will be making these decisions dispassionately, on financial / legalistic grounds.
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May 21
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I believe that too. I think that if the market does not stabilize that many people who can afford to pay will stop paying as a simple financial decision. Right now I think many of those people are right on the edge and waiting to see what happens in the market. Some are hoping for a bounce halfway back to bubble values and some are looking for the magic number that they refuse to owe beyond. I think the larger question is whether this idea hits critical mass in the public or not. I think that the media focus on walking away with no shame and allowing homeowners to take no personal responsibility for the situation will feed that beast if it is ever uncaged to roam free. If that happens, it could really decimate values nationwide. I hope it does not happen. I welcome an honest correction of the market, but I don't think that every house in America REO wholesale would be good for the country as a whole.
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May 21
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DebtsNMesses

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I believe in strategy without any qualms to my concience. Why? Because the banks and insurance companies KNEW what would happen when they did the things they did... and they did anyway.

Why should we care about our contracts for the benefit of them? If our tax money goes to the banks, we might as well get as much for ourselves.

Two can play that game. :-)
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May 21
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sunnyview

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You may be right. I sure wouldn't choose the bank's repayment over my family's well being. That's for sure. It makes me queasy just thinking about making the choice though. If you can pay, should you still pay even if you are going to overpay? I think it would be a hard situation to be in. Darn ethics. The problem in this situation is that my ethics and my sense of justice would be equally matched in a fight to the death. Oh the humanity...
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Okay, it's settled then: everyone who bought a house in California over the last 7 years WILL eventually walk away and leave it to the bank...;)

Let me plug that number into my spreadsheet...
...Uh-oh, that's not going to be pretty.
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OK, I'll go out on a limb here and say, "Not us."

We bought January 2007 and we aren't planning on moving and we bought it because of what we can turn it into.

If we left where would we go?  Back to renting?  Not something we want to do.

Of course, we're doing fine financially and we're having a good time with what we've got so maybe if that changes radically for the worse in the next 7 years we'll be forced out but other than that there's no reason to bail.
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