Monday, January 28, 2008

Southern California Real Estate: Walking Away is Stupid

Last week was quite a week with mortgages bouncing up and down in a matter of days while Wall Street and the financial community tried to decide if the FED move was good, bad or mediocre. All of us in the South Bay-Beach Cities were also trying to decide how this cut and further cuts would affect our local real estate market.

Amid all the breaking news there have been a couple of related stories that tell a lot about the current housing crisis and the mindset of many consumers. Peter Viles who writes the The LATimes real estate blog LALand posted an article about people who were just walking away from their homes. One comment from a person who labeled herself as Condoblue wound up as another post. It seems that Condoblue has a mortgage that is getting ready to go up and her property has lost value.. so instead of making her payment ( which she can do) she plans to buy another home and walk away from her current home because it's good business.

Meanwhile over at CBS ....60 Minutes offered a report Sunday titled House of Cards:The Mortgage Mess. After all the requisite chat about rotten loan brokers and poor helpless buyers Steve Kroft talked to Matt and Stephanie Valdez, who bought a condo that went down in value. Although they too can make the payments they are contemplating walking away from the property... because it doesn't make sense to them to make the payment when prices are going down.

To Condoblue and Mr and Mrs Valdez I have three words... Shame on you! Didn't your parents teach you anything about ethics and values. You made a deal with the bank.. they would give you the money and you would pay them back. I don't believe the bank held a gun to your head or threatened to break your kneecaps if you didn't sign on the dotted line. However Condoblue and Mr and Mrs Valdez believe that only means something if prices are going up. If prices go down it seems that all bets are off. It appears that the only time someone has to honor a commitment or a contract is when it suits them.

What I found even more appalling was the number of people who seem to agree with them. Of the 69 comments about Condoblue most didn't find anything wrong with her stance to skip out on the old lender while she lied to the new lender. On the 60 Minutes site there were over 200 responses to the story. Those who found walking away offensive and wrong are barely in the majority.

It may seem to many that walking away is a no- brainer.. like returning a shirt to Nordstrom or a TV to Costco. But while Nordstrom will still take just about anything back... Costco had to change their policy on electronic items as consumers took advantage of them.

Those of you who say Banks are rotten and justify not honoring a contract by saying the principle is different are not getting the big picture. If you can afford to make your payments and choose to walk away you are taking advantage of not only the lender but all of us. In the case of Condoblue you are also committing loan fraud on your future purchase. For those of you who agree with this I have one word... DUMB!

Do any of you really believe that banks are going to let a bunch of people who can afford their payments walk away from their obligations without a consequence. They may not pay that consequence but I guarantee you will. You think the liquidity problem is tough now.. just wait. Banks make loans and charge for them based on risk. As more people who are not in dire straights walk from their obligations the banks are going to charge those looking for a loan a hefty premium to make up for their losses.

In addition to the costs of borrowing there is another little matter that may have escaped all of you who think that massive foreclosures are peachy because you will be able to buy a house cheap. You might want to rethink that if you work as a teacher, civil servant or for any state or government agency because you like their retirement benefits. If you have a company pension plan or use your 401K to buy stocks it might be a good idea to not be so gleeful. Most pension funds and mutual stock funds have part of their portfolios in financial stocks. B of A and WAMU are publicly traded companies.. if they tank so does any of the stock held by investors. Your pension fund or mutual fund could be one of those investors. That just might affect your benefits.

It's one thing when a little kid does something bad and tries to blame his imaginary friend. It's quite another when an adult decides to take no responsibility for their actions and skip out on their obligations. Frankly I have zip, zero, nada sympathy for Condoblue, Mr and Mrs Valdez or any of the others who are financially capable of making their payments but believe that walking out on a contract is OK. Aside from the fact that you are incredibly immature... you are also twits.

I bought my current home in 1991 at the top of the market. I watched the price go down and down. Yet it never occurred to me to walk away from my home or stiff the lender. It was not an option for me or any of the rest of us who hung on to our homes during some very bad times. I signed a contract and made a commitment. I stuck to that commitment.

That's not to say I didn't believe that ultimately my home would be worth more then I had paid for it... I knew that even as the market was tanking. I knew values would come back. I had a down payment to protect and I wasn't going to walk away from that. Also my parents taught me to honor an obligation. If I gave my word I stood by that. I still believe that is the way to handle any situation business or personal.

So to all of you who are walking away from your homes because you think you only need to honor an obligation when it suits you... Bad behavior is bad behavior no matter how you try to justify it...

*** Flickr Photo from Zunzuncito


Anonymous said...

Well said. When values increase, the banks don't share in the equity gains. Yet it amazes me that some homeowners think that it's okay for the banks to take the equity hit on the downside. I hope that the bankers go after the recourse loans, and future lenders figure out which people scammed banks previously before lending to them again.

Kaye Thomas said...

Anonymous 11:05,
Great point.. banks don't get extra cash if the value goes up. I suspect that lenders will look at those who had the wherewithal but don't pay a bit differently then those who could not make their payments.

I think banks will get tough if walking by qualified borrowers becomes an accepted practice. That of course will make it much harder on people who genuinely have financial problems. It will also make it more difficult for buyers to get loans in the future.

Anonymous said...

it's very difficult for a bank to go after a delinquent borrower with a recourse loan in CA because we are a single issue state. that means the banks must choose between foreclosure and pursuing a deficiency judgment. they cannot do both. historically, they've gone the route of FC, because of the time, expense and low recovery rate on the latter tack.

the reality is that the phenomena of 100% LTV and low doc loans were predicated on ever-rising house prices. some banks may have been cynical and made the loans thinking that "dumb" homeowners would continue to stay current on expensive, upside down mortgages, but my experience has been that the reputable ARM lenders in CA were well aware that 100% LTV loans would be toxic in a down market. that's why they will be in business 5 years from now.

taking a long-term view, it's difficult to escape the conclusion that mortgage credit is going to be more expensive in the future than its been the past 10 years. we are going back to the days of 20% down payments and fully documented income. at the same time, the flight of capital away from the US (and the housing market) will lead to wider credit spreads (e.g., 100-200bps vs 25-50bps). throw on top of that a higher inflation rate now that the Great Deflation is over (e.g., back to 3%) and it's easy to conclude that mortgage rates over the next 10 years will average >7% (2% real rate + 3% inflation risk premium + 2% credit spread + .5% servicing fees).

you are in a much better position than any of us to predict what 20% down payments, +7% mortgage rates and full income documentation will do to the local market.

housing may get a cyclical lift from the fed rate cuts, but when i look out 5 years, i see headwinds as far as the eye can see. The collapse of the inland areas will put pressure on the westside due to the availability of cheaper substitutes. mortgage credit is getting tighter. inflation is in a secular bull market. none of this is good for housing demand.

if nominal prices in MB/HB are flat from today's prices over the next 5 years, i think it should be considered a very optimistic outcome.

Kaye Thomas said...

Anonymous 11:44,
Actually only a purchase money loan on the original purchase is considered to be non recourse in CA.. I understand that several lenders who held both the first and second (100%) are foreclosing on the first and if the second is a HELOC then are going after the buyer for payment on the second.

If a property has been refinanced then the lender can foreclose and seek a deficiency judgment if they choose.

In the 90's I had several lenders not allow a short sale on a refi unless the buyer signed a note to pay the balance.

I absolutely agree about future interest rates and the cost of money.. But I suspect that lenders will allow 10% down the loans will just cost more (higher rate or 2 points upfront). I see rates at 7%-8% and that will certainly impact the real estate market.

Truthfully if prices stay relatively flat over the next few years we will be well ahead of other markets.

Anonymous said...

I saw the 60 min. report this past Sunday and was amazed - it gave a great picture of the problem (owners and bankers).

I concluded that the problem was on both sides and that owners should never taken the loans, and banks/lenders should have never made the deals. I put more of the responsibility on the banks/lenders b/c it is their business to understand the loans (not that the owner doesn't have a responsibility).

I think prices really need to come back down, not by 50%, but by another 20% or so to make this market affordable again. Without the creative financing, no documentation, flippers, and contractors out of the market, hopefully we will see prices pull back.

I know their are a lot of people like me waiting buy, but prices still need to come down and news like the 60 miniutes report put in clear perspective what is happening and what needs to happen.

Our local economy would benfit if we could start selling the inventory on the market.

Kaye Thomas said...

Anonymous 8:07,
No question everyone shares in the blame for this mess.. and I do believe lenders have to shoulder more guilt here..

I have never figured out the rational that says you can qualify for a higher loan with a payment that adjusts then for one that is fixed.. This has never made any sense to me..

I think we will see prices decline a bit more although I don't think we will see 20% in our immediate market unless there is a major crisis such as massive unemployment.

Inventory is still low. Until we see big increases in inventory the market will remain relatively the same.

Anonymous said...

What a load of crap written by people totally unaffected by this whole mess. I put my 20% down for my home, have a 793 credit score and have never been late on my mortgage payment. I was transferred by my company and placed my home up for sale. Imaging my shock to learn that the home I bought for $479,000 is now worth $350,000 - well below what I owe. I have lost 15 years of home equity because greedy banks lended money to sub-prime people who could neither afford nor qualify for these homes. What happens to the sub-prime owner? Nothing - they go back to renting just like before with their crappy credit just like before and have not lost one dime. They put no money down and inmany cases took money out with second mortgages. In the meantime, I have been paying 2 mortgages, made up for $1800 a month in rent shortfall - only to learn yesterday that my renter is skipping out. You bet I am doing a shortsale. In total I have lost $123,788 dollars. I have my ARM due in one year and can either short sell or pay another $85,000 for a house I already put $95,800 plus closing costs. While it is so easy to sit in your fat California home that you have owned for 20 years and judge, you have no idea who is really impacted by this whole damn thing...the middle class who has prime credit. And I trust you have not sold that home because you cannot afford to pay taxes on the new one - another brilliant California law that I paid for. In the future - shut up, roll up your sleeves and come up with some constructive ideas for a change.

Kaye Thomas said...

Anonymous 2:46,
A shortsale is completely different from someone who could pay theri mortgage and chooses not to do so.

I'm somewhat mystified at how a home you have owned for 15 years is currently worth less then you paid for it 15 years ago and that you have no equity left. I don't see how that could happen unless you have refinanced the property.

I have a very good idea who is impacted and who will be impacted in the future. The fact is that all of us will be impacted. Money is going to be tight, loan rates are going to be higher and it will be harder to qualify.