Mr. Jones is a Punk
In this WSJ article the author writes, "But after four years of struggling to pay his own mortgage, Mr. Jones says he has no equity to show for it. He may end up walking away from his home...
I would offer up a thought here... Mr. Jones is a punk and I resent his sorry, tough-get-going I-guess-I'll-quit since life isn't giving me what I'm entitled to guts.
I would also like to put on record the next short-sale seller who gives me an attitude for showing up at their "home" after I call in advance for an appointment per MLS instructions, whose instructions by the way, are nearly always more elaborate than the instructions of other comparable re-sellers who are also trying to sell their home the traditional way.
If you happen to be a short-sale seller, I harbor no judgment against you. I don't blame you for your situation and don't question why you aren't working four jobs to somehow make it work. But if you are going to break your agreement, and ask for a hand out, which is exactly what every short-sale seller is asking for, then for Pete's sake, try to dig down deep and help us help you... or at least get the hell out of the way.
Contact Seth Chalnick
Fair Housing and Equal Opportunity
Comments
Walk-aways are the result of lenders removing down payment guidelines. Those policies drove prices upwards and placed more people in the role of debt slave to a bank. To continue that trend, banks did zero down and negative amortization loans -- even more mortgages and more debt . To the bank's surprise though, these policies also created an environment where buyers were effectively purchasing nothing more than an option to buy down the road. I feel no pity for the banks now when the little guy is making the prudent fiscal decision.
HELOC'ers and the fact the Fed decided to throw never-ending taxpayer money around blurs the situation a bit, but still can't fault the massively underwater for saying "Hey... mortgage says we either do A) or the result will b B). Let's just let B) occur".
By the line of thinking you presented, a guy "buys" a house with no money down... pays his mortgage for four years... can still afford it... is resentful that he has no equity... so figures may as well rent for less.
Another guy goes to the hospital... gets a big bill... resents the fact that other folks don't have health insurance and don't pay their bills... which inflates his own cost… says heck with it, might as well not pay either.
Another guy borrows $500 bucks from a friend to get through a tight spot... never seems to have the extra money it to pay back.
Another guy and his wife divorce. He doesn't understand why he has to pay so much alimony and child support since it doesn't leave barely anything for himself... justifies why he doesn't have to.
I guess the issue I’m struggling with is how it seems so many folks accept… even promote the idea that it is ok to break agreements simply because they become inconvenient, or worse, because there is just no short term incentive for themselves.
I guess it has probably always been this way. And in the end, despite the health of the overall economy, and despite the tough hands life deals each individual… the folks who consistently do the right thing… get back a disproportionate share of higher rewards… not because they deserve it…. and not because its ever handed over without a struggle… but because their sails are always trimmed to catch the opportunity when it presents.
In most instances I'd agree with you about personal responsibility. However these are extraordinary circumstances.
In the late '90s the Clinton administration decided more people needed to be homeowners, in PR blurbs there should be more minority homeowners. The Clinton administration apparently believed that rather than paying $z per month in rent, it was always better to rent cash equal to 175 x $z for the right to hold a title on a home and do your own maintenance. As with any government intervention in a market, the idea might have had merits but the outcome was doomed for failure. The government either lacks the foresight or willpower to corral the downline effects of their policies. The unfortunate fact is Clinton and Co. chose to tinker with a market that represents consumer's greatest expense/risk, proving vastly more disasterous than the typical government escapade.
The Bush administration certainly went along with what was in place. Either through ignorance or (more likely) opting to inflate a second bubble as an existing one was bursting (dot.com) they ramped up the policies over the years, turning an inflating bubble into a veritable Ponzi scheme. The Ponzi scheme boasted "job creation" and wage increases in segments related to the bubble - lending, construction, investment banking, real estate agents etc. -- but nowhere else, really -- overemploying these industries relative to a non-bubble environment. Basically, fake job creation and wage increases.
In the macro environment, those buyers from 2002-2007 (depending on geography) didn't have a chance. Sure, on an individual level each made his/her own choice. But at the macro level this demographic was being set up for fiscal destruction. EVERY outlet pushed to notion of "acquire massive debt, it's good!!". Lendors, NAR, newspapers, tv shows, Wall Street -- even the Fed decided to routinely voice their opinion on the merits of buying a home (crescendo reached with Greenspan's surreal "Housing market is stable" circa 2006). And to a degree, it was true at the time. The renting consumer faced MASSIVE inflation over this era with housing skyrocketing... though the gov hid those figures as apparently they equally weight increases in the price of flour ($10/month) and housing ($1500/month) when calculating CPI. In the face of this inflation the renter who saved money in a conservative manner (savings acct, CDs, etc) was losing money year over year. The government's made sure interest rates were far below what consumer inflation cost the saving public.
In essence the government intervened, perhaps conspired, in a relative efficient market and set the stage for this mess. Lendors, builders and agents took advantage of the government's inept plan and profited HEAVILY during the era (either via direct wage inflation or massive job creation in these sectors) -- and no, I don't fault these parties in this mess. They did exactly what the laws of economics suggest they would do, especially given the government absorbed much of the risk associated with these practices.
As so we're left with the aftermath. The government effectively created the greatest Ponzi scheme in the history of mankind with several industries assisting. The Fed's policies saddled the economy with untold trillions of dollars of excess debt and unseen levels of personal debt in less than a decade -- ineffecient debt no less. Not debt to create infrastructure, technology or factories (job creating), but rather debt to finance excess homes, marble counters and unneeded strip malls. An inevitable deflationary environment is in place and the government is spending future dollars like crazy trying to stop the inevitable. The overextension of credit into real estate construction over this era, rather than funding long-term job-creating ventures, has crippled the employment picture for the foreseeable future. State and local government budgeted based on bubble revenue and are now paying dearly to deflate -- more damage to infrustructure. It's a bleak picture out there.
Not to worry though. The Obama administration is fixing the mayhem caused by years of easy credit and artificially low interest rates by financing our future to provide easy credit and even lower artificially low interest rates. Wait... that can't be right. Uh oh...
Back to the topic...
On a micro/individual level the answer of "walk away: right or wrong?" isn't easy to answer. On the macro level however, years of policies were created and nurtured creating a remarkable Ponzi scheme that will be discussed for decades, if not longer. To tell the bottom rung of the pyramid, the collective 2002-2007 buyers, "yeah, umm, that Ponzi scheme we crafted and maintained finally blew up, as was inevitable. But that's your signature so you gotta pay for the tab. Please ignore OUR lack of moral and ethical restraint this past decade -- we really need you to feel morally obligated to cover this mess. It's important to keep the future debt process humming along. PS, we obliterated the economy in the process - best of luck out there". That broad-based request, I can't agree with. Too many signed on the dotted line not realizing the government and it's cohorts had already ensured it would be the worst decision they'd ever make.
Fortunately for many, no one remembered to plug the "non-recourse" escape hatch.
If people can't make their payments, then foreclosure may be inevitable. If a guy tries his best, but loses his job, and then tries his best to find another one, but simply can't, and he tries talking to his lender and tries making partial payments from what he can scrape together… but his lender won't listen... then foreclosure may happen… and there is no shame in that.
But that's not who I'm complaining about. It the folks who can make their payments but who choose not to, because it is difficult, inconvenient, or without glamour... and it is the people who ask for others to eat their losses, but then sabotage the process, in order to prolong their ability to stay rent-free... that are acting even worse than the politicians you describe, who act surprised when they get more of the type of behavior they subsidize.
Two couples buy a home in 2005 for $600K. They use some exotic financing to do so, small payments years 1-4 jumping up at start of year 5.
a) Joe UpperMiddleClass makes $110K per year
b) Gary MiddleClass makes $70K per year.
(pardon the sexist nature of my male homeowners)
It's now 2009, mortgages are resetting and 2nds are being added to monthly payments. PITI plus maintenance is now $4300/month. In the meantime the present value of the homes have plummeted to $350K. Comp homes across the street are renting for $2K/month.
We can both agree Gary MiddleClass is S.O.L. He has no prayer of covering the new payments, can't possibly refinance, banks should have known he never would have a chance and he walks away. No ethical issues here - it's simply not possible for Gary. He'll take a few years of a credit score hit but gets to dump a $250K deadweight of underwater debt that's been hanging around his neck and rent the place across the street at sub-50% the monthly cost he would have been facing. He's in the clear.
It's Joe that's the more controversial. Joe *can* make the payments, albeit it'll eat up about 1/2 his takehome. But he could do it. He intended to do so when he bought the house. If he walked and rented, he'd be able to sock away significant cash monthly and, after four years when his credit largely cleared, put a huge down on the same house then priced at $400K. Or he can honor his obligation.
You seem to lean towards the latter, and I can understand why.
In my opinion, Joe got blindsided. He did it right, didn't overextend himself. Pushed his finances near the breaking point, but kept it within limits. Joe's taken a beating because he didn't realize the home he bought for $600K should have been available for $375K. He overpaid by $225,000 and over the life of his mortgage he'll pay an extra $750K in mortgage payments versus an accurately priced home.
Joe thought he was buying into the "right market". He makes $110K, can afford a $600K home, and here's what $600K gets you. He didn't realize macroeconomic forces artificially injected into the market by the government and lending industry had grossly overinflated the home he was buying. Joe wasn't told those folks he was bidding against for his home were flippers and liar loan bearers who couldn't possibly afford the home in the long term. He wasn't told the three previous years of 20% appreciation the home had seen was a mirage created by these same forces. He wasn't advised that every aspect of the industry, at every level, had created a false demand for the homes on his block leading him to a pay an 80% premium for that home. And he certainly didn't realize he was headed for 12-15 years of underwater living because of the greed, arrogance and ineptitude of the government and affiliated sectors.
Joe grossly overpaid for a home because every aspect of the industry took a 5 to 7 year hiatus from operating as it should have. Lust for origination fees replaced need for repayment ability. Government guarantees on zero down replaced mortgages accurately reflecting risk. Negative amortization replaced need to cover real PITI. Given the circumstances if Joe opts to honor his inflated debt because he signed and initialed a few pages, I'd tip my hat to him. Really, I hold great respect for those taking it on the chin because they said they would do so. But if he opts to abandon ship and put himself and his family in a better financial position for the future -- I'm not going to judge him. He was setup for a beatdown but everyone, including the government, advised him otherwise.
maybe mr jone lives in non Deficiency Judgment state suceh as california, arizona and florida, where as state law prevent banks from going after dead beat debtors assets!
maybe thats the reason!
Your home is not a commodity! Weather the value of your home goes up or down your home is your home. There are lots of people who are upside down on the market value of their home. So what. They will stay because they purchased the property for their home. "Do Not Hate the Players Hate the Game." Ice T
Great Post... Lots of heat
In the Joe vs Gary example, Joe's debt to income back in those days would have been around 41% (if using i/o as the qualifying pmt). And now that it changes to p&i the dti would jump to 55%, which is pushing it, but still doable.
Gary would have had a 65% dti back then and the only way to qualify would have been to inflate his income. There were LO's out there doing it alright, but Gary still had to know that even before the payment adjusted to p&i, there's no way that situation would have been sustainable.
But bygones… some people were irresponsible. Some people were offered a chance to have at the American dream and couldn’t resist. I don’t blame them for having at it, but I don’t feel bad for them either, since as you put it, they only “rented an option to buy later” and they will end up suffering with marred credit for years to come.
But in the interests of not splitting hairs... the gist of our point of departure is what about the folks, like Joe, who can still afford it but just don't want to because it now looks like a bad investment?
I respectfully have to disagree here that everybody let Joe down. Joe let himself down. What about the people who didn't take the government and the banking system up on their tempting but inane offer? How about those folks who could have easily qualified for up to $1m in loans but didn't because they just weren't sure they could afford it long term… or just didn’t like the “value” they would be getting at the $600k tier?
Is it ok for our kids to make a trade, and then demand an exchange back because the item they got seemed greener from the other side of the fence?
What do we say to the folks who exercised restraint back then, but who do not qualify for stated income now, even though prices and rates are lower, because other people irresponsibly squandered this great resource? The stated income loan is not for liars. It is for the hardest working class of people who drive America forward… the small business people, who work twice as hard to make Joe's top line salary, and who end up with maybe 10% more than Gary after all the taxes and overhead are paid.
The ironic thing is it is not such a bad investment to keep paying that mortgage. In 10 years there’s a good chance we’ll see higher prices then anything we’ve ever seen yet… through rampant inflation and a population set to double in the next 45 years. Everybody and their brother want to live where Joe does. He just needs to keep his job until then.
Meantime, if Joe had put down 20%, do you think he would even be thinking about walking away?
And what about the impact Joe has on his neighbor Mark, who did put down 20%?
But what I would like add, which I have noted in other posts, is that these types of conversations create such a healthy and stimulating forum. And it is precisely these types of debates that will attract others to provide their input - thus we all benefit from a multitude of varying opinions, thoughts, and conjectures.
What I really appreciated about this particular post is that you obviously have 2 differing opinions, but both argued objectively, unemotionally, and intelligently. Imagine if we could debate Abortion, Israel/Palestine, Trade, Capital Punishment, etc. in a similar manner.
Kudos to the two of you; and for positively influencing this forum through thoughtful debate.
Yeah, Trulia is an exceptional forum, in that it fosters the understanding of alternative perspectives as much as it gives a soapbox. I might not agree with everything folks present, but I sure appreciate contributors like Steve, for their mindful responses, informed opinion, and respectful attitude.
By taking the best of what each other offers up, we each get better for it. Better to be happy than right anyway.
Now Steve, what other topics should we endeavor to cover next? Then again, maybe not today, I'm still on my first cup of joe too.
: )
All right I enjoyed it! Steve and yourself are very good at this, hope you discuss more.
Your must Trusted Advisor Guy about any stuff that might be discussed or debated in the Community ever,
Dunes LOL
Just wondering, Dunes
I take your comment as a huge compliment though, and will try to get back into the flow as I get caught up.
Some other things I've been working on lately include revamping my website to strengthen the back end, enhancing SEO, and improving the site’s property search functionality and features… so when I've not been busy... I've been, well... busy... lol!
Also I seem to have reached plateau where, although I’m happily getting back nearly all of what I put in… the moment I stop putting it, the getting back part stops. So I’ve also been focusing on ways to leverage systems to work smarter.
Seems I need to clone myself… or better yet… take a vacation.
I've been focusing on ways to leverage systems so I look smarter!
See ya around