Walk on Existing Mortgage??

[onewhippedpuppy]

Originally Posted by m21sniper

My solution would be to not be a total moron and buy a house you KNOW is priced about 100% or more above it's real value.

But you kids wanted the Kali sunshine, so abandoned all manner of good sense when buying your $700,000 econo-homes.

Suddenly those of us in the flyover states don't look so stupid after all. Besides being a bit of a buyers market, our real estate hasn't suffered.

[jbryant]

Rick Lee-

Things might not be as bad here as you think...the market here is better than the rest of the Country right now. Commercial leasing is rising...the Stimulus Bill and all people planning on feeding off it are moving into town...So you could probably re-rent it quickly.

[the]

Originally Posted by onewhippedpuppy

The bank is absolutely NOT in the business of appraisal. The independent appraisal that the bank requires prior to closing is typically the only information a bank sees. The appraisal typically takes the home, location, and condition into account and provides a number based on comps and current market conditions. That's fine when a single house is over-priced, but what if it's the entire market? How is a mortgage officer who never sees a house in person qualified to judge a house as over/under valued? Asking banks to assess the "true" value of a home is asking them to take on an entirely new skill set. You could make a case that appraisers need to take the the bubble effect into account, but that opens the process to a LOT of interpretation. Who determines what yearly appreciation in SoCal should be?

I don't argue with you on putting money down, but that's really not relevant to this conversation. The thread poster is upside down on his loan. Had he put 20% down he would still be upside down on his loan. The question and business case would remain the same. He's considering walking on his loan not because he can't afford it, but because that's what the numbers tell him to do.

In a non-recourse situation (i.e., where the bank can only look to the collateral in the event of a default), the value of the collateral is everything. What else is there? That's their ONLY remedy, they better be darn sure they know what the value of their remedy is, if not, they have no meaningful way to price risk. Perhaps banks, like you, did believe their business did not involve making realistic evaluations of their collateral. Look what it got them. Banks ARE in the business value of appraising their collateral, though, whether they knew it or not. Those that did not realize that was their business will go out of business.

Putting money down is highly relevant. In any given situation, someone who put down 20 or 30% is far more likely to not walk away from that. He has a sizeable cash investment that he would be tossing away, immediately, when he walks. He has to analyze whether that is worth it, or whether he should stay in the house and try to wait for it to rise in value again, so he doesn't realize his loss.

But when the homeowner put no money down, and has no skin in the game, it makes it much easier to walk.

[onewhippedpuppy]

Originally Posted by tc-sacto

Scenario
House Value $250,000 (assuming neighbors house short sells...Listed at $250,000, most recent short sale closed for $299,000)
Mortgage $460,000
underwater $210,000

No mention of money down, so we can't evaluate that. Also no mention of whether $460k is the original mortgage principal or current principal after down payment and monthly payments. But lets assume $460k is the original mortgage amount with $0 down. If he had put 30% down that would amount to a $138k down payment and the principal would be $322k. So assuming that $250k is the "real" value, he's still $72k upside down. With the more common 20% down the down payment would be $92k, $118k upside down.

Obviously walking on $138k or $92k would be painful, but I'm sure you could still justify walking with a "good money after bad" argument.

It's easy to blast the banks for not assessing a property's "true" value, but you would have needed a psychic for that. Remember that we all have the benefit of hindsight, I don't think most saw the bottom dropping out of the market this quickly or to this degree.

[Seahawk]

There are a thousand permutations in a contract, in life. How you deal with them gets to the heart of the person.

When I sign a contract, I uphold my end. I nearly lost my farm the year after I bought it because the person I entered into a rent to buy contract (done by my lawyer and signed by all parties) on another property I owned, walked.

I then got orders out of state (unexpected, needs of the Navy) and had to eat the commute and lodging.

My wife and I did all the right things, sold the '83 SC, scrimped and made it through.

But walk of my own volition? It is not in me, or anyone I'd want to know.

You guys can dress the pig in untold guises, I'm not paying for the dry cleaning.

[m21sniper]

Originally Posted by onewhippedpuppy

It's easy to blast the banks for not assessing a property's "true" value, but you would have needed a psychic for that. Remember that we all have the benefit of hindsight, I don't think most saw the bottom dropping out of the market ...to this degree.

I did, as i say, when houses in the ghetto here more than doubled in value in about 4-5 years, i knew BAD things were going to happen...

[Dottore]

Originally Posted by Seahawk

There are a thousand permutations in a contract, in life. How you deal with them gets to the heart of the person.

I agree with this to a point, and certainly respect your views on this board. You strike me as someone with a pretty clear moral compass.

But each person is different—as are the circumstances of each contract and the manner in which that contract was negotiated and agreed. A lifetime in the law has taught me that law and justice are two different things and that the law is frequently an ass. I can certainly visualize scenarios where walking away from some serious negative equity is a choice I would make. I certainly wouldn't do that lightly—but I can imagine such a scenario nevertheless.

My field was corporate finance and I spent many years working with banks all over the world. Strangely (or perhaps not) I have very little respect or sympathy for the banking profession today. When it came down to the short strokes I have never, ever seen a bank make a decision by reference to moral principles. Never.

[the]

Originally Posted by onewhippedpuppy

It's easy to blast the banks for not assessing a property's "true" value, but you would have needed a psychic for that. Remember that we all have the benefit of hindsight, I don't think most saw the bottom dropping out of the market this quickly or to this degree.

Need a psychic, or too bad they simply didn't read the More Bad RE News thread through 2006 and 2007.

Many of us saw this coming, it was no surprise at all, and banks lending out billions of dollars should have seen it, too. It wasn't hard at all to see. There were so many things that made it easy. Just a few: (1) It happened before. (2) You can't have an asset like real estate, which pokes along at a relatively stable, slow appreciation rate, suddenly double or triple in value in a few years, and expect that to hold. As was said in the More Bad RE News thread, over and over again in real time through 2006 and 2007, only a total idiot/clueless/naive person could think that.

[onewhippedpuppy]

Originally Posted by the

Need a psychic, or too bad they simply didn't read the More Bad RE News thread through 2006 and 2007.

Many of us saw this coming, it was no surprise at all, and banks lending out billions of dollars should have seen it, too. It wasn't hard at all to see. There were so many things that made it easy. Just a few: (1) It happened before. (2) You can't have an asset like real estate, which pokes along at a relatively stable, slow appreciation rate, suddenly double or triple in value in a few years, and expect that to hold. As was said in the More Bad RE News thread, over and over again in real time through 2006 and 2007, only a total idiot/clueless/naive person could think that.

So you're saying that the banks could have simply referenced Pelican Parts OT for a precise to the penny value for any real estate? Amazing!

It's one thing to say, "this can't continue". It's quite another to determine a precise property value based not on what it is selling for today, but what it will be worth in an undetermined future recessionary period.

By the way, how does this have anything to do with skipping out on a commitment? What I don't understand is the fact that when the home was purchased, it was obviously worth X dollars. Unless it was bought to flip, why is it suddenly no longer worth X dollars to the homeowner? Simply because houses are now selling for less?

[KFC911]

Originally Posted by Dottore

.... When it came down to the short strokes I have never, ever seen a bank make a decision by reference to moral principles. Never.

Unlike the insurance industry ?

[Seahawk]

Originally Posted by Dottore

I agree with this to a point, and certainly respect your views on this board. You strike me as someone with a pretty clear moral compass.

But each person is different—as are the circumstances of each contract and the manner in which that contract was negotiated and agreed. A lifetime in the law has taught me that law and justice are two different things and that the law is frequently an ass. I can certainly visualize scenarios where walking away from some serious negative equity is a choice I would make. I certainly wouldn't do that lightly—but I can imagine such a scenario nevertheless.

My field was corporate finance and I spent many years working with banks all over the world. Strangely (or perhaps not) I have very little respect or sympathy for the banking profession today. When it came down to the short strokes I have never, ever seen a bank make a decision by reference to moral principles. Never.

Your views are always welcome and respected as well. You are an interesting man, in the best sense.

I share all of your life lessons and some lack of respect for the banking profession today. And the law is indeed frequently an ass. My sister is a DA and I'll pass along our respects

All that said, the nuance of contracts law and the simple terms of a mortgage are completely different animals. Beyond the diligence necessary to make sure the house you are buying is as advertised and meets code, there is little to a mortgage contract terms that requires more than rudimentary math.

My favorite professor at Cal had a term, "ditch digging": Read the terms, do the math, dig the ditch. His point was that most transactions, most contracts always start with a estimate on how much the ditch was going to cost and then they work from there. Focus on the ditch first, the basics.

Here is the rub I have with the OP: he, like many others, were gambling, were willing participants in financial schemes they hoped was mortgage upsidasium...and they thought that they would win.

I simply cannot, if he can afford to stay and live where he is, brook any bravo sierra from him, anymore than a Casino in Vegas would if he had lost at cards. Bankruptcy laws never intended to put a safety net under his sorry ass.

I have owned a number of businesses and have engaged in a lot of contracts: The only time I walk is to chase and punish the SOBs after they didn't own up to their part of the bargain, didn't dig the ditch. I have only lost once. My fault.


Sorry for the ramble.

[Jim Richards]

How does the IRS treat this jingle mail? It seems that a loss eaten by the bank when the homeowner mails in his keys is a gain for the defaulter.

[Dueller]

Paul, while I certainly understand your point (and share your morality sentiments), would you not agree that some of our most "successful" entrepreneurs routinely walk away from sour business deals rather than honoring their original commitment? Many of these folks use bankruptcy and default as nothing more than a business tool. Trump comes to mind.

That being said, more than one of successful business people I personally know have gone broke, lost fortunes but always seem to land on their feet and come back even wealthier.

[Rick Lee]

Originally Posted by Jim Richards

How does the IRS treat this jingle mail? It seems that a loss eaten by the bank when the homeowner mails in his keys is a gain for the defaulter.

That used to be the case and the defaulter got a 1099 for the amount forgiven. Imagine getting one of those for in the six figures and not knowing it was coming. I think that law was changed last year though, so that loan mods and deeds in lieu of, etc. were no longer considered taxable income.

[the]

Originally Posted by onewhippedpuppy

So you're saying that the banks could have simply referenced Pelican Parts OT for a precise to the penny value for any real estate? Amazing!

Pretty much, although it didn't need to be called to the penny in order to avoid this disaster.

It was called in 2006 that RE in the bubble areas would go down in value at least 50%. Charts were posted, showing almost exactly how much this would fall (it is reverting to the mean, i.e., correcting back to where real estate appreciation tracks the general rate of inflation), and when it would fall. They turned out to be almost exactly correct.

Also, you don't need to know the value for any real estate. Only the bubble areas. The other stuff doesn't matter much. I read yesterday that this whole crisis was caused by the bubble in only 40 counties throughout the US - those bubbly ones we all talked about in 2006-07.

If the banks would have seen that information, and opened their eyes, all of this would have been averted. It really didn't take a genius to figure it out. What the banks did was a massive failure, based mostly on short term greed, which clouds judgment.

[Jim Richards]

Originally Posted by Rick Lee

That used to be the case and the defaulter got a 1099 for the amount forgiven. Imagine getting one of those for in the six figures and not knowing it was coming. I think that law was changed last year though, so that loan mods and deeds in lieu of, etc. were no longer considered taxable income.

I guess this is the change to the tax code...

http://www.irs.gov/individuals/article/0,,id=179414,00.html

also this...

http://www.irs.gov/pub/irs-pdf/p4681.pdf

If I'm reading the irs docs correctly, abandonments (what the OP is talking about doing) have tax different treatment than simply being foreclosed on.

[jyl]

I have no info on anyone's individual situation. But I wanted to remind us all that, in the long-ago days of 2004-2005, in California, 90% of everything the average person heard, read and saw was telling them if they didn't buy at the prices then, they would never be able to own a home. They would be a permanent renter, a lifelong loser, forever shut out from the American Dream. Lots of apparently authoritative people said this, the media and all manner of books said this. Meanwhile prices were steadily moving out of reach.

There was tremendous pressure to stretch and buy a house, while one still could.

Yes, some of those people were gamblers, schemers, and speculators. But others were simply ordinary people (who didn't read the "More Bad RE News" thread closely enough) who were trying to do what they thought they had to do. They were wrong, and they will lose a lot of money, but I wouldn't necessarily tar them with the "gambler" brush.

Originally Posted by Seahawk

he, like many others, were gambling, were willing participants in financial schemes they hoped was mortgage upsidasium...and they thought that they would win

[the]

Originally Posted by jyl

Yes, some of those people were gamblers, schemers, and speculators. But others were simply ordinary people (who didn't read the "More Bad RE News" thread closely enough) who were trying to do what they thought they had to do. They were wrong, and they will lose a lot of money, but I wouldn't necessarily tar them with the "gambler" brush.

If they were in a bubble area, I'd tar them with the "stupid" brush, though.

[the]

How anyone could have thought, in 2006 (and earlier) when this graph was posted, that the practically straight up appreciation line could EVER be sustained, is nuts. Anyone who has lived at all for a few decades and paid even loose attention to real estate could see what was going to happen.

Like many said in 06, it's a simple bell curve, which will revert to the mean (i.e., the green inflation line).

Anyone with an ounce of common sense could see that. It was expressly called in 2006, and the chart has followed precisely as planned. There is no other way it could go. What goes up like that bubble MUST come down the other side, simple bell chart.

Anyone who looked at this chart in 2005/06 and didn't agree there was a major bubble was, simply put, extremely ignorant.

[Seahawk]

Originally Posted by Dueller

Paul, while I certainly understand your point (and share your morality sentiments), would you not agree that some of our most "successful" entrepreneurs routinely walk away from sour business deals rather than honoring their original commitment? Many of these folks use bankruptcy and default as nothing more than a business tool. Trump comes to mind.

That being said, more than one of successful business people I personally know have gone broke, lost fortunes but always seem to land on their feet and come back even wealthier.

Again, business contracts are different from a mortgage contracts...until now. Business contracts are the essence of competition; mortgages, at least in the old days, were based on cooperation, a willingness to serve the contract by both parties...weapons of mutual success.

It is quite unfortunate, in my mind, that the ethos of the art of the deal has sunk into the most basic contract, a house...a house has never been an investment leader, rather a small part of the portfolio. That a house got elevated in the investment matrix speaks volumes about financial amateurs. Again, dig the ditch first, based on time honored investment principles.

Believe me, I am no Pollyanna in finance and business...but I think we are into Apples and Oranges where the OP was headed.

Dueller, you and I can seek advantage on each other in a business deal, but if either of us defaults, at least in my world, that is a death knell for the loser in terms of future relationships.

Reputation should matter, it does to me.

Not arguing...you are another poster I respect.