Charts and graphs are all well and good, but once in a while it’s good to look at some of the more personal effects of the housing bubble. Today let’s take a look at a possible scenario that some hopeful home sellers today might be facing. Next Friday, we’ll turn our attention to home buyers. (Update: Make that Monday)
Let’s consider a hypothetical couple—we’ll call them Joe and Linda. The year is 2005, and the mid-20s pair buy a quaint little 2-bedroom, 1-bathroom, 1,100 square foot Victorian charmer in Snohomish for $245,000. A perfect home for the young family of two.
Not wanting to blow their entire savings on a down payment, they finance the home in the same way many others did during the bubble, with an 80/20 pair of loans. They sign up for a $196,000 30-year adjustable rate mortgage (fixed through 2010) and a $49,000 15-year second with a balloon payment in 2020. All together, their monthly principal plus interest payment comes in at around $1,400—an obligation they can afford on Joe’s professional salary.
For the past four years, they have been dutifully paying their mortgage on time every month, fixing up the house, and generally enjoying life. Of course, they knew that the days of a fixed $1,400 payment were numbered, but this is just a “starter home” anyway, and if for some reason they don’t move within five years, their loan officer assured them that it would be no problem to refinance.
Now it’s 2009, Joe and Linda are nearly 30, and with a young son, another on the way, and their fixed rate set to expire in just over a year, they a have naturally begun to think about moving up the “property ladder.” Unfortunately, that’s where the problems begin.
Joe and Linda start to look around at recent comparable sales in their neighborhood, and they realize that best case, they might be able to find a buyer that would pay $250,000 for their home. After agent fees and excise taxes, such a sale would leave them with about $228,000.
Since Joe and Linda still owe over $230,000 on their mortgages, they realize that selling their home will actually cost them a few thousand dollars—or more, if they can’t find a buyer at $250,000.
At this point, Joe and Linda could refinance into a new 30-year fixed-rate mortgage and wait for better times to try to sell, or they could bite the bullet, sell the home at a loss, and take their pick of a growing supply of two and three bedroom homes for rent in the general area for as little as $900 a month.
So what should they do? If I knew a couple like Joe and Linda, I would recommend they sit down together and decide whether they can be happy living in their home for another ten years.
If the answer is no, and if they can afford to, they should probably do whatever it takes to sell ASAP. Sure, they may have to come to the table with a few thousand dollars, but when they find a decent place to rent for a few years while the market continues to cool, they will easily make the money back in monthly savings, and they will avoid taking an even larger loss down the road.
If the answer is yes, then by all means, refinance into a nice safe fixed-rate loan and get comfortable. Thankfully, Joe’s job has not been in serious jeopardy, so getting a new loan should be relatively straightforward.
The reality of today’s housing market is that we are not going to see a quick rebound. Things are going to continue to get worse before they get better, and when we do finally hit the bottom, the market will likely languish there for some time. If you think “waiting the market out” means trying again in 2010, you are going to be in for an unpleasant surprise, especially for the more rural markets further away from the “job centers.”
So what advice would you give to Joe and Linda? What’s the most realistic and prudent way for a homeowner to make the best of a situation like this?
Shaq » Jan 30, 2009 at 9:41 am
Offhand, your hypothetical seems awfully generous.
DrShort » Jan 30, 2009 at 9:43 am
For most people, the only way to move up to a nicer house these days is to sell and rent. Bridge loans are hard to find and homes take too long to sell. The logistics of selling one house and buying another without temporary housing in between is tough.
Peckhammer » Jan 30, 2009 at 9:46 am
We have been wrestling with the same question, although my circumstances are way different than the couple you described. We own our condo outright, and live for $400/month (dues, taxes, insurace and utilities).
We’ve recently become interested in a particular condo, but to afford that place we’d either have to sell our current unit, or take on a significant increase in monthly expense and hold our current place as a rental.
The advice I was given, by someone who posts to this blog, was similar to your recommention of deciding whether we can be happy living in our current home. If we answer “no” to that question, they recommended that we sell immediately, and then try to get the new place at a reduced cost. I guess that implies the possibility of renting until the new place reaches a price point that we have decided represents “value.”
AMS » Jan 30, 2009 at 9:55 am
Since you have no underlying debt, your situation is much different than the one presented here. You can make a lateral move in the market. In other words, while your place might have gone down in value, so did every other place on average. You can sell at anytime, and you don’t need to find excess cash to do so.
AMS » Jan 30, 2009 at 10:04 am
Oh, and I think I should say that from an investment standpoint, you are better off selling at the peak, renting until the market is favorable to produce the minimum return you seek, and entering at that point.
For example, if the market bottoms out, but is going to only go up very, very slowly, then you would still want to rent seeking better opportunities for your cash, such as treasuries (in the case that the housing market forecast is to go up slower than treasuries–treasuries may pay little, but if housing pays less, then treasuries are a better investment).
Some people think that Seattle real estate is actually increasing. If you are one of these people, then you may want to stay invested in your condo.
In the end, I sell assets that lose money in favor of those that make money, but my crystal ball is a little hazy at times.
Jillayne » Jan 30, 2009 at 10:05 am
1) Was the 1400 their minimum monthly payment and have they been unfortunately growing their principal balance each month?
2) When the payment adjusts, what will their new payment be and could they afford that adjusted rate when rates start to go up?
3) Could they refi into a 30 year fixed, paying off the existing first AND second, move out (and rent a bigger place) and put a renter in there for enough to cover the new combined payment?
4) Would they be interested in using some of their cash on hand to build an addition on to the house to accomodate their growing family?
5) Does Linda want to work to contribute to the household income? *Could* Linda contribute in this way if Joe were to find himself suddenly unemployed?
6) What other tax deductions do they have besides the interest on their mortgage payment?
Groundhogday » Jan 30, 2009 at 10:10 am
Here is the scenario some of our friends are facing:
Young couple that purchased small house in 2006/2007 for $250k (Pullman, WA). Now the job of the primary breadwinner is seriously threatened (potential 20% state budget cut), and will be insecure for the next several years even if not cut this summer.
You could rent an equivalent house for $900/mo (maybe less as rents are falling). Do you aggressively price the house to sell in early spring and take a loss or just wait for the job cuts to be announced (at which point the housing market is likely to be much worse)?
softwarengineer » Jan 30, 2009 at 10:11 am
I WOULD HAVE SAID STAY PUT FOR ANOTHER 10+ YEARS
I’ve changed my mind today, the answer today is take this hypothetical small loss [I assume they can afford it or qualify for a small bank loan, Hades, hand the keys back to the bank if you have to] and get back to cheap rent again.
Freddie has just announced today that foreclosed homes will now be turned into rentals [Fannie got caught today trying to shred all their embarrassing fraud papers]….if this doesn’t glut the market with rentals, nothing will. I see rents clearly going down with home prices now…..especially if you can land those cheap Freddie rentals.
See the proof:
http://finance.yahoo.com/news/Freddie-Mac-to-rent-apf-14209112.html
AMS » Jan 30, 2009 at 10:15 am
1) Was the 1400 their minimum monthly payment and have they been unfortunately growing their principal balance each month?
Think in terms of positive leverage versus negative leverage.
2) When the payment adjusts, what will their new payment be and could they afford that adjusted rate when rates start to go up?
This is a cash flow argument. Of course the owner must have sufficient cash flow to keep the property maintained.
3) Could they refi into a 30 year fixed, paying off the existing first AND second, move out (and rent a bigger place) and put a renter in there for enough to cover the new combined payment?
Refinancing a bad investment does not solve the underlying problem. This is an attempt to finance your way out of debt–it does not work when the underlying fundamentals are unfavorable.
4) Would they be interested in using some of their cash on hand to build an addition on to the house to accomodate their growing family?
Further investment in a bad investment just makes matters worse.
5) Does Linda want to work to contribute to the household income? *Could* Linda contribute in this way if Joe were to find himself suddenly unemployed?
Increasing income does not make any expense better.
6) What other tax deductions do they have besides the interest on their mortgage payment?
The tax benefits from renting are always better than buying. Landlords are often in a higher tax bracket, so the total tax benefit is larger to start with. Landlords can write off all expenses, including regular maintenance, and that is not the case with owner occupied homes. Finally the tax benefits are passed to the renters in the form of reduced rent. There is no way you can convince me that if we have essentially equal units and you are not passing any tax benefit to your tenants that you will be able to compete with my rental rates. In other words, the market will push you to share the tax benefits. I am sure Tim has also discussed the standard deduction that is lost when you take the so-called tax benefits of home ownership.
AMS » Jan 30, 2009 at 10:26 am
I know a guy who purchased GM stock near the peak. His cost was near $70 per share. The total investment was a little over $200,000.
When it was in the $50s, he decided that he would sell in the $60s.
When it was in the $40s, he decided that he would sell in the $50s.
When it was in the $30s, he decided that he would sell around $45.
He finally sold near $25, losing about $140,000.
My advice: Never chase a market down. You need to make sure the rate you reduce your expected selling price in a down market is greater than the rate the market is going down. And if your stating expectation is too high, the rate at which your reduce prices had better be much greater than the decline in the market.
Scotsman » Jan 30, 2009 at 10:27 am
Take the loss and “buy” the freedom to go with whatever the market brings our way. Put the savings in the bank, and enjoy the freedom from stress as we go forward. Buy what you want, at a price you never thought you’d see, in 4-7 years.
Scotsman » Jan 30, 2009 at 10:28 am
Should I Stay Or Should I Go?
http://www.payorgo.com/
Ben » Jan 30, 2009 at 11:06 am
This is a very interesting post because it is very similar to my own personal position, except I live in Redmond and I bought much earlier, so I have a while to go before I need to bring money to the table to get rid of my house.
I still want to watch case-shiller for another 6 months before I make up my mind on strategy. If the curve looks like y=-x, then I will have to think harder about renting. If the curve looks like y=1/x, then it will tell me that the house I want will be as cheap as I want in short order anyway.
I find it interesting that Tim did not mention the foreclosure path. This is an option that some people take – live for some months without paying anything (which builds a nice sum of cash) and then rent afterwards. This assumes that your next landlord is not picky about credit, but in this environment that seems likely.
I would never go the foreclosure route unless I had no income (and I would not throw my savings or 401k at the problem first). But some people have a different bar for this.
The Tim » Jan 30, 2009 at 11:11 am
I just didn’t want to get into the whole ethics discussion again, which is a separate issue.
DrShort » Jan 30, 2009 at 11:51 am
Slightly off topic, but an interesting preview of January activity…
http://blog.seattlepi.nwsource.com/realestate/archives/160808.asp
Sniglet » Jan 30, 2009 at 12:11 pm
The answer is very simple: if losing 50% in the value of your home (from current prices) in the next 5 years would be a disaster, then you should get out now. However, if it wouldn’t constitute any particular hardship to you to have the value of your home drop 50%, then stay.
patient » Jan 30, 2009 at 12:12 pm
I don’t put much weight on anything written on the PI blog but if it turns out correct not only Ardell will be wrong with her bottom calling of sales volume (Nov 08) but I also think our own The Tim made a statement in that direction recently. And less surprisingly John L Scott’s predicition of a pent-up demand being released in January will be way off.
deejayoh » Jan 30, 2009 at 12:22 pm
Um, yeah. 80% off. King Count SFH median is going to $100k. right back where it was in 1985
Not
BanteringBear » Jan 30, 2009 at 12:28 pm
Your post is a wonderful example of chasing the market down. Most people don’t have the capacity to think ahead of the market- something that is required in order to sell a house right now- or anything for that matter.
I am liquidating inventory (not houses), selling it at $.35 on the wholesale dollar. While I’d love to get more, I’m simply adapting to the current marketplace. You’ve got to be aggressive in order to move anything right now.
For laughs, I recommend perusing craigslist for used cars, trucks, boats, and motorcycles. Some of my favorite are full size trucks with monster lift kits, etc., trying to garner $50k. These people don’t understand “sunk costs”. Denial and ignorance is the name of the game for most. It gets them nowhere.
patient » Jan 30, 2009 at 12:29 pm
“Um, yeah. 80% off. King Count SFH median is going to $100k. right back where it was in 1985″
You could theoretically maintain the current median with a 50% loss in home values.
Joel » Jan 30, 2009 at 12:31 pm
The whole hypothetical situation is ludicrous because it hinges on the houseowners honestly valuing their house against recent comps and taking a cautious stance regarding near future house values. Anybody that thinks like that has already decided to sell and rent. I actually know someone who did just that even though they bought way way earlier.
kfhoz » Jan 30, 2009 at 12:33 pm
Because the hypothetical couple do not have significant equity in the house, I think they should get out now and go rent. Sitting tight for 10 years is what I would tell them only if they had big equity.
People who do have major equity might consider other risks and remember that weird stuff happens. We believe that the housing market is going to continue to plummet, and we think prices may go back to classic 3x incomes, and prices may dip below that for a while in an over correction. But it might not. WWIII might happen and change everything.
Other strange things happen. If the rest of the wheels fall off the economy, it might be good to be in a house. I know someone who lost his job and is “renting” for free because the bank is taking, so far, 11 months with no payments, to foreclose on his house.
I know one of the Europeans who put their money in a bank with good interest rates and lost 75% of it. That was a British guy who was getting 6% on a CD in Iceland. To Ben who said they would not raid their 401k to pay for a house, I ask, what makes you think that 401k money is safe? My 401k is now in money market funds, but they are not FDIC and I think that an even bigger breakdown in the economy could kill those.
If I had minimal equity or if I owned a nice big house in a nice area, I would get out or downsize or rent immediately and hope to buy about the same thing back in 3 years at a discount.
My own situation is similar to PHammer’s above, and we plan to tough it out in our little 1-br, 1-ba while saving to upgrade when prices really hit bottom. If anything does not play out like we expect, we can still hunker down in the little house for the rest of our lives. If we both lose our jobs, then we have enough savings so that we can live and even can fix up the little house in many ways that need intense labor, but not much $.
Ardell DellaLoggia » Jan 30, 2009 at 12:34 pm
I wrote an offer for someone at 37% off peak recently, and told them I expected we could get to 50% off peak before we see a rise. I thought that was good news given there are very few properties I can zero in on at 37% under peak :) We were in a restaurant in Kirkland, I think I ruined everyone’s appetite.
Ray Pepper » Jan 30, 2009 at 12:35 pm
Ethics aside this is what investor/owners upside down have been doing for months. 6 clients have already done it.
Hold off paying Mtg for 90 days. Submit current ability to pay your Mtg but at a greatly reduced payment. (you must put on your thinking cap here- you cannot show that you are broke but have the ability to pay)
Wells Fargo/ Wachovia on each of my clients have extended the term from 30 years to 40 years and then dropped interest rate from 6.25% to 4.25%. What was once a 2100 PAYMENT HAS BECOME 1653 on my last client.
In the absence of forgiving debt at this time the Lenders are bending over backwards to accomadate the owners. BTW this is owner-occupied and non-owner. Be smart and educate yourself. Refinance at 5% and worry about appraisal and pay 5k in fees. I think not.
For the bashers out there, I’m just the messenger. I do not support nor advise people to hurt their credit. I only want people to know their are options out there and as always FAMILY FIRST.
Joel » Jan 30, 2009 at 12:37 pm
50% off the latest Case-Shiller numbers would only put us 56.8% off the peak. I know, Case-Shiller is for November, but it’s not far off.
Ardell DellaLoggia » Jan 30, 2009 at 12:50 pm
To answer The Tim’s question in the post. They bought a 2/1 “Not wanting to blow their entire savings on a down payment, they finance the home in the same way many others did during the bubble, with an 80/20 pair of loans.”
They should have used the downpayment funds (the example suggests they had it but chose not to use it as downpayment) to add a bedroom and/or at least a 1/2 or 3/4 bath. If you buy a 2/1, pay attention to ease and cost of adding on. I have had clients buy a 2/1 and add a master suite (one story rambler) leaving them with a 3/2. It doesn’t have to be a fancy master bath. Lowest cost is good enough when expanding a 2/1 starter home.
Then they really COULD decide whether to sell or stay for 10 years. The return on an addition of a bedroom ,making it 3 vs. 2, is much higher than adding a 4th to a 3. Especially if that 3rd is a large master bedroom. The total cost of adding a large bedroom is usually not much different than adding a small bedroom.
All too often people spend too much money making a 2/1 prettier instead of bigger. ” fixing up the house, and generally enjoying life.” New kitchen instead of additional bedroom? Not a wise move.
So Tim, what happened to that downpayment they had, but didn’t use? Hopefully it’s not in the driveway or left in Hawaii.
AMS » Jan 30, 2009 at 12:58 pm
“Some of my favorite are full size trucks with monster lift kits, etc., trying to garner $50k. ”
LOL! I bet Craigslist is full of them.
I just picked up one of those fliers the other day. My recycle was just picked up, otherwise I would go dig it out. I’ll do my best…
“Unforeseen circumstances force me to sell my beautiful Dodge Pickup”
Turbo Diesel, Quad Cab, 4×4, custom wheels, blah, blah, blah…
Then it says,
“Retail: $52,000
Trade: $48,000
Price: only $41,000″
Sure the truck looked nice and all. But I think having $41,000 in the bank looks nice too.
I showed it to my mother, and she couldn’t even believe it. She didn’t know what value it might have, but she saw the $41,000 price and didn’t know whether to laugh or cry.
Ardell DellaLoggia » Jan 30, 2009 at 12:58 pm
If they sell now and rent and lose their job, they will be kicked out of the rental in 20 days or so.
If they stick it out and lose their job, they will have a roof over their heads for several months, and possibly until they can get a new job. Once they get a new job, they likely can get a forebearance that adds the arrearages to the end of the note, and possibly a loan mod as well.
Going to a rental is not a good idea if you currently own and are afraid of losing your job.
deejayoh » Jan 30, 2009 at 1:02 pm
Huh? 50% off the latest CS number = 166.23 * 50% = 88.11.
That’s May 1998. If you think prices are going back to that level, have a good time waiting
and Sniglet’s typical refrain is 80% off peak – which would be 192.3 * 20%, or and index value of 38.4. The index started in January 1990 at 58.2.
DavidB » Jan 30, 2009 at 1:09 pm
Ardell, was the offer at 37% off peak accepted by the seller? To clarify, were you offering 37% below listing price?
It’s hard to imagine a seller accepting such a large discount at this time. Many still have hopes of getting bubble level sales prices.
nonskanse » Jan 30, 2009 at 1:14 pm
Tim – Typo, 3rd paragraph, 2020 instead of 2010. Had me confused for a minute.
That said, this couple should refi if they can – it will save them money in the long run, or go back to renting after taking the 2k loss on their current place.
The Tim » Jan 30, 2009 at 1:17 pm
Nope, no typo. The 1st has a fixed-rate for five years, that expires in 2010. The 2nd is a 15-year mortgage amortized to 30-years, which requires balloon payment of the remaining balance in 2020.
anony » Jan 30, 2009 at 1:26 pm
1) If they go to the rental and lose their job, they can take that other job offer in Portland and move with no hit to their credit or ethics.
Someone able to take a job in any of the 50 states they will likely find one much sooner than if they need a job within a 50 mile radius of SnoCo. Particularly if they are in aerospace and all the aerospace companies in Snohomish county are laying off at the time, for example.
2) Some layoffs come in the form of a decision. You can lose your job or move to the plant in (fill in the blank).
3) A landlord can’t kick you out in 20 days just for losing your job. You have to fail to pay the rent first. If you have savings or unemployment or equity you will be able to pay the rent for a lot longer than you will be able to pay a mortgage due to the much lower payment.
Slumlord » Jan 30, 2009 at 1:26 pm
They could always have an insurance fire…
Groundhogday » Jan 30, 2009 at 1:32 pm
Ain’t that the truth! Houses sit vacant for a year while sellers wait for the market to turn around, dropping the price by trivial amounts. Houses are rented out “until the market turns around.” And then a year later the market is much worse.
Meanwhile everyone who had their 401k wiped out is staying all in, waiting for the stock market to “recover.” Remember when the market fell 10% and the media was full of “experts” telling folks not to panic, dollar cost averaging was the way to go, invest for the long run? Now all the suckers are down 40%+… and still investing for the long run.
Ardell DellaLoggia » Jan 30, 2009 at 1:34 pm
DavidB…in play. 37% off peak. 37% off Original List Price, (not current list ). About 32% off Assessed Value. If it’s not accepted, it will be due to terms…not price. Price is agreeable to both parties..
Ardell DellaLoggia » Jan 30, 2009 at 1:36 pm
anony,
All good points, as well.
AMS » Jan 30, 2009 at 1:40 pm
So your contingency plan is to hold out in a home for as long as possible until a couple of days before getting tossed out?
Wonderful.
DavidB » Jan 30, 2009 at 1:41 pm
Ardell, those kind of discounts were unthinkable a year ago! I’m glad to see prices correcting to reasonable levels but it’s a financial blood bath for anyone who bought in the past few years!
I expect we’ll see the median home price plunge this year with discounts like those happening.
deejayoh » Jan 30, 2009 at 1:51 pm
Is that your prediction then?
Ardell DellaLoggia » Jan 30, 2009 at 1:53 pm
DavidB,
These kind of discounts are happening, and will continue to happen more and more, in the Jumbo Loan price ranges. Due primarily to the larger downpayment requirements and fewer and fewer jumbo lenders, especially for condos. High priced condos will likely take the biggest hit.
Not so much with starter homes and median priced homes. I don’t expect the market to be 50% down for all properties or as a median drop.
Ray Pepper » Jan 30, 2009 at 1:56 pm
David its happening already everywhere..I love Slumlord response.
Peckhammer » Jan 30, 2009 at 2:11 pm
“Remember when the market fell 10% and the media was full of “experts†telling folks not to panic, dollar cost averaging was the way to go, invest for the long run? Now all the suckers are down 40%+… and still investing for the long run.”
Sage advice. And I am following it. In fact, I have increased my contributions. I will retire in 10 years, and being able to invest at 1980s prices is a rare opportunity that I don’t want to squander.
boomer » Jan 30, 2009 at 2:14 pm
A refi is out of the question unless they have at least 20% equity in the home — which they don’t so that would require them to put down $50k.
Joel » Jan 30, 2009 at 2:17 pm
166.23 * .5 = 83.115
The peak was 192.30 so an index value of 83.115 would put us at about 43.2% of the peak value which is about 56.8% off the peak.
That refrain sounds really familiar.
deejayoh » Jan 30, 2009 at 2:44 pm
um, yes. I really don’t know math do I?
so it’s not May ‘98. It’s February.
$100 says we’re not there in 5 years
patient » Jan 30, 2009 at 3:04 pm
I haven’t made a prediction in a 5 year time frame but I do predict that home values will have fallen much further than the median 5 years from now.
AMS » Jan 30, 2009 at 3:37 pm
With that mentality you may want to purchase GM.
GM is down to 1930s pricing, plus or minus a few years.
BanteringBear » Jan 30, 2009 at 3:48 pm
Just curious: how do you know for sure that won’t happen?
CheapSouth » Jan 30, 2009 at 3:51 pm
I have some PanAm stock to sell you. Huge growth company!!!!
Richard Stabile » Jan 30, 2009 at 4:08 pm
It is a matter of staying power. This is a reaction to over stimulation of the credit markets. When the markets take hold again, which they are about to do, It will in a different way start to turn the psychology. When that happens, everyone will be caught by surprise! If you sold the top, you should be out looking to buy again. If you are still in and can hold on then that is what you should do.
AMS » Jan 30, 2009 at 4:20 pm
How can I refuse?
Scotsman » Jan 30, 2009 at 4:38 pm
Richard- don’t bogart that joint my friend…
Thomas B. » Jan 30, 2009 at 4:52 pm
I would refinance at a higher rate and then sell at a loss. If you’re going to go… go big.
In all seriousness… the time value of money has a lot to do with the decision. Future money is always worth less than current money.
Ray Pepper » Jan 30, 2009 at 4:55 pm
Richard nice home on your website. Let me guess. Short sale or Foreclosure? New Jersey is screaming for 500 Realty. Care to bring a new model to the East coast masses? Your customers will love you!
lilypad » Jan 30, 2009 at 4:56 pm
I’ve been lurking around for many months now, but finally will comment because this question hits close to home. We bought 2 years ago, 15% cash down and the rest in a 2nd mortgage. Yes, we spent too much, and yes, we signed the papers willingly. We wanted to be in a certain neighborhood because the school had a program for our special needs child. And we were naive—we had bought our first home in 1995, 2 more after that, and it never occurred to us this time either that a bank would give us a mortgage if they thought we could not afford it. We told the truth on the application and did not deceive said bank in any way. Within a year, we realized we could not continue to stay here—we were subsidizing our payments every month from our savings because I became ill with depression (not covered by our insurance, as if mental illness is some sort of choice on the part of the sufferer and not just my body not working the way it is supposed to) and could not work. We put the house on the market and despite a price drop of over $100,000, it has not sold. We have remained current on both mortgages. Now we’re down to the point where we have to stop paying. We can’t lower the price without it becoming a short sale—and with 2 mortgages, a short sale is much more difficult and very unpalatable to potential buyers. Not to mention we are sick of dealing with the incredibly rude agents who have shown our home and don’t relish the idea of keeping it on the market. I have busted my heinie keeping this house in tip-top shape, and we have disrupted our lives for too long. Relatives have suggested we should try and renegotiate with our lenders and stay here till the market improves and try again in 2010 or 2011 . After reading this blog, my instinct is to get the heck out of here, even if it means foreclosure and ruining our credit (currently in the 800’s), rather than keep throwing good money after bad. I sure wish I had discovered this blog about 1.5 years earlier than I did…
TheHulk » Jan 30, 2009 at 5:26 pm
Lilypad, if you bought your first house in 1995, surely you must have a ton of equity from your previous house(s) that you presumably plugged into the latest house. Isnt that enough to keep you above the tide that is going out so to speak?
rose-colored-coolaid » Jan 30, 2009 at 5:30 pm
Eh? I own a home, and can trivially afford a nicer home in my area than what I am currently renting. As good as selling->renting->buying is, renting->buying is even better in today’s market.
Rhonda Porter » Jan 30, 2009 at 5:42 pm
My apologies for (1) coming late to the party and (2) not reading all of the comments before commenting.
Joe and Linda may qualify for a FHA mortgage. The interest rates for the 5 year fixed ARM and the second mortgage aren’t mentioned…. but the principal, interest and mortgage insurance for this couple shouldn’t be much higher than their current payment…based on what I quoted today at MP and RCG.
I think they should do it quickly however… the biggest issue I’m confronted with for refinances is appraisals coming in lower than anticipated.
Ray Pepper » Jan 30, 2009 at 5:48 pm
Lilypad. I will be blunt. Your home will not sell this year or the next few. If your decision is to stop paying then do it NOW. Start saving your money and take all calls from the lender and tell them your DESIRE is to stay in the home but you cannot afford the current payments. You must also write a hardship letter explaining why you have suffered a loss in income and exactly what you make now. The lender does NOT want your home. The loan will be restructured as I previously described based on what you make. Either way if they are unwilling to work with you (you will know in 100 days) then continue living in the home for the next 12 months if they pursue foreclosure.
There is no secret to this. In the coming years you will have to explain what happened to you but I think you learned from this blog there is no harm in renting. In addition there are numerous owner-contract deals that are hitting the MLS. Family 1st and move-on with your life. The cure to your problem is an easy one. Don’t make it so difficult. The hardest part is not making that 1st payment.
**Remember tell the LENDER YOUR DESIRE IS TO STAY IN THE HOME**
DavidB » Jan 30, 2009 at 5:49 pm
Richard you must be smoking some good stuff because you’re in a world that’s completely different than the one I’m in! If those thoughts help you get through life day to day then I guess it’s OK!
It’s going to take years for the economy to recover and home prices are not likely to be at those bubble prices ever again in our lifetimes!
Rhonda Porter » Jan 30, 2009 at 5:49 pm
Looking back (after reading some of Ardell’s comments towards the bottom)… isn’t this couple better off since they did not invest a huge down payment? It takes a significant amount to make a difference. If you only have 5%, you might as well go zero down in most cases and keep the cash out for savings…in case of emergency.
Those who put zero into their equity have lost nothing in this market–how can you lose if you don’t put any money in?
Where folks are in trouble is if they need have a shorter term 80/20 (like a 2-3 year on the first that’s resetting now w/ a high margin) with no equity. FHA may be the only loan that saves them if they’re not underwater.
Ray Pepper » Jan 30, 2009 at 5:59 pm
Lilly I also want to emphasize the rules of the game have changed. We are in an entirely new world of investing. More and more people are choosing everyday to not refi and take the “DEAL” that is offered by their lenders. Good Lord if my clients are getting free refi’s to 4% on their RENTALS you will most certainly get one for an owner occupied residence. Again what I see daily from Wells and Wachovia is:
take the 3 to 5 months delinquency and place the deferred amount on the balance
then extend the terms from 30 years from 40
then a drop in rates from 6-8% to 4.25.
**In the long term I do NOT think this will work out for the masses because there has been no principle reduction. If we enter an era of owners being able to lower their principle then you will truly have a 1 time GIFT of a lifetime” But, we can only deal with what is available today Feb 2009. Keep your child in school and take care of your illness. This soon will pass and you will be far better off then you imagined.
Rhonda Porter » Jan 30, 2009 at 6:05 pm
lilypad
Can you rent out a room to a friend or family member?
Are there other debts you can pay off with larger monthly payments and smaller balances (can you restructure any debts) to put yourself in a better position?
What about bankruptcy?
lilypad » Jan 30, 2009 at 6:15 pm
TheHulk, we did put more quite a lot down on this place but with prices falling as much as they have, it’s long gone. We didn’t put anything into upgrades on the house or cars or vacations but instead had to spend a ton on tuition and medical expenses. Our savings have dwindled to the point that we have to stop paying our mortgages while we still have enough to pay for a move and deposits on a rental, etc. We’ve never had so much as a late payment in all these years, so it’s quite disconcerting to end up here and believe me, I think about it all the time!
Groundhogday » Jan 30, 2009 at 6:29 pm
The trouble is that if you wait another 6 months you have probably lost another 15% the way things are going. Remember, there is a seasonal dynamic that makes it a lot harder to sell in the late summer and fall.
Groundhogday » Jan 30, 2009 at 6:37 pm
“…the biggest issue I’m confronted with for refinances is appraisals coming in lower than anticipated.”
Why am I not surprised?
lilypad » Jan 30, 2009 at 6:54 pm
Because of our child’s special needs, we really can’t rent out any rooms, and the house is only 1450 square feet—so not a McMansion. We actually don’t have any other debts, no credit card debt or student loans etc. Both cars are paid for. I talked with a real estate lawyer about our situation and he said usually when people call him, they have all kinds of debt on top of the mortgage debt. I’d really like to avoid bankruptcy so haven’t looked into it that much, although could discuss that more with the lawyer in the future. He didn’t recommend it at this point. Thanks for your ideas, though.
Markor » Jan 30, 2009 at 6:56 pm
Lilypad, I tend to agree with Ray here. I say don’t just take the deal offered, negotiate the deal. The writing is on the wall for banks, who don’t deserve sympathy as they are sitting on $billions of taxpayer money and planning to use that money as not intended (like to buy other banks). They’ll lose money if they don’t negotiate, esp. since they aren’t reducing principal (yet). Make it clear that you have no choice but to default if you can’t get the deal you want. Negotiating this way requires that you do research about the best deal you can hope for, and have a walk-away point planned in advance. I’d focus on getting a lower interest rate, and not worry about the extension of time to 40 years or whatever. That’s because the economy is likely to get far worse, meaning you can go back to the bank and re-negotiate again, perhaps for a principal reduction then.
lilypad » Jan 30, 2009 at 6:59 pm
Ray, thanks for your insights. People keep telling me that the bank won’t want the house either and we should live here for “free” as long as possible. You are right, the hardest part is not making the payment. That’s why we have continued to pay for so long, we are so afraid of having bad credit—maybe we’re just old-fashioned. I read the thread about ethics that The Tim posted about—don’t know how I missed that back in August!—and it was very enlightening. Previously, I would have been in the camp saying one should keep paying no matter what, as a matter of honor, but seeing the impact this has had on my family, I’m ready to cut my losses.
Groundhogday » Jan 30, 2009 at 7:08 pm
I truly feel sorry for you. Since you have an almost perfect credit score, the hardest thing for you will be to not make payments. We have been told all of our lives to be “responsible” but in this case I don’t see that you have any choice. The lender agreed to lend you the money non-recourse with the house as collateral. Just let them have the contractual compensation for the default. I agree with Ray, stop making payments, offer to work with the lender to restructure the loan, but in the end be prepared to walk.
Good luck.
b » Jan 30, 2009 at 7:09 pm
I would let the house go and get into a rental that is going to be much cheaper and within your means. Your credit will get hit, but with the flood of foreclosures, etc, these days I doubt it will get hit as badly as it did when lending was sane.
b » Jan 30, 2009 at 7:15 pm
If you have no other debt, have cars paid off that are usable, etc, then why care about your credit rating enough to avoid foreclosure? The reason most people strive to maintain a pristine rating is to get good rates on car and home purchases. If you are not going to buy either of those for several years, then who cares? It will repair itself.
Groundhogday » Jan 30, 2009 at 7:21 pm
There is no need for bankruptcy, given that you have no other debt obligations. Again, a home loan is non-recourse so if you let them have the house then you are following the terms of the contract.
Your potential landlord might well do a credit check, so make sure to have several months of advance rent saved up in case it is needed to put your landlord at ease. You could also just explain your situation…
lilypad » Jan 30, 2009 at 7:58 pm
I am hoping that a landlord will look kindly on us and I have printed out copies of our credit report (while we are still not behind on payments) to show what our credit rating is before we stop paying. But we will definitely will save up enough if living here “free” to put down a substantial deposit if need be. We have always been frugal (before frugal recently became cool :-) and responsible and that will continue to help us get through this. I just rue the day I saw this place and wish the bank had laughed in our faces instead of signing off on this thing! And yes, we were told that in a few years, we could just refi our way out of the 2nd mortgage and waltz into the sunset…
I appreciate everyone’s help and ideas, for the longest time I have been really afraid to post for fear of being flamed as an irresponsible deadbeat etc. That might have forced me up onto the roof, so thanks for your restraint!
mukoh » Jan 30, 2009 at 8:02 pm
Remember the home in Edmonds the big white colonial that was in the newspaper? It just had a notice of foreclosure filed this week. LOVE IT.
Ardell DellaLoggia » Jan 30, 2009 at 8:22 pm
Lilypad,
Generally speaking, check with your attorney and I’;m not even sure you are local, and this is generally for the Seattle area.
1) you have to be 3 months behind before the lender gets beyond just hounding you to make a payment, as Ray said.
2) It takes 4 to 5 months behind before you get a formal notice of default, not the fake one from the lender, the real run from the Trustee
3) it takes at least 30 days from the formal notice (it would come certified and also be posted on your house) to set a Trustee Sale date.
4) It takes another 90 days from the time the Trustee Sale date is set before there is an actual sale, and sometimes no one buys it at the first sale date.
5 you have 21 days after the sale to leave
So all tolled that is 3 months plus 2 months plus 1 month plus 3 months plus 21 days…and that’s usually a minimum before you have to leave.
As someone said, forget the “nice landlord”. You need a big chunk of money to rent if you have bad credit. You don’t even ask. You hand them a check for 3-6 months rent up front. 6 will usually do it. When they see that kind of money up front, sometimes they don’t even bother to run your credit.
Don’t leave too soon…the bank would want you to stay and keep the place up. Don’t feel guilty about staying. Knowing that you have a lot of time (check with your attorney) will help with your anxiety and depression issues. Smile, be happy. Just do the best you can for you and your family. That’s all you can do, the best you can. And feel good about that!
If you are local, let me know. I can get you into a support group with people in similar circumstances.
David Losh » Jan 30, 2009 at 9:00 pm
In the scenario I think the people should just live in the house and let the bank figure out how to deal with them. OK, If the payment adjusts today it goes down. if it was supposed to be a neg am it is now paying down the principle. The adjustable rate was supposed to be a gift to the lender/investor, with rates down it is working in the borrowers favor. OK the note comes due, no what is the lender to do? Foreclose? Little Jimmy and Linda in court with the big bad lender? No the lender is looking to keep suckers, I mean borrowers, paying the mortgage. They extend unless they really want the property.
What ever, sue me for bad advice. DON’T REFI and give those blood sucking bankers another dime of your money. Just give the crooks the payment you agreed to and call it good. If you want worst case wait until the problem comes to you, don’t try to fix today what may not be a problem tomorrow. Wait.
I’m having a problem with the almighty credit score. Mortgage reps have held that over the heads of borrowers for years to squeze out another point or two. In a case of foreclosure I would hire an attorney. A Note and Deed of Trust is a legal document. For all the non recourse State I have heard I have also heard the second position loan can function as an unsecured after foreclosure. In terms of negotiating with a lender/investor i would want representation.
All that being said my thought process is, if I were a lender/investor, would I want to go into court with a couple who have a special needs kid, where the wife may be clinically depressed, and foreclose, or work out a deal? To get a deal i would want a lawyer.
I would never take advice from a blog site as legal advice. I would want a lawyer, an attorney I trusted. I would shop and take recommendations, then investigate the attorney. It’s 1400 square feet, you put money into the deal, I presume a Real Estate agent was paid, so you had representation, I would sue. Weigh the mental drain of a foreclosue, against having legal advice from an attorney, and I think the attorney comes out ahead.
The Tim » Jan 30, 2009 at 9:06 pm
For those that are in the dark, mukoh is referring to this forum thread.
mukoh » Jan 30, 2009 at 9:14 pm
David, Umm, you never deal with investor. You deal with the bank who is the lender. Secondly recorded seconds cannot function as unsecured.
Get a lawyer is the best advice.
Going to rent is equal to paying a mortgage, as you are paying someone elses mortgage.
takenroad » Jan 30, 2009 at 9:25 pm
Question: In the scenario where homeowner sells now, banks big equity, rents cheap while market prices decline, and buys back in a couple years from now – do any of you worry that this is the BIG ONE? The total debt collapse. All banks fail, straining the federal government’s insurance function past the breaking point. Your big equity pile in the bank disappears.
In other words, the dot com bubble came and went, and the nation returned to normal more or less. Is the question this time bigger than just the housing bubble popping?
Ray Pepper » Jan 30, 2009 at 9:35 pm
Lily you will not have any problems getting a rental. Have you checked Craigslist lately in your area? Good Lord! Paying a few months ahead will lock you in a rental for sure…………….However……………….You will be pleaseantly surprised at the offers from your Lender in/re to the home. Find out what you can afford to pay each month, have your hardship letter ready to go, be able to substantiate that you can afford the new lower payment, and you are not going anywhere.
I strongly suggest you take the extended term of 40 years if offered. The goal is for you to stay in the same home so as not to cause distress on the family unit. The goal would also be to have a payment somewhat close to what you could rent a similar home in the area.
Its time to be saavy and help others you find with what you already know here. Normally I would agree with Dave Losh about not listening to advice on blogs. HOWEVER, what I speak is fact and I have copies of letters from Wells/Wachovia from my clients that we have been passing to many people like you. They show what was done to their loans and its all about education at this point and helping others to make the right decision. Bankruptcy is not an option for any of my clients. I find nearly everyone just wants to stay in their home.
Be smart and don’t pay one more dime.
Michael » Jan 30, 2009 at 9:47 pm
“I find nearly everyone just wants to stay in their home. ”
Their home. Now that’s a good one.
Ardell DellaLoggia » Jan 30, 2009 at 10:03 pm
David,
It is my understanding that Lilypad has a lawyer:
“I talked with a real estate lawyer about our situation and he said…haven’t looked into it that much, although could discuss that more with the lawyer in the future.”
Lilypad does not appear to be “tak(ing) advice from a blog site as legal advice.”
She appears to be talking here in addition to having a lawyer and seeking legal counsel. Sometimes just hearing a lot of different opinions can help someone understand the attorney’s advice better, and also assist in helping formulate all the right questions to ask the attorney, as well.
Also, a lot of her problem stems from being ill with depression. Having someplace to talk through things, and seek out supportive people, can also help with her frame of mind.
AMS » Jan 30, 2009 at 10:51 pm
“Having someplace to talk through things, and seek out supportive people, can also help with her frame of mind.”
Oprah is that you?
b » Jan 30, 2009 at 10:53 pm
“Dollar cost averaging” is wall streets favorite way to convince Ma and Pa Yokel to keep plowing money on in. When all you have is a hammer…
Markor » Jan 30, 2009 at 11:01 pm
New here?
Yes, this is a BIG ONE. I wouldn’t say ‘total”, but “really huge” collapse. Millions walking away from their debts, depression-era unemployment. People with cash in the bank will need to be extra vigilant. With WAMU it was pretty easy; there was plenty of notice to get out of potential harm’s way. If the dollar is to be devalued, say, it will require more care to move in time.
Herman » Jan 30, 2009 at 11:26 pm
Except in a deflationary situation. Such as now.
Mason Boswell » Jan 30, 2009 at 11:36 pm
I didn’t see the possibility of simply walking away from the home listed (i.e., let the bank foreclose), which actually seems like their most viable option, moral issues aside. If they plan to rent after this, then any collateral damage to their credit may not be an issue (and likely wouldn’t be reflected by the time they sign a lease anyway). I don’t see any reason they would pay thousands to try to sell other than honor and integrity which aren’t always so common today. A more amenable way of doing the same thing would be to approach the bank about the possibility of doing a short sale. The home might net more than a foreclosure helping both the owners and the bank, and the bank might be willing to forego tarnishing the owners’ credit.
Herman » Jan 30, 2009 at 11:38 pm
Yours is a sad story. I hope that things pick up for you and you feel better.
Don’t feel bad for the banks. They are supposed to be experts at calculating risk vs. return. They should have known what they were getting into when they loaned you the money. Just give them the house back.
Your credit score will take a hit, but based on your situation, you are a credit risk. It’s a reflection of reality. It should be possible in the US to live a good life without credit. There is nothing wrong with renting.
Markor » Jan 30, 2009 at 11:52 pm
Good advice.
ARDELL » Jan 31, 2009 at 12:03 am
“Oprah is that you?”
LOL! Well, I was thinking maybe The Tim’s place is not a good place for that :)
Ben » Jan 31, 2009 at 2:37 am
I figured that was the case. I brought it up so that you don’t have to!
Ben » Jan 31, 2009 at 2:38 am
Yeah, but price drops that don’t make me negative only help me out, because they make the next place I want (which will be bigger) cheaper by even more.
Ben » Jan 31, 2009 at 2:43 am
I would not put my 401k money in my house because that is not what the money is for.
If I decide that I cannot afford my mortgage, the bank can have the house. That was the agreement that we made. Live by the sword, die by the sword. I did not agree to give up anything other than the house.
Seems pretty simple to me.
economist » Jan 31, 2009 at 4:35 am
You have no way of knowing which way the stock market will perform going forward. Nor does anyone else. Given that, you are best off buying stocks when you have the money rather than sitting on cash and trying to time the market.
Getting back to the start of the thread: what kind of lunatic would invest 200K in one company?
LeftOverpricedSeattle » Jan 31, 2009 at 4:45 am
OK,
My one concern here is this idea that someone should be handing over 6 months rent to a new landlord.
If I was going to do that, I would want to make darn sure that landlord isn’t under financial duress.
The last thing you want to do is hand over 6 months in advance and get a notice of foreclosure on your new rental 20 days into it.
I would ask the landlord for his credit report as well AND check county records to see how leveraged he or she is.
If not, then I would suggest an escrow account of some sort or property management.
economist » Jan 31, 2009 at 4:46 am
It should be possible in the US to live a good life without credit.
“Should be possible”?
Everyone would lead a better life without credit than with it. That’s because you’re not paying interest. You have more money to spend on you, not the bank.
My comment does not apply to situations where the yield on the asset is greater than borrowing costs, in which case you are making money, i.e. buying a house when it costs you less than renting, or buying a car if you need it to work.
economist » Jan 31, 2009 at 4:57 am
All banks fail, straining the federal government’s insurance function past the breaking point.
No problemo, Ben’s helicopter will arrive promptly on FDIC’s roof.
The Fed WILL NOT allow any FDIC insured depositor to lose their money. They don’t call it “fiat money” for nothing, you know.
Ray Pepper » Jan 31, 2009 at 6:05 am
There is also this option that will be presented to thousands of people. Not a bad idea if you want to stay in the home. Don’t pay the Mtg for a year plus, save cash, then rent it back from the bank.
http://www.cnbc.com/id/28933621
softwarengineer » Jan 31, 2009 at 6:36 am
LIVE DEBT FREE
This is slightly off topic and probably advice we should all have followed 10-20 years ago, but had most of us done the following, this financial mess wouldn’t have happenned:
Don’t listen to the media [or your tax accountant for that matter], when times are good they can brainwash you into things like 2nd mortgages paying for the 3rd SUV, when the 1st and 2nd SUVs are still basically unpaid for in the swollen toxic debt mess against your home’s principle too.
Do pay off your home’s principle ASAP if you have enough cash left over afterwards. There’s two good reasons to do this, (1) as the money market $70/month interest [after taxes] on like $100K is a total joke compared to avoiding a $500-600 net payout [that's more like $700-800 payout off your gross pay] on the swollen debt mess payment. Its like a monthly early retirement with no income tax to worry about. (2) The blogs above talk about bank doors possibly closing [like the Great Depression]; you won’t be able to get at your cash, if that happens, FDIC or not. There’s a 3rd reason, think of the relief you’ll feel actually having your home’s title in your hands.
If you can’t afford to pay off your home’s mortgage principle right now; start saving money like mad. I heard recently on the news, if we are to get out of this economic mess, perhaps its time we switch roles, now the Asians became the spenders and the Americans the savers….lol.
lilypad » Jan 31, 2009 at 6:41 am
A couple of months ago, we did talk to the banks about a short sale. I filled out all the paperwork (humiliating “hardship letter” included) and basically I was told to contact them again when we had an offer. They said they would not do an appraisal until after we had an offer and that I should price it at “fair market value”. So of course, the onus is on us to come up with a price that the bank may or may not accept, and at any time the buyer can get tired of waiting and walk away. Even if the bank agrees to an offer, they can change their minds down line and mess everything up and the buyer walks and the deal doesn’t close and we’ve just gone through 90 days of stress and are back where we started from. So we never changed the price on our house down to “short sale” level and we did see a lot of viewing activity without having lowered the price. Since we still have no offers, foreclosure just seems like a quicker resolution (even though it takes so many months to play out, thanks for the time line, Ardell) and at least we don’t have agents calling us at 8:28 a.m. for a 9:15 a.m. showing the same day. I didn’t state in my original post that we are actually fine with leaving this home, it would of course be good for continuity’s sake to stay here but we are certainly not very emotionally attached to it. We could rent a lot more house for a lot less money.
lilypad » Jan 31, 2009 at 6:43 am
Are they going to make me pay a pet deposit for my cat? :-) She’s already made headway on ruining a spot of flooring close to her food dish. Kitty has a delicate tummy.
softwarengineer » Jan 31, 2009 at 7:09 am
HOUSING PRICE OUTLOOK TIED TO AMERICAN STOCK MARKET
Here’s the January 2009 Performance Report [in part] from Dr. Doom’s [Roubini's] January Stock Report [P.S., its horrifying]:
“Performance
S&P 500 fell 8.6% in Jan 2009, eclipsing the 7.6% drop at the start of 1970 for the steepest Jan decline in the gauge’s 81-year history. Profits decreased 38% for the 208 companies in the S&P 500 that released Q4 results since Jan 12. Q4 2008 is projected to mark the sixth-straight period of decreasing profits, the longest streak on record
DJIA dropped 8.8% in Jan to mark the worst Jan in its 113yr history (Bloomberg)
2008: DJIA had its worst year since 1931 losing 34% and the S&P 500 its worst year since 1937 dropping 38.5% (the first loss exceeding 30% since the 39% plunge in 1937). At its lowest closing level of 2008 on Nov 20, the S&P 500 was down 49% for the year and 52% from its Oct 9, 2007, record of 1,565. The plunge came as more than $1tn in credit-related losses at financial companies globally dragged the U.S., Europe and Japan into the first simultaneous recessions since WWII
Jul 9: S&P500 joins DJIA in bear market
June 27: DJIA enters bear market after 2-day 450-point drop
Jan 22: Nasdaq enters bear market with 21.5% decline since October highs; DJTA, Russell 2000 and some foreign indices were already in bear market
Records
Biggest two day rally since 1987: Nov 24 2008, S&P 500 added 6.4% to 851, capping a two day gain of 13%
Worst bear market since Great Depression: Nov 20 2008, S&P 500 is -52% from Oct 2007 peak
Best % gain since 1933 and largest point gain ever: Oct 13 2008, DJIA closed up 11.1%, 936 pts
Worst weekly drop since December 1914: Oct 10 2008, DJIA’s 20.8% weekly decline
Largest 1-day point drop since 1987 crash (when DJIA fell 508 points or -23%): Sep 29 2008, DJIA fell 777.68 pts or -7%, S&P 500 -8.7%, Nasdaq -9.1%
Worst June since Great Depression: June 2008, DJIA fell 9.4%, versus June 1930 when the index lost 17.7%
S&P 500 lost 23% in 2002 and 29.7% in 1974, losses that were followed by annual gains of 26% and 32%, respectively….”
alex » Jan 31, 2009 at 8:48 am
Now THERE’s a real sign of the times!! The tenant asking for the credit report of the landlord-to-be! Awesome!
ARDELL » Jan 31, 2009 at 9:39 am
Ray,
On the West Coast, Deeds of Trust that you sign at time of closing generally provide a speedier recovery point for the lender than what you are suggesting. The Trustee Sale process is supposed to kick in at 4 months behind, and then takes about 4 months from there, plus 21 days after the sale to vacate.
I have found this to be the case, so suggesting people can stay in the house much beyond that is really without basis for this area. Banks also rarely rent the property back to the owner, and many times the property is bought by a 3rd party at the sale.
I’m not saying what you are suggesting to Lilypad about staying for well over a year and renting it from the bank can’t happen, but it clearly is not the norm. Far from it. Normal process is it sells at the Trustee sale in about 8 months and you have 21 days to vacate. Also, different lenders act very differently from one another.
Lilypad’s experience with the short sale process is not abnormal. Banks DO want fair market appraised value, at least most do. Some are getting bad inspection reports and low appraisals to beat that system. But being honest and letting the lender decide based on the true facts is generally the better choice IMO.
Groundhogday » Jan 31, 2009 at 9:44 am
“You have no way of knowing which way the stock market will perform going forward.”
So in 1999 no one could have predicted that the market would collapse?
ARDELL » Jan 31, 2009 at 9:46 am
The fee for a 3rd party handly is very reasonable, and warranted these days for many private rentals, especially Lease Purchase arrangements. The tenant pays the 3rd party servicing company who pays the mortgage and then gives the balance, if any, to the owner.
Just because you are paying the rent doesn’t mean he is using it to pay the mortgage, and the property could go into foreclosure if you don’t use a 3rd party servicing company. Knowing the owner’s credit score is not the best prevention method.
Paying rent in advance is generally not advisable, but often necessary if you have very recent credit issues. If Lilypad stays for as long as possible…that would add up to 9 recent no payments on her mortgage prior to approaching landlords. The best answer is to stay with family for awhile…but unfortunately no everyone has that option.
Groundhogday » Jan 31, 2009 at 9:47 am
Relative so selling now and renting for the next couple of years you will be losing money. Perhaps that money is in the form of home equity rather than cash, but you are still losing it.
Groundhogday » Jan 31, 2009 at 9:51 am
“If you sold the top, you should be out looking to buy again.”
Yeh, ten years up, one year down and we’re ready to zoom right up. Where have I heard that one before. Wait, don’t tell me…. CALIFORNIA! How did that work out?
takenroad » Jan 31, 2009 at 9:52 am
Money lost, or fiat money worth zero. Difference? Neither one will buy you back into the housing market.
David Losh » Jan 31, 2009 at 10:57 am
Holy Cow Ardell!
Six months of rental payments? Giving time lines for foreclosures, saying banks don’t rent back, and then topping it off with the very real problem that banks want fair market appraised value.
Here’s the reality; fair market appraised value is a very hard thing to get in today’s market. You said earlier you wrote an offer for 37% below the top of the market, assessed value, or original asking price. There are no buyers. That’s why when a buyer comes along they can dictate terms.
This woman needs to spend more time with an attorney. Banks, as Ray has said, are at wits end to keep income. A client of mine never received a notice of default after nine months. The bank didn’t want the property, they wanted it shorted if at all possible.
Sure these people can walk away, but I don’t see the income stream. If they are eligible for Section 8 housing they should maybe be quick to get in some place.
If the income is from other sources there may be questions about garnishment. I also have a client who had a BECU second that we got them a partial payment for from the short sale. They are going after the unpaid remainder. If the second is supposed to be wiped out how is that possible? I don’t know. I’m not an attorney.
Markor » Jan 31, 2009 at 11:59 am
That’s my plan. I stopped contributing to a 401K a decade ago, when I realized that paying down the mortgage was better. When house prices come down far enough, and hopefully before cash is somehow confiscated (which I think is likely), I’ll buy a house again, if only to avoid cash confiscation. Tricky part will be, we’ll still be in a depression, so how much is needed for survival? In the good times people would be wise to be as frugal as comfortably possible, so that when bad times hit there’s little change needed.
mukoh » Jan 31, 2009 at 12:34 pm
David,
You talk entirely about things that you have no idea about in every one of your paragraphs.
You obviously didn’t take care of your client through getting the bank to accept a release of any and all obligations.
ARDELL » Jan 31, 2009 at 12:43 pm
We clearly don’t have to agree, David. My “blog comments” are based on WAMU as well as having personally interviewed short sale and foreclosure specialists and WA practices generally and the agreement made between all buyers of homes and lenders via the Deed of Trust arrangement here.
If the right of the lender is to complete the action within 8-9 months, and no less – which I believe it is – then that is what we know for fact. I also know for fact that WAMU has operated on that exact basis at least once :)
Leading people to believe they can stay longer or shorter than the process permits, is not helpful. Worse case scenario is actually comforting when you know it. Pie in the sky sometime’s happens, is false comfort…possible, maybe even probable, but false comfort nonetheless.
The combination of our responses gives Lilypad a list of questions to ask the attorney. That is helpful. Whether your advice or Ray’s advice or my advice is more on target to her situation, is not our decision…it is her attorney’s decision.
So we do not need to agree, and i doubt we ever will…on pretty much anything. Better for Lilypad to see that there are varying opinions, than to try to narrow it down to one “right” response.
ARDELL » Jan 31, 2009 at 12:50 pm
mukoh,
Under the antideficiency provision attached to Trustee Sales, there is “supposed” to be forgiveness as a result of a Trustee Sale (non-judicial vs. judicial foreclosure). But due to a recent case, that may or may not apply to the 2nd – and clearly does not if the lender of the 2nd is different than the lender of the 1st. Even an attorney cannot answer this question for fact, if the lender is the same on both the 1st & the 2nd. There is no precedent set yet on that.
Short Sales and foreclosures are kind of like having babies. done many times, but often the particulars defy prediction. Even with the same lender…often different results. We can only surmise, and a distressed seller is never a “client” of an “agent” really…they are the client of the attorney. The agent cannot supercede the attorney advice, though can be helpful in helping the buyer or owner to carry out the attorney advice.
ARDELL » Jan 31, 2009 at 12:52 pm
“That’s why when a buyer comes along they can dictate terms.”
No one ever “dictates, David. All is negotiation. Except the lienholder can dictate “get out in 21 days” after the Trustee Sale.
As to my 37% under market example…it is not a short sale or a bankruptcy property. Don’t assume.
Ben » Jan 31, 2009 at 1:27 pm
My goal is not to minimize losses or make the most money. My goal is to live in a nice place and not end up somewhere where I owe more than it is worth when I want to sell it.
My current place the mortgage is less than 2x my income. Very easy to afford.
mukoh » Jan 31, 2009 at 1:41 pm
Ardell,
I agree. However I see David making statements that either qualify him into blabber category or someone who doesn’t know what he is talking about and just wants to be heard.
I referred my agent who has 25 years experience to help a friend of mine with a short sale. He negotiated with both banks to close out the sale in three weeks and leave my friend clear of any further claims. The sale was $115k loan amount. All he will get is a 1099-S with the difference at the end of this year.
Routinely I myself deal with banks directly on their notes which they are trying to sell to me or other investors for 50 cents on the dollar. I have foreclosed on notes before myself which have been purchased. Have wiped out seconds, and liens as well with foreclosure.
AMS » Jan 31, 2009 at 2:02 pm
“My goal is not to minimize losses or make the most money. My goal is to live in a nice place and not end up somewhere where I owe more than it is worth when I want to sell it.”
In a down market you must make large payments against the principal. I had a friend who ‘lost’ about $100,000 over a little more than a year. He would need to make approximate $8,000 monthly principal payments to keep up with market values changes.
His gross income is about that much, and taxes must be deducted to reach net income.
Now we get to the whole held-to-maturity issue. Sure he could pay less now hoping the market will rebound, and by ‘could’ I mean ‘can only.’ I guess if you pay on a 30 year mortgage (positive amortization) for 30 years, sooner or later you will pay enough to have something left over when you finally sell. What if some random event happens before that? What’s the contingency plan?
drshort » Jan 31, 2009 at 2:19 pm
FYI…
909 Notice of Trustee sales filed in King County for Jan. That’s more than double last Jan and up 30% from Dec 2008
EconE » Jan 31, 2009 at 2:32 pm
Lilypad…
JMO…but I think that it would be beneficial to sign up for the forums and start a personal thread so that other readers (perhaps in similar situations) can read about the logistics of how everything plays out. I myself have a couple questions that I would like to PM you.
I sincerely wish you the best.
David Losh » Jan 31, 2009 at 2:39 pm
That’s funny!
Ardell the 37% is a figure you came up with to prove another point about something else, it goes to current values.
It’s just bad acvice that I object to. These short sale threads are loaded with bad advice, consistently. What I know is that an attorney needs to be the one dealing with specific situations.
Yes the there is a time line for foreclosure that can change by circumstance. To quote it as fact is a disservice. I’m happy to see you correcting yourself..
Mukoh, yes the client can get a 1099S, but they may not want one. Each set of circumstances are different. You can either get out or not, it’s the client’s choice.
We had an agreement with BECU that they changed at closing. It’s thier call. If my client didn’y close the buyers may have had recourse. BECU was well aware of that.
David Losh » Jan 31, 2009 at 2:55 pm
I want to flag this comment by mukoh seperately.
“Routinely I myself deal with banks directly on their notes which they are trying to sell to me or other investors for 50 cents on the dollar. I have foreclosed on notes before myself which have been purchased. Have wiped out seconds, and liens as well with foreclosure.”
This is a good description of the secondary market on a small scale. It is very real. mukoh becomes the investor and does deal directly with the borrower if he, or she so chooses.
The fifty cents on the dollar up to eighty cents on the dollar is what I want to point out. The bank, representing another investor, just wants to cash out. They may have collected interest, penalties, or just want to take that loss and move on.
I want to point out what the “float” is on these mortgages. Fifty cents on the dollar is what is being offered to outside investors. What can be offered to a home owner who may want to stay in the home?
OK, mukoh, you called me out so please help me explain why a bank would sell a mortgage for fifty cents on the dollar.
TheHulk » Jan 31, 2009 at 3:09 pm
Reading through all the posts, Lilypad’s case is seems to be the classic worst case scenario (that would have historically resulted in going to foreclosure in any case). By that, what I mean is in her case, her family was hit with some medical issues that really took the bottom out of the safety they had built. I suspect absent those issues, they could have continued to make those payments.
These days, their problems have been compounded by all the other houses that are sitting on the market for sale at the same time under distressed conditions. Absent those conditions, the lender would probably be ok with a short sale situation (since presumably they would have the time to address it properly).
Lilypad, IANAL, but seriously, like you said the bank should have just refused your loan (although the medical thing probably came out of left field). If you truly feel like you were cheated, this is the perfect opportunity for payback. Just stay there, build up some savings and stop making payments. God knows with the wave of foreclosures coming up, you should be able to find many places to rent even with the hit to your credit score.
Ray Pepper » Jan 31, 2009 at 3:35 pm
In calling 4 of my clients who are playing the foreclosure game in Pierce County all have been in the home currently 9-13 months from the date of their last payment. These 3 have all utilized an Attorney and still do not know when they must “officially” be out. 2 of the 4 made 1 payment midstream to buy more time. Educate yourself, listen to the offers the Lenders make you now and in the near future, but do not make 1 more payment. Chasing good money after bad is insanity. Again, we are in an whole new world now and the ability to force a Lender to accomadate the needs of a Borrower still fascinates me. 2009-2010 just may turn-out to be the GIFT OF A LIFETIME to upside down homeowners but they must be educated on what to ask for and how to play the hand they are given.
Good Luck Lily and any of you BubbleHeads who find yourself upside down asking why you are making payments still.
Ray Pepper » Jan 31, 2009 at 3:51 pm
Ardell I did not specify to Lilly that she can rent her property back from her Lender. That is a CNBC news clip so take it for what its worth. It appears to be happening though and Lilly needs to ask about it. As for advice we all have it but again we are in truly uncharted waters with the impending foreclosures that will be hitting our counties. I suspect there will be some outstanding “deals” presented to homeowners that will keep owners in their homes 2009-2011. However, if you continue payments as agreed you will see NONE OF THEM. All the real people I know going through this state to me the “GAME” gets very interesting after 90 days. So again, if you are upside down, and feeling you are throwing money away each month, and above all if your homelife is being affected by this stress remember its your family that counts. Your credit will come back and so will a lovely home. MOVE ON with your life but educate yourself on how to play your hand so YOU have the edge not the Lender.
mukoh » Jan 31, 2009 at 4:02 pm
David Losh,
Once again when the bank is selling me a note while it is two thirds of the way in foreclosure I do not deal with the investor. My purchases only relate to multi unit properties, sometimes it is single family when it just sings to me. Such as a property with two homes in south Snoco that was sold for $65k, I love it as two renters in there are swinging a whole $2k a month.
When a bank sells the note taking into example a $1m loan, they free up their reserves which they had to deposit while originating loan, and in addition more reserves when the loan went to their NPA1 folder. Thus the bank has to deposit at least $100k cash in order to have that loan + a % depending on the bank when the loan is non performing. The bank will get rid of the loan for 50 cents on the dollar not to someone they don’t know who walked in off the street and is a retail client shooting offers. They work with people who they have a relationship with, who holds their money, and has a history of doing this. usually ATM 70 vs. 100 is going ratio, some have come to grips with letting it go for 50 vs 100 in case by case.
The bank does not want to hold the property post foreclosure in any way PERIOD. Thus they end up selling the note a few days, weeks before foreclosure.
This is not secondary market when a property is in foreclosure. You either haven’t seen secondary market or just heard snippets on blogs.
Let me just make it clear Dave. THIS IS NOT SECONDARY MARKET.
ARDELL » Jan 31, 2009 at 4:51 pm
Thanks for clarifying Ray, that it was a CNBC news clip, and yes, I absolutely see that happening in parts of Florida and Vegas and AZ…but not in this area. It depends on how many foreclosures there are in the immediate vicinity and how many vacant REO properties there are as well.
You may see a change right now ,as more lenders were dragging their feet in November, than they will be in “high season”.
David Losh » Jan 31, 2009 at 5:00 pm
I’m well aware it’s not the secondary market.
“This is a good description of the secondary market on a small scale.”
It’s been twenty years since I have worked with notes, as I did ten years before that. I also forgo foreclosures, but have worked with them in the past when they made more sense to me.
The fact is there is a margin, a “float”, in play on a loan. The secondary market does routinely buy for eighty cents on the dollar because there is a difference between the money that is bought and the money that is lent.
Buying notes and foreclosures in a deflating market makes very little sense to me. It depends on the deal. Now with the number of people who owe more than the property is worth, and those who can’t afford to pay back, the market is saturated with these preforeclosure “deals.”
This may even be something for a post because from what I hear the money that is churning is running out. There are just too many good deals for “investors” to buy.
Now “banks,” I mean the servicers, are at wits end to get income. They have to do something to show the stock holders, who are the true investors, they can mange the money.
All kinds of crazy stuff is going on. Banks are encouraging people to stay in the property. It makes sense to have occupied properties than empty.
So are you really buying notes in preforeclosure? That seems risky to me, today. Even at half price there is still going to be a carrying cost. Is your buyer pool that thick that they are also thinking they are getting a deal?
David Losh » Jan 31, 2009 at 5:16 pm
It will get worse in the high season.
I have a short listing in South Everett. The person next door is renting from the bank for $900 per month. There are two other short sales that have closed on this cul de sac.My guy bought for $340K and the short sold for $285K, and $250K.
A gentleman in my office listed 90 similar homes last week, brand new, with upgrades, and more square footage for $265K to $295K. This builder has more lots to build once he rids himself of these.
The bank is offering 4% thirty year fixed mortgages on these homes. They are also willing to work with the builder and any buyers.
Take a look at the number of lots, even inside the City of Seattle, and you’ll see there is a ton of money hemorrhaging from those developers. If they die, or are allowed to die, then it will be hard to get future developers to put money here.
softwarengineer » Jan 31, 2009 at 7:33 pm
DROP SAFES ARE A GOOD ALTERNATIVE TO BANKS NOW-A-DAYS?
Now that money market interest rates are like 1% at BECU, perhaps the mattress is an alternative now?
This suggestion also came from a conservative financial adviser in a tailored suit to his client, not a wild eyed gun-toting survivalist.
I call it “cash cans” [some are actually burying it in sealed coffee cans....lol]. If you have a trust fund and you want to keep the State’s greedy mits out of it….give two map half to two attorneys, give both map halves to executor after you die. Call it a hidden pirate chest trust fund….lol.
Have two hidden, if thieves find one, you’ve got a backup.
Is gold a good investment? Perhaps, but mass deflation is hitting oil and other related commodities….why would you think gold is immune? Another thought, as bankruptcies hit, folks are selling everything to stay afloat, gold too.
Angie » Jan 31, 2009 at 7:51 pm
Dang, the conversation has roamed all over the map.
Lilypad, I wish I had a good suggestion for you–failing that I’ll offer my wishes for good luck.
As far as the original scenario, my advice to Joe and Linda is to refinance both loans to one of these insanely low rate 30 year mortgages and stay put. Yep, their payment will probably go up a bit and they’ll have to pay some PMI; consider it a stupidity tax for taking on a balloon loan in the first place. Their outlay would undoubtedly also be bigger yet if they bought another house.
Don’t rent. They’re already rooted where they are. It’s important to stay rooted when you have kids. Stay put and chip away at the house payments. If the worst happens you can follow Ray’s prescription and take it from there.
They don’t need to move up. Get a grip. In years past a 2br/1ba/1100 sf home would have been more than sufficient for a family of four. In point of fact, it’s more than sufficient now. I speak as the voice of experience: my family of four (2 parents, two kids aged 4 and 8) is living in 2 bedrooms with one bath and maybe 850 square feet and, what do you know, we are living to tell the tale and (gasp!) are even happy. We also save a lot of money because the size of the house necessarily limits how much crap gets brought into it.
Living within your means is good.
TheHulk » Jan 31, 2009 at 7:55 pm
Could not agree more with that statement!
Ray Pepper » Jan 31, 2009 at 10:17 pm
Angie I must agree. We live in a 1646 3bed 2bath brick tudor home and there are 5 of us and 1 dog. Well actually 4 but our daughter keeps coming back from college it seems every weekend so I consider it 5. I never liked the big homes because of the upkeep and utilities. Without a doubt I know I will be living in a condo as the kids move out. I hate alot of junk and above all I hate yardwork.
Angie » Jan 31, 2009 at 11:23 pm
I actually adore yardwork and would hate to live in a condo! But I have to say, almost without exception, the people I know who live in very large houses just accumulate phenomenal amounts of STUFF. It’s expensive and ultimately suffocating, I think. Seems they get in the habit of getting stuff, and eventually space runs out, but the habit of acquisition dies hard. Then there’s all that sunk cost and it’s hard to get stuff back out the door.
We like nice new stuff too, but give purchases long thought before committing valuable space in our house. And we make probably half a dozen Goodwill donation runs every year, clearing stuff OUT, too.
mukoh » Feb 1, 2009 at 12:17 am
David,
What buyer pool, and which carrying costs are you talking about? There is a seller pool to pick what fits what I or my group wants its either 40% off todays prices or 50%. And it is all cash. Nobody deals with financing on this.
David Losh » Feb 1, 2009 at 1:13 am
So you’re holding properties for cash? Where’s the return if you are only buying for 50% of today’s prices? Why would you do that for cashanyway, why not finance at todays good guy rates of 4% or 5%?
So if you buy the paper for 50% of value there is no profit unless you sell it for more than 50% of value. In today’s market place that paper may only be worth 20%, as sniglet keeps reminding us.
Thank you for rising to the bait.
In the world of mortgages anything is possible. This guy is claiming a Note is being sold regularly for 50% of value and made an argument to support why it makes economic sense for the “bank” to sell cheap. This went on even before the credit crisis, today there must be some real deals out there.
The bank made the “bad” loan. They should take the responsibility to make it right. They are the experts who knew what they were doing. So rather than sell the paper for cheap, it makes sense they can renegotiate a note for 60% or 70% and continue to have interest income.
The whole idea of the bail out was to put the money back into the mortgage market. It makes sense that banks will take cram downs or be good guys and make deals.
mukoh you and your group only have so much “cash.” Think bigger.
lilypad » Feb 1, 2009 at 8:09 am
Without the medical problems (for all 3 of us, actually, over the course of the time we’ve lived here), we definitely would be able to make the payments. We even had a great big emergency fund, which saved our heinies until now. We are Seattle natives, both started working when we were 16, put ourselves through college, worked hard and didn’t go crazy with material stuff/credit card debt. When our kid came along, we went into extreme frugal mode and I worked part time or not at all so that I could raise my own kid. So here we are. The only time we made a decision that was pretty crazy and not frugal like normal, a huge leap of faith (i.e. buying this house), it blew up in our faces. I feel like the kind of person I always mocked, the ones who “only forgot to use a condom one time” and end up with triplets. At least we won’t have to pay for this mistake for 18 years :-) So thank to everyone who commented, I appreciate it a lot. Mr. Lilypad and I have had some great conversations about the comments over the last 24 hours. I am feeling a lot better about our situation, I dare say I’m feeling a bit empowered. Wait, now we’re back to Oprah type stuff!!
Sniglet » Feb 1, 2009 at 8:20 am
Unofortunately, I think the fact that MANY banks are flirting with insolvency is leading them to do things that would otherwise be irrational. While it may make financial sense to re-negotiate loans, or selling notes at deep discounts, the losses such actions would force lenders to take might drive them into insolvency.
I am certain that SOME banks prefer to just do nothing with delinquent loans, neither foreclosing or selling REOs, so they can continue to keep the loans (and re-posessed properties) at artificially high valuations on their books. As I’ve mentioned before, the bank still hasn’t foreclosed on my sister’s home in Florida, and she has been delinquent for a year and a half!
Maybe the banks are just waiting for nationalization? Regardless of whether the government decides to “nationalize” all banks, or they go in FDIC conseravorship, the end results is the same. The tax-payers will ultimately wind up being the ones who eat these losses.
lilypad » Feb 1, 2009 at 8:44 am
Oops, I also wanted to apologize to The Tim for inadvertently hijacking the discussion…I didn’t know there were forums, I’m a very un-tech-savvy dweeb.
Ray Pepper » Feb 1, 2009 at 9:30 am
Snig this only touches a part of the mess. You will soon be hearing about 1000’s of Heloc’s that have not been paid off in the last decade. I have four seperate clients that sold their home nearly 3-8 years ago and they never closed the lines. Families continued to use the lines and now with the HUGE downturn payments have stopped coming in. One home sold 3 different times while the borrower just kept making monthly payments. Call it an Escrow fault or Lender it doesn’t matter. The losses will keep mounting for years from every angle.
johnnybigpsenda » Feb 1, 2009 at 10:12 am
Its funny how the same cognitive error that caused people to extrapolate the rising market prices and consider them as a ‘given’ for the future is now the same error being made by the people who are forecasting to the downside.
Its the same deal in the stock market… the retail folks are looking at this quarter’s numbers and thinking they are a genius for selling. The pro’s are looking at the retailers and saying ‘thank you for your shares….’.
I also like the ‘its different this time’ crowd…. again, same argument was used on the way up.
Be careful not to become too convinced of your own theory. Anyone here who claims that they know with certainty what the next 5 years hold are fooling themselves.
To me, it comes down to time horizon, personal liquidity and risk tolerance.
David Losh » Feb 1, 2009 at 10:55 am
The HELOC situation is interesting. I know that there are seconds out there that are tied to the property, but not really. There must be different kinds that follow the borrower.
Let me also throw in that it occurred to me that some seconds may only be secured by the property. Some investors use what is called a phantom second for property purchases. This second can either be paid or released after closing with a Quit Claim Deed. No cash needs to be paid or involved.
This only works on a purchase, but I’d be curious if all banks/lenders/investors have to put in all cash at closing to make a mortgage.
We are so far away from normal banking standards, in my opinion, that I think banks could renegotiate a Note without taking the write down. Nationalized banks make no sense, Forgiving a portion of the debt, or should I say a portion of the interest income, makes more sense to me.
I’ve been accused of being vague before so to make it more clear let me say that the income from loans, in my opinion, has gotten to be stupid. Accounting magic got us here and can get us out.
All an investor/lender/bank needs to do is collect the debt. In my opinion they are more interested in generating other “profits” through penalties and interest.
If more time, effort, and resources were spent on collecting the money owed we would all be dollars ahead. If you owe $500K on a house, with interest, why aren’t the banks concentrating on collecting that $500K? They can keep the $500K on the books and let go of any or all interest income.
If you look at mukoh’s comment they can, and do take fifty cents on the dollar. Why not keep the whole amount on the books and collect the debt with simple interest? I do know the answer to that, but the answer is unkind.
Paper traders are a bunch of whiney little kids who want to bank money today. They want that lolipop today, rather than do good business. They want the government to give them money, they want the stock holders money.
Paper traders are above it all. They are the cash kings and you best do what they say or they will make your life a living heck. When this is done out on the street it’s called extortion, harassment, swindle by device, and contrary to the law. Here we are trying to figure out how to “get that credit flowing again.”
I just think anything is possible today.
The Tim » Feb 1, 2009 at 11:57 am
No need to apologize. This discussion is related to the topic of the post, and appropriate to have here, IMO.
mukoh » Feb 1, 2009 at 12:33 pm
David you can keep throwing stuff out there without knowing anything. When other people have reasonable assumption such as Snig/DJ, you have the throw my idea against a wall.The reason I explained at least one tenth of what is going on out there, as you are the only one on this blog that essentially huffs and puffs about what is happening, without KNOWING it, or being a participant. Do not distort the of the credit system with blabber if you have no idea. Which is exactly what I have seen you do with development discussion/UGA/mortgages and paper swaps.
Who said we don’t refinance a property later when it is rented? All the purchases though have to be done for cash as they are 1-3 day closes. Want to know something funny? The underlying bank is willing to finance the same property for 2-3% on a note later to us. :)
TheHulk » Feb 1, 2009 at 2:10 pm
All that is fine and dandy, but if you were a first time buyer, would you buy a house in the Seattle Area in the next two months?
David Losh » Feb 1, 2009 at 2:37 pm
Funny,
So now your building a rental portfolio. OK, so what? It seems pretty basic. It is an avenue that I’ve advocated, but what does it have to do with the post?
You are the Land Lord. The mighty all powerful king of the fiefdom. You are the person that renters should give money to. You want to live off of rental income, and you are right I do not participate.
What happened to people who bought in good faith is wrong. They should be able to keep thier homes, and sue.
You presented an example of how screwed up our mortgage system is, and you are very right you are only one small part of the system.
How about after you and your buddies screw the bank why not sell the property back to the foreclosed home owner at the discount? Better yet you refi and do a lease back for five years, or ten.
Mkkby » Feb 1, 2009 at 3:02 pm
There is mental illness in my family, so I doubly feel for you.
Don’t worry about your credit score being hurt. As others have pointed out, living on credit is not a good thing, it can be a curse. Living within your means empowers you and feels good. Working hard all your life to feed a bank can feel like being a prisoner. American business pushes all these messages that you must borrow and spend to be happy, but it’s just a propaganda stunt to take your money.
My advice is, do what’s best for your and your family, placing no emphasis or value on the credit score.
Mkkby » Feb 1, 2009 at 3:21 pm
I don’t think I’ve seen anyone flamed unless they sounded like a shill for the real estate industry. Everyone feels bad for the homeowners who were mistreated by them.
Mkkby » Feb 1, 2009 at 3:48 pm
If you’re planning on going the mattress/safe route, I would recommend gold or silver coins. It would sure hurt to have cash get wet and moldy, burned in a fire, etc.
I don’t think we’ll ever get to the point where cash is worthless or confiscated, but it’s not a terrible idea to have something stored away. Just like you should have some canned food, bottled water in case of natural disaster.
mukoh » Feb 1, 2009 at 8:00 pm
David,
“How about after you and your buddies screw the bank why not sell the property back to the foreclosed home owner at the discount? Better yet you refi and do a lease back for five years, or ten.”
This is exactly why you are not a participant.
This is not about doing great things, I do that in charitys, this is a business to make money, get the best ROI. You figure it out.
harbored » Feb 1, 2009 at 8:22 pm
Joe and Linda’s PI = $1400
TI = $500.00
FI =$200 (FI = Flood Insurance)
You did say Snohomish.
Rent = $1500 (Error on the side of caution)
What if they could only sell for
$225?
I’d argue your probably better off selling, even if you had to bring cash to the table.
In 2010 and 2011 a huge wave of Alt-A foreclosures are going to hit the market. The majority of loans in this catagory are delequint even with teaser rates.
I’d say sell a soon and for as much as you can. All of the rules for selling still apply. You must have your home in absolutely tip top move in ready condition.
You also must price it ahead of the comps. Not stale listings that haven’t moved in months.
In 2012, to be golden you must have:
20% down
10k for closing
No mortgages, reasonable debt.
Your house is going to loose about $1200 in value every month.
If you tack that on to your lower monthly payment, you can get a nice rental, and have a ton of cash flow.
If I might be so bold, I’d suggest you look at Washington State GET Program. Two boys = min 8 yrs college. From SnoHoCo, you have close proximity to a multitude of public higher ed.
Rathole your cash, wait 3 years.
The Alt-A wave is going to wash us back to late 90s prices. Plus you will have so many people with shoddy credit.
I predict prices will crater so far, that you will be able to buy a better house later, and get it with a 15 year mortgage for the same payment on 30 year fixed now.
johnnybigspenda » Feb 1, 2009 at 9:08 pm
I agree that there are only a very few ’screamin deals’ out there today. Sellers have not yet hit that capitulation point here. Not sure if its the fact that they were higher quality buyers with actual money down (compared to CA or alike), or if we are just behind the curve and the rest is inevitable.
If a government sponsored housing relief package comes out and/or a bad bank/mark to market suspsension and a resulting stock market rally, things could turn around quicker than many here expect. Likely, the downward trajectory will flatten and in short order the short term mentality of j6p will extrapolate that they aren’t going to lose their life savings if they put it down on a house. Don’t kid yourself, there is pent up demand out there (as well as pent up sellers… but if things turn around, some of those that are thinking of selling may even consider not selling since they would no longer be anticipating a certain loss in the near future.
David Losh » Feb 1, 2009 at 10:09 pm
I have.
You have proven my point about Real Estate being a business. You are the face of the Real Estate investor looking for wholesale Real Estate deals. Any one can do it. There is always money available, and if you work hard, keep your head down, there is money to be made.
It’s a job. Now I’m not kicking about you. I bought my last house from an investor for $100 per square foot when the going rate, at the time, was much higher. The investor made a quick seventy grand plus retained a building lot. Investors are a good source of housing units if you get in with a good group.
This blog is about people who want to learn the game. This is the first time I can recall you being forth coming about how to play.
Charity is very important to me. Giving money is one thing, and sharing is another.
Markor » Feb 1, 2009 at 11:04 pm
“2 of the 4 made 1 payment midstream to buy more time.”
Ah the North Korean negotiation tactic, smart.
Markor » Feb 1, 2009 at 11:17 pm
I’m renting w/ kids but not worried because there are plenty of rentals in the area. That’ll probably stay true for the next few years.
Yep, less is more!
Scotsman » Feb 1, 2009 at 11:24 pm
They should definately sell. As an economist who’s always had an interest in the bond market and interest rate speculation via futures markets, I can tell you that in all probability the worst is yet to come. And it will be much worse than most can comprehend.
Markor » Feb 1, 2009 at 11:35 pm
GET program for college requires 14% up-front fee, ouch. May not pay off. If it would pay off, kid might be better off having that money for retirement (or to buy a house, cheap!) than for education.
Ardell DellaLoggia » Feb 1, 2009 at 11:39 pm
Lilypad,
” I am feeling a lot better about our situation, I dare say I’m feeling a bit empowered. Wait, now we’re back to Oprah type stuff!!”
Hey, if we helped you feel that much better…”empowered” even…Bring on the Oprah! LOL!
I totally agree with your assessment of the short sale situation, BTW.
Angie » Feb 2, 2009 at 6:58 am
GET program for college requires 14% up-front fee, ouch. May not pay off.
May not pay off *if your kid is going to college in the next two years*. If your kid is three or more years out, without a doubt you will recoup that upfront fee. If your kid is an infant or toddler you will come out way ahead.
Everyone I know who had their money in a 529 investment account is kicking themselves right now. Declines are way more than 14% and there’s no telling when they’ll be offset. Whereas with GET, you know there’s no way to go but up. If the state of Washington wants to put itself on the line to make up the difference, that’s fine with me, I’m happy to take that bet.
Lake Hills Landlord » Feb 3, 2009 at 12:17 pm
my clients are getting free refi’s to 4% on their RENTALS
Can you get me a deal like this? I have a rental I would love to move to a 4% 40 year loan.
Josh » Feb 3, 2009 at 2:19 pm
I’ve been interested by the post and more importantly the comments related to lillypad’s situation. In some ways I have a similar situation.
I bought a 1-bdrm condo in the Seattle area 3 years ago with 10% down and a combination of 2 mortgages. I am upside down by around $5k at the moment but that is steadily increasing every month. In addition, I pay $350/month in HOA dues. But unlike lillypad I do not want to keep the property. Over the past two years my family has increased by 2 and we would like/need to move.
Last year I attempted to sell but, due to the current financial mess we are in, the few interested buyers were unable to get the funding they needed. Our condo was on the market for some time and I am quite burnt out from showing the place. Also, the stats for absorption and net pending sales for the King County condo market (http://www.alanpope.com/Dec08/King.pdf) make the prospect of a sale look pretty gloomy.
I had planned in the fall to put it back on the market in March, but now I’m in a situation of having to bring money ($15-20k+) to the table or do a short-sale if I would like to sell. And both of those scenarios will only work if I am lucky enough to find a buyer. All this talk of foreclosure has made me wonder if that is the right route to go.
I was wondering if there were any suggestions on what I should do.
David Losh » Feb 3, 2009 at 7:58 pm
I’ll be more forth coming than I have been because of the response to this post that I have received. Evidently many of you want to know how this works.
In order to short sale a property the bank wants a compelling reason for them to sell short. Medical reasons, loss on income, growing financial burden (baby), or illness in the family. The bank wants a catastrophy.
This Change in Circumstance outlines as the title says; how your circumstances have changed since you got the loan. If you Stated Income and you had none, that’s a problem. There’s a long list, but you get the idea.
If your reasons are financial they want you to prove it with pay stubs. I routinely give them nothing but the hardship letter/Change in Circumstance. Some negotiators just want a clean file, others want you to work for it.
Real Estate agents can list short sale properties and get it sold and closed. It’s all a matter of price and getting the lender to take the price. Lenders want a long listing history to show that the listing agent really worked for the seller. It’s all good faith kind of stuff.
The lender then contracts with an independent agent for a Broker’s Price Opinion of value. The lender usually wants 80% of that value.
There are a million things at play here. Some seller sell to a relative for a discount in a short sale. Some agents have investor clients they sell to. This is where the anti scam legislation came in.
OK? There is a lot to know about short selling, but that’s it, kind of, in a nut shell.
Foreclosure, you stop making payments and walk away. Lenders wanted the right to foreclose quickly and got that right to reclaim the asset in a simple process. It’s the law. The big problem today is that so many people have walked away there is no way that a buyer pool will absorb the inventory. No way, because most people are skeptical of owning property.
Rents will go threw the floor very quickly. I helped a guy move into his van today, I kid you not. He’s headed for warmer weather where you can live in your van.
Most of the financial reasons for owning a home are fading.
So I recommend any one, and every one, hire an attorney before thinking of short selling, which is getting tougher, or walking away from a loan.
The pit falls of short selling are just now coming to light. A loan is a big document that you freely signed. It’s a legal document, so you should read it. There are some clauses that are more than standard.
The most successsful shorts or foreclosures are by people who leave the property. By all means stay as long as you can afford, but cut the ties, and get out. You can save some money for a couple of months but after that get into something for the long haul.
A new problem is the stability of your land lord. Will they be owning the property for a long time? Are they financially stable? Are they looking to sell? Are they looking to cash out before all the equity is gone?
If I were changing circumstance and walking away, I would find a house to rent with a mortgage payment i could afford, then make the owner a deal that you would pay the mortgage as long as they allowed you to stay. I would sign a five year lease at that amount. I would not lease option at this time because cheaper properties may become available.
Kiva » Feb 6, 2009 at 12:27 pm
Greetings from N. CA
Do you folks know of a site similar to this for Norther CA? I’m further up in N. CA (90 miles north of SAC). Not quite as nutty as SAC here, but interesting.
I’m trying to get some info on our particular scenario and where to go next (refi FHA, stop paying and negotiate, etc.). I could post details here, but wanted to make sure that is OK being from CA ;)
thanks!
kiva
ARDELL » Feb 8, 2009 at 9:23 am
RE: ARDELL @ 117 –
Correction…that 37% under peak WAS a short sale. It was undisclosed and a private lender…so it did not appear in the listing.
Robert » Feb 12, 2009 at 4:37 pm
LET THE ARM ADJUST!
Refinancing is probably NOT a great option. Why? Two reasons:
1) They have no real equity, so they’d have to make a substantial principal reduction to refinance to a conventional loan (which now go to only about 90% of value), or pay big fees and pay some principal to take an FHA loan.
2) They’ll do better by letting their ARM adjust! Arm’s are usually tied to either a LIBOR index or a CMT (T-bill) index, both of which are so low, their first mortgage rate is likely to FALL by doing nothing! An ARM is a dandy thing to have while the economy is bad, because the short term rates should remain low. The risk is that the short term rates are the first thing to correct when the economy DOES recover, so their rate may pop up quickly before the value of the house recovers.
In the meantime, though, their payments are more likely to FALL than go up by letting the ARM do its thing.