By The Tim on October 2, 2009
Here is your open thread for the weekend beginning Friday October 2nd, 2009. You may post random links and off-topic discussions here. Also, if you have an idea or a topic you’d like to see covered in an article, please make it known.
Be sure to also check out the forums, and get your word in the user-driven discussions there!
Posted in Open Thread | Tagged open_thread
Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.
Off topic…
In case your don’t get enough of Sniglet at Seattlebubble, I have just posted the inaugural Optimistic Bear (that’s me, Sniglet) round-table discussion podcast. Some friends and I talk about the economy, stocks, bonds, and a smattering of politics to boot.
http://bit.ly/4EyVW1
A fairly detailed SeattleTimes piece on local rents:
http://seattletimes.nwsource.com/html/businesstechnology/2009984804_rentsoutlook02.html
RE: Kary L. Krismer @ 2 –
The price drops mentioned in this article seem to be on the low side. I know of many Eastside tenants who have seen their rents drop by 15% and 20% in the last 8 months. One friend went from paying $1400 to $1000 when he told the building manager he was going to leave if they didn’t lower his rent.
So much for the theory that population growth always leads to rising prices and increasing scarcity.
The article neglects to mention that another contributor to falling rents is the fact that more people are deciding to double up, or downsize their living requirements, to save space. I know of one family in Bellevue that moved from a 3 bedroom, 2 car garage home, to a 2 bedroom apartment, and now have the kids sleeping in bunk-beds.
And this isn’t even mentioning the growing numbers of struggling home-owners who are now trying to rent out rooms in their homes in an effort to stop the bleeding.
Sniglet, if you’ve ever been on the other side of their polling to find rents, you wouldn’t put any faith at all in their numbers.
Tacoma is the number 1 housing market set to recover in the next 3-5 years!!!!
I guess no one told yahoo about Russell Investments or that they are not adding the 3000 jobs to the port.
http://realestate.yahoo.com/promo/10-hard-hit-housing-markets-that-are-ready-to-rebound.html;_ylc=X3oDMTFvcmJ1a2xuBF9TAzI3MTYxNDkEX3MDOTc2MjA0NjUEc2VjA2ZwLXRvZGF5BHNsawNyZWFkeS10by1yZWJvdW5k
By Acerun @ 5:
I was just about to post that link. A 41% increase by 2012 in the bag! That’s better than my 401k, so screw that! Tacoma condos for everyone!
RE: Lake Hills Renter @ 6 –
Holy Cow, I totally forgot about all the luxury craptastic condos in Tacoma.
They will be filled with Military Men and Longshoremen, kind of like the Village People!
RE: Sniglet @ 3 – Sniglet – that is why it is important to instigate a rally ASAP. The govt should start employing people as soon as it can. Obama should start printing like a crazy lunatic and try to send local govts more dollars so they can try to sustain the economy by creating demand. And there should be some hype – like it is worth investing all your money into sthg. It has to be loud and clear.
And maybe to make the society more focused – maybe send some scare about the swine flu or sthg. And this way people will feel in check and will focus on swine flu and not their house payments.
By Lake Hills Renter @ 6:
Not only is the rate of return better, we all know that housing is a much lower risk! It’s free money! Just go snatch those $20 bills from the sidewalks of Tacoma.
We are well through the looking glass, and further down the rabbit hole than Alice ever ventured. It’s like the ’60’s all over again! Or is it more like 1984?
Government says 250,000 jobs lost in Sept.
Reality says almost a million. Who ya gonna believe, the government’s birth/death model, or the actual household count?
http://market-ticker.org/archives/1485-September-Unemployment-ACTUAL-LOSS-995k.html
RE: Scotsman @ 10 – On the unemployment note, have a look at the weblink below. It shows unemployment since 1948. Only 1982 has higher unemployment than we have now. Then it took about 5 years to come down to a more acceptable level of 6% unemployment. It could be good to see for people who think an imminent and quick recovery is around the corner.
http://www.miseryindex.us/urbymonth.asp
I caught this in a real estate Q&A over at the Washington Post (2nd question) and thought it was interesting, in light of recent comments by Tytler and Krismer.
RE: The Tim @ 12 – Is walking away from a bank any different than walking away from a family member who loaned cash to purchase a home?
Also in the situation presented, the ‘owners’ have $180k in annual income on a ~$500k place. That’s a great income:debt ratio, so the home is definitely within their current means.
If someone walked away from a car that had a current low market value, I doubt it would be generally viewed the same as walking away from a home. Walking away from a car that is affordable to the person is generally viewed is irresponsible. I am guessing, without surveying, walking away from larger losses, on the other hand, is viewed differently–prudent to financial health.
In bankruptcy there is means testing as well as judicial review. It’s not quite the same in housing.
RE: AMS @ 13 – There is another big difference in your comparison AMS. You do nomrally not get an interest only or a 30 year loan on a car. The payments on the car is setup to at least cover the deprication rate. Normally a car loan is for 5 years, that’s pretty high deprication rate for any car. If you at any stage “walk away” the car’s remaining value will more than likely cover the balance of the loan. That the mortgage lender did not make due risk analyses when issuing the mortgage is mainly their own fault if they didnt get out right frauded. You shouldn’t lend large amount of money without having very good odds of having the asset covering the loan throughout the loan period.
RE: patient @ 14 – “If you at any stage βwalk awayβ the carβs remaining value will more than likely cover the balance of the loan.”
Um, no. If this were true, then the car would just be sold private party. The “housing prices only go up” theory was used to suggest that a home’s value would cover the outstanding debt.
Also most people don’t fail on the last car payment. The failure is usually earlier rather than later. This is exactly when the market value has changed the most on the car.
I have purchased some of these cars at auction. I adjust my bid for risk. It’s a “fair price” given the circumstance, but like a foreclosure, a standard sale will almost always yield a higher selling price.
Finally let’s not confuse “depreciation” with changes in market value. Depreciation is an accounting concept that we could have all kinds of great discussions about. Market value is what a willing and able buyer will pay.
Example: If I buy rental home, I depreciate it down, and thus my book value is decreasing over the years. The market value may go up or down, but I still expense the depreciation.
See also: Mark to market securities.
RE: AMS @ 15 – AMS, my guess is that the cars you see at auctions are mainly leases that people walked away from. A lease is riskier than a loan for the “lender” since the payment rate is much closer to expedcted depreciation rate. If the lender does not own a car dealer the cars will endup on auctions and here the risk for a loss is much larger than with a loan.
RE: patient @ 16 – Having attended so many auctions and purchased so many different vehicles, I have see all kinds of different situations.
Police impounds (usually from drunk driving or suspended license, but there are other impound situations such as drug activity), abandoned vehicles, repossessions, cars turned back in from leases, donations to charity, insurance salvage, other dealers dumping cars taken in on trade, government salvage, mechanic’s liens, parking ticket problems (including tow zones), and so on. The history on each car is somewhat unique, but often the history is known. Abandoned vehicles are the most difficult to know what happened.
RE: AMS @ 17 – My guess is that very few if any are from people who have walked away from a car loan of the very reason that the car’s value covers the loan amount. Lenders protect themselves in the case of cars. In the case of leases there are often other protection clauses than just the asset. The other cases you mention are mostly forced repossessions. It’s not comparable with walking away from a mortgage. Lenders will love you and anyone else here that preaches that it’s immoral to walk away even it it’s legal in most cases in a non-recourse state. My view is that it was much more immoral to make these inflated loans than to default on them.
RE: The Tim @ 12 – I am curious about something. The character in the WaPo story says something I hear more regularly, and my gut agrees with it:
…but I gotta admit I find it eerie how similar that feeling is to the “property values never go down” gut feeling of about 3 years ago. I ain’t sayin boo, I’m just sayin that variable recovery rates would be interesting to see more info on. The one major thing that hasn’t changed, (and probably won’t) is the value of todays dollar is usually less than yesterdays dollar. Even though what you buy with it is not often comparable.
RE: patient @ 18 – People walk away from car payments that are too heavy. If the car has high value, then it’s sold before repossession. Almost in no case is the car worth more than the amount owed. Lenders have little, if any, protection for the deficiency. Beyond a deficiency judgment, what’s left?
Oh, and don’t be so sure that many of the other situations don’t have some underlying debt. I have purchased vehicles at the towing company that had an existing lien. The lien is canceled through the auction process, which requires notification to all parties. If you are the lien holder, you must go to the tow company and pay the towing and storage to get the vehicle. Often this is too much risk for the lien holder. The vehicle that I currently drive had a lien of over $12,000, and I paid less than $1,000. It was an impound where the lien holder actually got zero! Where is the lender going to recover?
RE: AMS @ 20 – Alrigth you win, or shall I say I give up :-)
RE: patient @ 21 – You give up against something that I have a great deal of personal experience with…
i’m just to busy to get into all the specifics and turns, my view that defaulting on an underwater mortgage is less immoral than what it was to make the inflated unsecured loans remains. The car thing, forget about it, if your comparison is good in your mind, good for you. I will not cntinue to try to change your mind.
RE: patient @ 23 – We are talking about what happens when there is *some* failure. Forget placing blame, what’s the “correct” move if a failure happens?
We can consider homes, boats, cars, trucks, and so on.
CORRECTION:
I can see the parallels between homes, boats, cars, trucks, and so on. You can reject such analysis.
” whatβs the βcorrectβ move if a failure happens?”
Not so interresting to me. I would change that to: What’s a reasonable action when the asset is worth significantly less than the loan and you have a legal right to opt out?
RE: patient @ 23 – One more question regarding lenders. You stated, “my view that defaulting on an underwater mortgage is less immoral than what it was to make the inflated unsecured loans remains”
The question, as originally posed above:
Is walking away from a bank any different than walking away from a family member who loaned cash to purchase a home?
By patient @ 25:
How about:
What’s the best action when the asset is worth significantly less than the loan with a secured interest?
I doubt that there is a “legal right to opt out.”
Furthermore, what is the basis for the decision process.
“California, here I come…”
Hey, guess what! WA. pensions are in trouble too! Many have speculated that lost pensions will be the next financial crisis. With social security weakened, savings/stocks reduced, and private/public pensions not living up to expectations, where will retirees find the cash? Why, their homes, of course! Or not.
http://www.theolympian.com/stategovernment/story/990137.html#
Here’s a better analogy. You get a loan from the bank to buy stocks. The bank holds the stocks as collateral with the notion that if you stop making payments they take the stocks. After a month the stocks dive with 30%. Oups, you are know faced with paying interest on a assets that is not worth the loan amount. What do you do? Stop paying on the loan of course and give the stocks to the bank. You would say, now that is a stupid contract, why would a bank do that? It’s more exactly what they did with mortgages.
RE: patient @ 29 – This reminds me of a landlord I know.
When prices went down, he wanted to sell the place to the tenants, essentially shifting the loss to the occupants.
If prices would have gone up, he would not have shared a dime.
What you are suggesting is that the lender get nothing if prices go down, but only get the principal if prices go up.
In other words, banks are a lender if prices increase.
Banks are an owner if prices decrease (equity position).
Is it different with family?
RE: AMS @ 30 – It’s business and contracts AMS. Lenders need to protect themselves. I’m not interrested in the family comparison, it’s totally different to me and I see no relevance to the topics discuseed here.
RE: patient @ 31 – How does a lender protect himself?
(Also a family member is a lender, just as a bank is a lender. It’s just about contracts and business, and the legal system, right?)
By AMS @ 32:
Traditionally the answer to that has been simple: require a 20% down payment or PMI with a smaller down payment. Prior to the current crash it was quite rare for home prices to fall more than 20%.
Arguably, the fact that lenders decided to throw that requirement out the window is a primary reason we’re currently seeing declines so far in excess of 20%.
RE: B&W NIkes @ 19 –
Conventional wisdom among long time agents is that prices far exceed all reasonable expectations. Many people, investors, long time investors, watched prices climb. Many long time investors dumped properties and people bought it.
Think of it like you bought a stock for five dollars and agreed to sell when it was twenty dollars, then it went to one hundred dollars.
Banks made money, lenders, investors, financial management companies, and individuals. Now that the money is in hand, and the market has tanked, are you going to re invest in Real Estate? Heck no, that’s done. There are other things that will give a return.
So Real Estate as an investment will languish while prices return to actual value. Without investment dollars there is very little to drive the market or create a frenzy.
RE: AMS @ 32 – “How does a lender protect himself?” Downpayments that is relevant to the risk for example. And no, family is not a lender, they follow no contracts or business rules, it’s just so different. A corporation will never treat you as family. Banks want to skin you of your last cent but you are supposed to treat them like family? Do you really think the banks or any corporation would take a loss on your behlaf if they didn’t need to or if it wasn’t to minimize further losses, monetary or reputational? Don’t fool yourself. All is business decisions for them. For you as a borrower it means weighing the credit score hit against the loss, nothing else.
RE: The Tim @ 33 – In states where there is no deficiency judgment, the lender must risk the loss.
It seems the lenders priced the risk of a downturn way too low. Interest rates probably should have been double, which, I suppose, is another way for a lender to protect himself. (I use ‘double’ only as a simple multiplier. Maybe more or less would have been more appropriate.)
Increasing interest rates would have restricted the housing market, and it goes against what all the unknowing baby boomers sought: a higher than average return with little to no risk.
By patient @ 18:
It appears to me that in Virginia it’s not just a “moral” issue. It’s my understanding that a lot of the states are full recourse and it appears that Virginia is one of those. If the sites listed below are right about the recourse status of the loan, I’d think the bank would only bid fair market value, and go for a deficiency before letting a couple making 180K a year just walk away. Both Realtytrac and GreatrealtyUSA say Virginia is full recourse in non-judicial residential foreclosures.
http://www.greatrealtyusa.com/articles/Foreclosure/Foreclosure_Laws_in_Virginia_VA.htm
“If any Lien holder connected to the property wants to pursue the borrower for additional money beyond what the sale generated, they are free to attempt such an action. Virginia has no limit on deficiency judgments. In Virginia, the home owner has eight months to redeem the property.”
And Realtytrac seems to agree: “A lender may pursue a borrower for a deficiency judgment if the highest bid does not pay off the total amount due plus applicable expenses.”
http://www.realtytrac.com/foreclosure-laws/virginia-foreclosure-laws.asp
I’m not licensed to practice law in Virginia, but if Virginia is full recourse, the bank should be able to get something out of the borrower, even if it’s just a settlement amount so that the borrower doesn’t file a bankruptcy. I know if somebody tried to stiff me for 200K when they were making 180K a year, I think I’d make them bleed a little before I just let them walk. I’m pretty sure there would be a collection firm that would take that one as an assignment if not on a contingent fee basis because its a quick and easy settlement.
Don’t get me wrong, the bankers were stupid, and I don’t think they’ll get more than a nominal settlement unless the borrower has other assets in excess of the exemptions from execution in Virginia. But the borrower is the one who decided to buy the house and borrow the cash. They sound like sophisticated people making 180K a year. There’s no morality issue here. It’s just business and Virginia law regarding contracts, foreclosures and enforcement of judgments. I hate litigation, but I say sue the defaulting bastards if they walk. It’s just good business.
RE: The Tim @ 33 –
That’s ridiculous.
The 10% and 20% down payment was so a lender could sell and cover costs in case of default. It assumes a stagnant appreciation rate. When prices were going up 10% per year it made no sense to need a down payment. The skin in the game argument is for the rubes. banks are business.
I’ll save you the rambling and just say a primary reason weβre currently seeing declines so far in excess of 20% is because appreciation rates were set to double the price of Real Estate every seven or ten years. That’s double digit appreciation every year.
It was dream for those that had property.
When I worked in banking 25 years ago the average cost of foreclosing (legal, holding costs, marketing costs) was about 17-18%, slightly more for a lower priced home. That’s where the 20% down equals no PMI came from. These days I’d guess it may be a bit less as a percentage of currently inflated home values. But I’m not up to speed on current legal costs and procedures.
RE: One Eyed Man @ 37 – This is really an interesting social problem never mind the ethics or lack thereof from the borrower. We have a complete group of borrowers that are now “programmed” that there will be no problem from walking. It will be interesting to see if any “regulation” is enacted from the banking lobby to curb this in the future.
Some of the stuff I’m seeing (lender losses) is amazing.
100% loans appear to be coming back to get this market moving. Key Bank is now “bannering” their buildings with “First Time Buyers 100% financing.” Without rehashing my commentary back in 2006-07 about what I witnessed, this is the stuff that played a huge role in this market correction. Today, Mrs. S-Crow and I got into a discussion about FHA Streamlines and how many of these loans are going to blow up for us tax payers.
RE: One Eyed Man @ 37 –
I mistakenly looked up Virginia rather than Maryland, regarding the couple Tim referred to, but it appears Maryland is also a recourse state:
http://www.2-stop-foreclosure.com/states/maryland.htm
“Deficiency
In Maryland a deficiency judgment may be obtained if the lender makes a motion for it within three years after the accounting for the foreclosure is complete.”
RE: S-crow @ 40 –
I fully agree with you S-crow. And at least in the “recourse” states, I think the lenders, among other things, have to send the message that defaulting has a price to the borrower.
I’ve always agreed that zero down was a big problem. Although I didn’t see the residential deals, I was told that there was 100% residential financing in SoCal in the late 1980’s. If I recall correctly, the CS Index for LA says that market dropped about 20 or 25% between 1990 and 1995 and help cause the S&L crisis. And LA didn’t get back to the previous highs until 1999 or 2000.
When an excited Realtor told me in 2004 that he could get 80/20 financing for his clients, my only response was: “That’s the seventh sign of the Apocalypse.”
The only good news about todays no money down deals is that it’s the equivalent of the 2007 no money down buyer getting a 20 plus percent loan modification. The bad news is that he’s only at risk for moving and initial closing costs (if any) when the market falls further.
RE: One Eyed Man @ 37 – Yes, recourse versus non-recourse.
In some states it’s the type of foreclosure that makes a difference.
Quick and easy trustee sale = no recourse.
Complicated foreclosure in court = recourse possible, but you must be able to collect.
Is recourse a good thing? Basically you are trying to collect from someone who is already bankrupt, in most cases.
Should the lenders have “known better?” I don’t think so.
Should the owners have “known better?” I don’t think so, but they should assume the risk of the equity position.
Note how the lenders did not get one extra dime when the market was going up, and now they are taking heavy equity-type losses.
RE: One Eyed Man @ 42 – When an excited Realtor told me in 2004 that he could get 80/20 financing for his clients, my only response was: βThatβs the seventh sign of the Apocalypse.β
You should have raced to get your mortgage brokers license, lol. I wish I was more sophisticated and educated in the stock market (I’m not a huge risk taker)…..would have bet heavily against the market players (title companies, mortgage insurance companies, some of the Wall Street mortgage players. I really didn’t realize how problematic things were until I looked at how many purchases our office closed that were 100% financed.) In hindsight, in almost every case, if our office had a funding delayed by a lender, in the weeks or days following the delay, the lender imploded. New Century was one of those early cases. Escrow offices are the Canary in the coal mine.
RE: One Eyed Man @ 42 – I have known quite a few people, in number, who have purchased on a “zero down” or “near zero down” basis. The ones I knew the best did just fine, and a couple could have never made the purchase without a near zero down loan.
Did the loan help them with their goals? Yes.
I’d hate to see the responsible people pay for irresponsible people, but that seems to be the basic theory going, and I am not sure how to separate who will pay at the beginning. Certainly as a lender I don’t want to worry about market prices.
RE: AMS @ 43 –
I think Maryland and Virgina are recourse, even in a Trustee’s sale. Many eastern states forclosure laws aren’t that similar to ours, or the other western states. From the sites I looked at (I didn’t read the statutes) it appears that deficiencies are allowed in Virginia and Maryland after a Trustee’s Sale. The procedures are also different. In Maryland, the site said that even a Trustee’s Sale requires the filing of a court action, although there is apparently an expedited process.
In the example Tim quoted, it was a default by people who could afford to pay but chose not to. The borrowers were making 180K a year. They may not have had assets in excess of the exemptions from execution in Maryland, but they could have been forced into a bankruptcy and probably would have paid some amount to avoid the costs and other issues involved in a bankruptcy filing. There is no question that a creditor shouldn’t spend money chasing someone who’s judgment proof, but that doesn’t seem to be the case in the example Tim used. A collection firm will commonly take an assignment of a claim like that for about 30 to 50% of the collected amount so there is no cost to the creditor.
RE: One Eyed Man @ 46 – I agree that someone who has the ability but made a poor choice, or simply changed his or her mind, should not hold the lender responsible.
Oh, whoops, I don’t like the place/changed my mind/don’t think it was a good value/thought it was a better value yesterday… Here you go Mr. Lender you take the loss. Sure it was you I asked to lend me the cash…
No lender wants any part of a foreclosure. They simply want to be paid back.
RE: S-crow @ 44 –
You shouldn’t give me that much credit S-crow. I’m much better at spotting risks than I am at making profitable investments based on the analysis. I’m occassionally good at fundamental analysis, but I almost never get the timing right.
I’ve never had the guts to trade options or to sell anything short. I’m not sure I remember correctly when the home builders stocks peaked, but I think if you had sold the home builders short in 2004, you would have gotten crushed before the housing market and the home builder’s stocks turned down.
RE: patient @ 35 – “And no, family is not a lender, they follow no contracts or business rules, itβs just so different. ”
When a family member lends money, requires a contract to be signed, are you suggesting all rules of engagement go out the door?
Remind me never to lend you any cash.
RE: David Losh @ 38 –
Not so ridiculous. You’re only looking at it from the lender perspective.
From my perspective (borrower), if I’ve saved up $100,000 for a $500,000 house, I will obviously be less likely to walk away or stop paying my mortgage after prices have fallen 25% compared to the borrower with 100% financing.
Paradoxically, I am also a lot more conservative with what I buy with a large downpayment. When I didn’t have any money, sure, give me 100% financing in a rising market – its all good.
Not to mention it probably says a lot (beyond credit score) about the borrower who can raise the 20%, versus the borrower who can’t.
The main reason the banks didn’t care, is they didn’t hold the note, as sniglet said “some poor sap would”
Unfortunately, the poor saps will turn out to be the taxpayers, present and perhaps future.
RE: AMS @ 49 – Never lend me cash AMS.
I would never sign a contract with family if I lend them money or borrowed money from them. In the same way that I would never default if I borrowed from a family member. I would do whatever it takes to pay it back however long it takes until I die. I feel a bit sad for you if you have family relationship that runs like a business with contracts and all.
RE: patient @ 51 – After suffering a significant financial loss from a death, contracts have become a regular part of my life.
Simply put, if I would have had a signed contract, I would have actually got paid. Without it, I was left out in the cold. Dead men don’t pay, and without the signed contract, neither do estates.
:-(
RE: @ – The real difference AMS is that with family it is not business from either side. There is no interest rates or profit thinking involved. It’s about helping a family member not profit on each other. A mortage is a business transaction where the lender tries to maximize their profit and the borrower tries to minimize the lenders share. It’s so different that it’s not comparable. If you make up an hyphotetical family loan/contract that is like a mortgage you can just as well skip the family part and keep to the bank since you no longer have the family aspect.
RE: AMS @ 52 – I’m sorry to hear that AMS but for us contracts is not part of transactions between family members. If I take a loss on helping family, so be it.
By AMS @ 32:
Isn’t it part of the contract that if you don’t make payments they get to take the house back? Make payments and keep the house or don’t make payments and the lender repoes the house. Both parties agreed that was fair or they wouldn’t have signed.
People will still be buying houses? Where?
Employment as a percentage of the civilian population, 1948-2008:
http://www.tickerforum.org/cgi-ticker/akcs-www?getimagenr=45674
RE: Joel @ 54 – Take a look at the posts by “one eyed man” above.
Mish has a great explanation as to why lenders act like a deer in the headlights when dealing with delinquent borrowers.
http://globaleconomicanalysis.blogspot.com/2009/10/fannie-freddie-caught-in-mortons-fork.html
RE: The Tim @ 12 – I’m not even sure why you posted that. Someone earning 180k a year is not likely to get a penalty free short sale. It’s fantasy.
By patient @ 14:
Back in the 80s Porsche had a 30 year loan program, but it was also secured by your house. Apparently that program didn’t go too well.
By The Tim @ 33:
They never did throw that requirement out the window. They just went with 80/20 packages instead. 0 down was possible with PMI, but buyers wanted the lower interest rate that 80/20s offered.
I think the real difference was lower loan standards, not down payment issues.
RE: One Eyed Man @ 41 – I think most states are similar to Washington, where there is some path to deficiency. CA’s purchase money mortgages are the exception.
RE: Kary L. Krismer @ 58 – Not a short sale, as they make their financial condition known to the lender. Lenders are a bit overwhelmed these days. If the borrower simply walked away, the situation may not get the same level of attention.
If I were the lender, I would probably lose money chasing them down after spouting out like that. The owners are effectively saying, “I can pay but I really just want to transfer the loss to the lender…”
Yea, if I were the lender I there would be heavy casualties–I’d more than likely be spending good money chasing bad. It’s probably a poor business decision, but if they can pay, maybe not. I would not simply bend over.
RE: AMS @ 62 – RE: AMS @ 62 – I’ve heard rumors of banks going non-judicial in Washington, but I’ve not seen any examples.
Banks actually know a lot about their debtors, although some of the information is outdated. But income can be assumed to be the same if they can verify the same employer.
RE: Kary L. Krismer @ 63 – “But income can be assumed to be the same if they can verify the same employer. ”
Yes, and in this particular case we have someone who is perfectly able but not willing to pay.
An employer switch by the owners, and it becomes a little more difficult.
Flooded with too many foreclosures, and each garners a little less attention.
I will say this, however, the lender could hire a private investigator, and a whole host of information would quickly be revealed.
Holy Cow, where to start?
Lenders/Banks make money on generating Notes secured by a Deed of Trust. The borrower holds title in a Trust with the lender/bank. The Note gets bundled and sold and the Originator keeps a percentage of the Note to service it.
Investors buy, sell, and trade the Notes like base ball cards. As you pay front end interest the value of the Note goes down, the return goes down, and the Note is sold for less over the course of time.
A Note has had a life expectancy of 7 years before some one sells or refis. That has been the norm since 1998. Investor dollars traded on those Notes during that time, got interest income, and the face value of the Note.
Right now lenders/banks are wringing out the last of any value from the Notes they have.
Let’s use the seven year time frame for refi. If a person owned a house since 1990 it went up in price a lot. If you refi for cash back the Note goes up in price. If you have already gotten all of your equity and the price for sale pr refi has declined below the amount you have already taken and you have no chance to sell, foreclosure is the recourse the bank/lender has.
If lenders/banks want to go to court to get more then the home owner needs to file bankruptcy. If there is a judgment then that consumer is taken out of the game of our grand consumer based economy.
The courts are clogged, the lender/banks are preoccupied, and the economy continues to spiral downward.
On the other hand lenders/banks can take the losses and go on to the next swindle, like consumer credit which we all need.
If you want to talk about morals, lenders/banks lent more than the value, in many cases they lent twice the value of the Real Estate. The lender/banks knew what the value of the property was as did the Real Estate professionals. People sold properties based on terms rather than value. You mortgage payment became the bench mark of value. It’s like what used car sales people do when they ask what payment you can afford.
It was cheap, sleazy, a swindle, a lie, and a false economy.
Now we are all supposed to feel sorry for the banks or ask were our money went. Make the banks the enemy and stop feeding them.
RE: David Losh @ 65 – I’d love to talk about inflection points and interest rates, but I’d probably be talking to myself.
The expiration of the $8k credit should start showing up in the next week or so. The deadline is November 30, and one must close by that day, and given the current average length of time to complete a sale, those expecting to close by the deadline had better get moving on the deal.
In other words, I expect the November 30 deadline to start affecting new offers quite soon. (Clearly one could not close by November 30 if the offer was made on November 29th, or the 28th, and so on and so forth, until it is less clear.)
RE: AMS @ 66 –
Inflection points?
Come on man, that is irrelevant. The market has too much noise for inflection points to be of any meaning. If you could do the proper low pass filtering that captures the essence of the true market trend, then the inflection points would have some meaning.. but if you were able to do that, then you wouldn’t even need to look at inflection points, because the graph would essentially be predicting the future!! hahaha.
Knowing where the true bottom is just a matter of selecting the correct cutoff frequency of the low pass filter on the case-schiller, but noone can know what the true cutoff is that captures the future trend into the future until the future has already happened.
RE: anon @ 68 – When talking about banks and interest rates, inflection points are important.
How does this house end up as a short sale? $250K draw down of equity and then walk away?
http://www.redfin.com/WA/Newcastle/8009-119th-Ave-SE-98056/home/415589
RE: Gerald @ 71 – Gerald, the story here is that the property is encumbered well over $500K in 06′ and apparently substantially more beyond. Hope that helps a bit.
Last evening I was looking at a handful of real estate owned (REO’s) property by Fannie Mae and doing some searches of 6 specific properties. They revealed all had refinanced within the last three years and all had been purchased since late 2005 forward.
By AMS @ 68:
But not on Case-Shiller until sometime in February. ;-)
RE: AMS @ 67 –
What do interest rates have to do with the value of Real Estate?
RE: David Losh @ 74 – To listen to the NAR, low interest rates make homes more affordable. It also costs the lenders, mainly banks, when they must borrow at a rate higher than the loans.
The issues is duration, early payoffs, and the non-linear nature of present value.
I am sure that there has been a discussion here about how lowering interest rates resulted in increased (=inflated) market values.
RE: Kary L. Krismer @ 73 – It might take even longer, as we probably will want a few extra months to see what happened when it ended. Agents will start to see the drop in first-time home buyer interest right away, but it will take some time to fully flush through the system.
RE: AMS @ 76 – I was just pointing out when C-S would have December numbers, and implicitly comparing that to when agents might possibly know the effect.
RE: Scotsman @ 28 – Hey Scotsman – I think that it is not a biggie this unemployment and all. Basically the unemployed need to come up with realistic wage requirements. So say you were building houses and you were getting $20/hr. No say you come to an employer and you want to work for $5/hr, 10 hrs a day, 7 days a week. You get a pay cut and you work more but you are employed. And you have still superior conditions compared to buiders in India. So this should not be a biggie. Simply you need work harder and for less and you will be ok.
Regarding the social security – this should not be a biggie as well. The govt should ask people to just keep working until they are 80 or 90 and I guarantee that there will be social security surplass. In fact the fed will have to print money less.
So the key is to get everybody to say – hey we can work harder for less and we can work longer hours. But we are going to build/create great things and we will be proud of this.
Then China should simply float the juan and it will be clear that chionese employees can consume more and they will. They will start reaping benefits of a growing economy.
So in the end it is not a biggie. Just ask people to work for less, longer hours and till they are 80 or 90. And then it will not be a biggie.
RE: Kary L. Krismer @ 77 – Unfortunately my history with REALTORs and honesty about market conditions has not been the best. And we know there have been shifts in methodology regarding the REALTOR based NWMLS data. There are some very good, honest REALTORs, but it is tough to separate the falsehoods from truth.
RE: Trigger @ 78 –
There may be a lot of sarcasm in your comment, but there is a lot of truth.
RE: AMS @ 75 –
the non-linear nature of present value has nothing to do with interest rates.
It’s a red herring.
RE: David Losh @ 81 – What are the factors of Present Value?
1. Time point of Cash Flow (Payment)
2. Cash Flow Amount
3. Interest Rate (sometimes called the discount rate)
Note: Interest is part of the present value computation.
The next question is if PV is non-linear. I am not going to prove that PV is non-linear because it is obvious to everyone that knows anything about linear functions.
http://mathworld.wolfram.com/LinearFunction.html
What happens when a bank borrows at 5.5% to cover 6% loans? They make 0.5% on the spread. That’s fine and well, but if interest rates fall, and borrowers refinance at 5.4%? Now the bank has borrowed money at 5.5% and earning 5.4%. The spread has turned negative. This is more critical when interest rates rise and borrowers are locked into a low rate.
Now we just need to look at the duration. I hope it is obvious that people often seek to borrow money for periods either shorter or longer then they want to lend (deposit in) money to the bank. If the duration of loans and deposits was perfectly matched, we could stop here. But, alas, durations are not matched. Thus we need to also consider time. And now we can start to compute inflection points.
Please note that I am not predicting the future, but rather consider other questions, such as what if.
RE: AMS @ 82 –
Present value is the return on investment. If I buy a house for cash for $100K I want it to rent for … you figure your return. 4%, 5%, 10% is all up to the risk in owning that property.
That’s the problem. Banks, and mortgages insinuated themselves into the Real Estate business. Real Estate investors look at the bank as the enemy to be eliminated. You want the stinking bank out of your business as quick as possible.
If you want to talk about consumer credit, and credit cards, or personal loans then that’s different.
RE: David Losh @ 80 – But if you look at this it is true that Mexicans that jump over the big wall that is being built actually do find jobs even in this environment. So don’t tell me the unemployed cannot find jobs. They have to stay competitive and they do compete with Chinese workers for jobs. So they just have to come up with realistic requirements like I am willing to work hard for $5/hour.
I think Obama would do well if he got rid of employee rights, unions etc. Or any orgs that inflate prices of labour. The US needs to stay competitive.
RE: Clueless @ 83 – You sure provide plenty of entertainment.
“Present value is the return on investment.”
Just for the record, PV and ROI are not the same thing.
In other words PV /=/ ROI.
(In the rare case that PV does coincidentally = ROI, then PV is essentially zero, and we are therefore indifferent, but clearly the computations are not the same.)
I think also Obama could start helping the unemployed by redefining poverty line and lowering the minimum wage. If there are jobs out there that pay $4/hour – this is better than welfare. That is still $640 per month going into your pocket. And that buys food. So it is a good thing.
Also the unions – those guys completely destroyed the US auto industry. Why is there no talk about their role in US auto industry demise? Blue collar workers were earning more than people at MSFT sometimes. This is whacko.
RE: Trigger @ 86 – Is it a race to the top or race to the bottom?
RE: AMS @ 87 – I know it sounds bad. But if you start having persistent unemployment – then what? You have a whole 3rd world competing here. Those guys can work for $100 per month.
I mean this is globalization. That means anybody can offer services from anywhere. What does an American worker have that Chinese worker doesn’t. Maybe it will not be as drastic – but there needs to be a revision here. Look at GM – they paid a lot and could not make it. There were other issues there as well. But a big issue is your cost. If you can get labour that costs less – it helps you.
RE: Trigger @ 88 – The whole globalization idea–race to the top or bottom?
Some argue that trade increases the earning ability of all, thus everyone is better off. Specialization as well as efficiency issues are cited.
Others argue that trade decreases the earning ability of some, thus it hurts someone. The people in this camp cite jobs being shifted out of the United States, and thus we need protectionism or it’s just a race to the bottom. Environmental issues, working conditions, safety, and so on are cited.
RE: AMS @ 89 – I think it is both. Initially you have jobs being transferred which puts pressure on wages here in the US. But long term Chinese for example will earn more money and will create demand here in the US.
It is kind of like with immigration. Initially they depress wages but make some services more cost effective. Long term they provide good ideas etc. and they spend money in local economy and thus provide more benefits than costs.
So you initially bite the bullet. But long term because of this the world will be better off.
Mish has made another great post, explaining why severe deflation is just ahead. However, although I agree with his thoughts on deflation, I disagree on what he cites as the cause. I just don’t think we can lay this all at the door of greedy bankers and lackluster regulators.
http://bit.ly/yT5di
RE: Trigger @ 88 – GM & health care insurance:
GM’s management has suggested that it’s tough to compete with manufacturers that do not have to provide health care insurance. Essentially the argument is made that $X of the cost of a car is health care related, and some of the foreign manufacturers don’t have this same cost. The health care is nationalized for these manufacturers, or potentially non-existent. I guess this gets right to the question of whether or not GM, or any other US based operation, should have safe working conditions and a health care program for its employees.
Comments #78 to #92:
So, the U.S. is headed for 3rd world status. OK, well not quite, but there will be a rough period of adjustment… All sarcasm aside, I agree we will find ourselves working harder for less, and getting by without what many have come to expect. The good news/bad news is that over the years this country has accumulated a great deal of wealth that can now be taxed/redistributed to ease and smooth the bumps on the way down. Sometime a harsh wake-up call is better than a denial laced bender when change is needed. I’m afraid we’ll destroy much of what has been accomplished before making the needed adjustments.
RE: Scotsman @ 93 – Certainly with all the existing capital it would take years, decades, before degrading down to 3rd world status, and if those who support trade are correct, eventually we all would have much more…
Are we using our capital assets efficiently?
Also without digging up the specific details, just about every culture that spends too heavily in support of a strong military falls sooner rather than later.
All that aside, on a personal finance basis there is often that point of no return, where the person will always be underwater forever. Then there are those who reach a point where their investment assets support their lifestyle without any problem.
Where is the US’s point of no return, and how close are we?
RE: AMS @ 85 –
Putting out a random formula without variables is pointless.
RE: David Losh @ 95 – Since when is the PV formula random?
http://mathworld.wolfram.com/PresentValue.html
Chapman-Kolmogorov is a random equation:
http://mathworld.wolfram.com/Chapman-KolmogorovEquation.html
RE: AMS @ 96 –
random: Having no specific pattern, purpose, or objective.
What’s the purpose, or objective?
RE: David Losh @ 97 – Clueless: Of or like David Losh.
RE: Trigger @ 86 – RE: Trigger @ 84 –
Number one: The demise of the auto industry was by mismanagement. I always like to be clear about that. The gas combustion engine hadn’t changed in fifty years. We were a fossil fuel economy, and the auto industry was a big part of that. That’s a seperate issue.
The people jumping the wall are what I wanted to address because you have made a great point. In Europe and Canada immigration is more open. There are periods of frustration, but nothing like the hysteria we have in this country. In my opinion Americans don’t want to work.
What’s funny is that for all of our protectionism and whining, Europeans take more vacations, have health care, and seem to have a better perspective about labor.
When we see people with card board signs on the side of the road they are usually white, but most definitely American. Most cultures would rather work if there is work to be had. I don’t agree about cutting wages when a financial planner can bring in $150K per year for doing nothing. That should be obvious by now.
I use the example of my auto mechanic. He’s brilliant, wealthy, has vast amounts of knowledge and never finished high school, well tecnically he did, but still…. My mechanic makes me money by keeping vehicles on the road. My attorney is a stinking pile of poo yet I have to pay him five times as much. My attorney’s an expense who I have yet to see a dime out of, as a matter of fact he owes me money. Let me also mention that my stinking low life attorney messed up the last case he was given and another attorney had to clean it up. Was there a refund?
The problem with pointing at labor is similar to the debate about Real Estate agents. Is the wage justified by the work involved? In my opinion labor should be worth more than most professions we protect in this country.
If you want to lower wages let’s start with doctors, lawyers, engineers, financial planners, bankers, and all the “professionals” Universities turn out every year with the promise of a good job.
RE: AMS @ 87 –
Indeed. Countries that are racing to the top are leaving us in the dust. Higher minimum wages and higher taxes help them on average.
RE: David Losh @ 99 – You want to reduce the wages of the most talented people?
RE: Trigger @ 88 –
GM probably would’ve done well had they not embraced planned obsolescence, poor customer service and ugly design. Even their logo is dated and ugly. The same workers with Toyota management would probably have been successful, even if the resulting cars were priced higher than Toyotas due to higher labor costs.
RE: AMS @ 101 –
Of course! You’ve got to go where the money is- all good bank robbers liberals know that. David has a text-book perfect understanding of the classic socialist perspective. His understanding of contemporary economic issues is a bit more… “nuanced.” Gotta love him though! ;-)
RE: Scotsman @ 103 – Maybe we should just eliminate all the intellectuals. It’s been done in the past.
Heil in a new way of business!
RE: Markor @ 102 –
Maybe. But I think the real issue was $72/hr verses $50/hr for labor costs. Looking at only the last 5-6 years GM cars have done very well in terms of initial quality, performance, etc. In fact, GM currently has one of the top fleets for mileage and initial quality, stacking up very well against, Toyota, etc. But their cost structure kills them. A GM product at 75-80% of the cost of a comparable Toyota/Honda would dominate the market. But they couldn’t get there because of the unions and legacy costs. If management failed, it was in not standing up to what was quickly becoming an unsustainable situation and giving too much away to labor.
RE: Scotsman @ 105 – That’s not to mention that Toyota’s recalls have gone up drastically.
RE: AMS @ 101 –
Talent: A marked innate ability, as for artistic accomplishment. See synonims at ability.
Natural endowment or ability of a superior quality.
A person or group of people having such ability: The company makes good use of its talent.
Innate ability.
It’s another red herring.
RE: Markor @ 100 – RE: Markor @ 102 –
Those are more eloquent points.
RE: Scotsman @ 105 –
Well they don’t need to dominate the market, right? How much is labor as part of the car price? I think their reputation precedes them. Some 30% of Americans simply won’t even consider GM now (including me). That means less volume and concomitant higher cost. They may have mortally injured themselves with past practices. Had they not done that maybe they could pay labor more than the competition yet remain in business without gov’t subsidies.
RE: Markor @ 109 –
True, old reputations die hard. But hey, like it or not, GM is now YOUR car company, however small the share that your taxes have/are paying for, so we’d all better hope that they succeed. Otherwise the bail-out may go on forever, an ongoing subsidy for incompetence.
Personally, I’m getting pretty tired of sucking it up for failed manufacturers, union slackers, Wall Street shysters, whiny bankers and incompetents in general. The sooner this thing blows up the sooner we can get back to a sustainable reality.
RE: Scotsman @ 110 –
If GM had been designing cars that people wanted over the last 20+ years, they wouldn’t have gotten into financial trouble, despite union slackers. What they produced was ugly and unreliable cars for a long time. Yes, over the last five years or so they have vastly improved both in reliability and looks, but by this point a lot of people have given up on GM…I drive a Chevy. It’s never given me any problems, gets great gas mileage, and has over 100,000 miles on it.
I think Seattle IS special. Why? It’s simple;
Let’s say you grew up in a place like Cleveland. And wanted to move to the Great Pacific Northwest, stay in the U.S., and live in a “major” metropolitain area. It seems to me that there are only two choices here, Seattle and Portland. Now, you want to find work. Hmm let’s see, Boeing, Microsoft, Starbucks, Costco, Nordstrom, etc, etc. It’s as simple as that right?
Yes, I believe people (with the help of crazy financing) paid (and in some cases are still paying) way too much for real estate here. And I value and appreciate all the info and conversation on SeattleBubble. But it never ceases to amaze me that people still stay here no matter how much traffic, rain, bad roads, cost of living, etc. My family and I took a bus ride across the Aurora Bridge on this beautiful autumn day. Wow. Maybe it’s because I grew up in Cleveland but for what it’s worth, Seattle truly is special.
Thanks for reading,
P.S.- Another thing, if Seattle isn’t special, would SeattleBubble be as popular or exist at all?
Oh and one more thing if I may. Cleveland isn’t a bad place to live by any means. Despite being the butt of many unflattering jokes, it really has many similarities to Seattle. It’s not too far a stretch to say Seattle is Cleveland with mountains and forests (and less cold/snow of course).
.
A Time magazine article –
Get Homes off Welfare
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Washington loves to throw money at those who purchase houses. A lot of good that’s done —–
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For a nation whose citizens pride themselves on self-reliance, the U.S. doles out an awful lot of welfare. Corporations get it. Farmers get it. Even poor people get it. But no other interest group makes out quite the way homeowners do. They β or we, I should say, for I’m a homeowner too β are at the receiving end of a truly staggering array of subsidies and tax breaks. Putting an exact price tag on all of them is impossible, but the value is clearly in the hundreds of billions of dollars a yearβ¦β¦β¦β¦
.
β¦β¦.Housing subsidies have side effects too. For one thing, they push us to buy rather than rent. There’s a positive side to this, as homeowners tend to take better care of their property and their neighborhood than renters do. But there’s a negative one too, particularly in times of economic upheaval like this, as homeownership becomes an economic ball and chain that keeps workers from moving to areas where jobs are more plentiful. Subsidies also tempt us to buy more house than we would otherwise, a wasteful use of capital β not to mention of the energy it takes to heat and cool large houses. Finally, subsidizing house purchases drives up prices. That can be a boon to some sellers but not to renters or first-time buyers.
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Rising prices are always good news, though, for real estate agents, mortgage lenders and homebuilders. The higher prices go, the bigger their cut of the action. These groups are powers in Washington. The National Association of Realtors gave more money than any other group to candidates in the last elections ($4 million), according to the Center for Responsive Politics, and its 1.1 million members can do a lot of lobbying. Hence the subsidies for homeownership that never go away. In 1961 departing President Dwight Eisenhower warned of “the acquisition of unwarranted influence” by what he dubbed the military-industrial complex. Maybe it’s time to call out the real estate β industrial complex.
Long, but a great read.
http://seekingalpha.com/article/164452-recession-is-over-depression-has-just-begun?source=article_sb_popular
RE: JamesHarb @ 113 –
“Seattle is Cleveland with mountains and forests”
Oh god, help, i can’t breath. Seriously, I’m dying here… I’m laughing too hard,… help!!!!
Well, that would be special, in a dark kind of way. There’s a Tarentino movie in there somewhere…