On the Radio: Walk Aways and Puyallup Condos

Before we get to the main topic of today’s post, here’s a brief service announcement. I’ll be on KUOW 94.9 FM again today to discuss the topic of “walking away.” Here’s their promo copy:

Is It Ethical To Walk Away From A Mortgage?

More than a third of homeowners in the Seattle area now owe more on their mortgages than their homes are worth. If you’re underwater on your mortgage, is it ethical to walk away? Have you done it? Would you ever considering it? Or do you think it’s unethical? Call our listener feedback line now at 206.221.3663. Walking away from a mortgage is the topic on KUOW Wednesday (2/16/2011) at 12:20. (call in # during the program: 206.543.5869)

Call in with your comments and questions. Although I’ve made my position on this issue pretty clear here in the past, my main role on the program today will be to address the overall issue from a more neutral perspective.

[Update: Here’s the audio from this afternoon’s program.]

[End of Update]

Speaking of radio… I was flipping through the local AM radio stations recently, and I happened to land on Dave Ramsey’s financial advice show. If you’re not familiar with Dave Ramsey, his basic schtick is that he is anti-debt to the extreme.

As luck would have it, the caller that was talking with Dave when I happened to tune in was calling with a question about Seattle-area real estate. Here’s the audio from the call, and a transcribed excerpt:

Caller: In 2006… we bought a condo. Of course, knowing we would be gone in four years and knowing of course that our condo would sell… at that time we got a 5/1 ARM and were doing interest-only. Well, of course the price went down… I moved out of Washington… We owe about $157k on it, and it was appraised a few months ago at $164k.

Ramsey: What’s your plan with the condo?

Caller: Ultimately we would love just to be done with it. But, we know at this point that if we try to sell it, not only are we going to lose that $36,000 we put down, we’ll end up paying a little on top of that. So [selling] it just doesn’t seem like a real good option, at this point.

Ramsey: You’ve got two options. One is you lose some money on it now, or you let [the loan] adjust this once, rent it for another year, and then dump it next year, regardless. In a year it may come up enough that you don’t actually write a check. But the $36,000 is gone, dude.

Ramsey starts off strong. His point about sunk costs is a good one. If you’re holding onto a home because of money that you’ve already lost, you’re not doing yourself any favors. The money you’ve lost is already gone. Get over it and move on.

However, Ramsey doesn’t stop there. He rolls right on through his area of expertise and into a realm in which he is obviously not well-versed…

Caller: Do we just start paying a bunch of principal now, just to get the loan-to-value ratio better so we can re-fi and get a 15-year…

Ramsey: No, I would save up the money and sell the condo in one year. Let it adjust, and let’s let this market recover. The market is recovering. Ever so gently, but it is recovering. As some of this inventory burns off, these prices in many markets are going to recover. Where in Washington is it?

Caller: It’s near Tacoma. It’s in Puyallup.

Ramsey: That’s a pretty good market.

Caller: Okay.

Ramsey: That’s a pretty good market. A pretty stable economy. It’s not one of those that’s just got the wind whistling through the streets kind of thing. I’m thinking I give this thing a year, and see how much it heals. But as far as the $36,000, I wouldn’t be worried about it. The question is now: Do we keep this liability or not? The answer is no, on the long term.

Yikes. Advising someone to hold onto a condo in Puyallup? Sorry, but condos in Puyallup are the kind of housing stock that people were only really interested in because we were in a frenzied housing bubble, and they were convinced that they would be priced out forever if they didn’t buy something, anything as soon as possible.

From the numbers this caller gave, it sounds like he spent somewhere in the ballpark of $180,000 on his condo. The median listing price of condos currently listed in Puyallup: $100,000. The total number of condos sold in Puyallup in the last six months: 5.

Here’s a Puyallup condo that sold for $218,000 in August 2006. It’s currently pending at $85,000. Here’s another that sold for $185,000 in January 2006. That one is currently listed for $79,900 (with no takers, apparently). If the caller thinks he’ll be getting anywhere near $164,000 for his condo, he’s probably dreaming.

Condos in Puyallup are not going to suddenly become a hot commodity a year from now. That market is dead. This is why you don’t take real estate advice from a national talk show host. Here’s hoping the caller does some research of his own and lists sooner rather than later.

  

About The Tim

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.

87 comments:

  1. 1
    EconE says:

    Cue the sockpuppets with their perpetual “Won’t inflation bring prices back soon?” babble.

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  2. 2

    Even the Des Moines Condos are Going for $100K, Not Far from the Water too

    What advice can I give a Puyallup condo buyer? I come up empty, but when you paid $200K for an apartment or in this case a soon to be apartment, perhaps walking away is the best thing. You won’t be able to buy a house for a long time and your credit will be blemished [but perhaps you’ll invest more wisely next time]…but the banks must have known it was a bad investment too [even Madoff stated the banks knew about his fraud and did nothing and I believe him] and still proceeded with the bad loan anyway. This uncontrolled growth frenzy the last couple decades has turned a good percentage of America into either con artists or incompetent fools.

    http://finance.yahoo.com/news/Apartments-pushed-home-apf-82483276.html?x=0&sec=topStories&pos=5&asset=&ccode=

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  3. 3

    The walking away question really shouldn’t be phrased was whether it’s ethical. Clearly it is not, and if you think it is you don’t have a very high level of ethical standards. But that’s different than whether it’s a good thing to do, depending on your circumstances. There are circumstances where you have no choice, and circumstances where you have a choice but the other implications are very bad. It’s that last part–how bad–that people will have differing opinions on.

    As to Puyallup condos, I’m not familiar with the area, but I’d hate to paint an entire market as being one thing. My guess is there are some condos down there that are horrible and others which are not so bad. The former can be drug down some by the latter. The point I’m making is the radio host shouldn’t have given any advice about the condo without being familiar with the unit.

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  4. 4
    Scotsman says:

    Dave’s point about sunk costs is a good one. Most people, especially those without a business mentality or prior experience and “education” have a really hard time getting their minds around the concept. But how you got into the mess, what happened yesterday, the size of the loss so far, none of it really matters. You woke up this morning to a somewhat restricted set of choices. Those are the only reality you have to deal with. Pick one and move forward.

    On his other point, I’m not a realtor, and I haven’t consulted one, but even I know Puyallup is way over built and out in the middle of a vast wasteland of nowhere. Prices there will certainly not be going up any time soon. And everybody here knows how I feel about “that which shall not be discussed” on any thread except the one where it may be discussed, and how it too will continue to impact the resale market for homes.

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  5. 5
    Drone says:

    By Kary L. Krismer @ 3:

    The walking away question really shouldn’t be phrased was whether it’s ethical. Clearly it is not, and if you think it is you don’t have a very high level of ethical standards.

    Sorry Kary, but I don’t think it’s as clear as you claim. Nobody ever complained about the ethics of default when the recovery values were higher than the loan. When someone lost their house most person would shrug, and maybe mutter something about how it was “just too bad those poor people lost their home.” Somehow the money made the ethics magically disappear! If ethics were unimportant then, they’re also unimportant now, and to argue otherwise seems disingenuous.

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  6. 6

    By Drone @ 5:

    By Kary L. Krismer @ 3:
    The walking away question really shouldn’t be phrased was whether it’s ethical. Clearly it is not, and if you think it is you don’t have a very high level of ethical standards.

    Sorry Kary, but I don’t think it’s as clear as you claim. Nobody ever complained about the ethics of default when the recovery values were higher than the loan. When someone lost their house most person would shrug, and maybe mutter something about how it was “just too bad those poor people lost their home.” Somehow the money made the ethics magically disappear! If ethics were unimportant then, they’re also unimportant now, and to argue otherwise seems disingenuous.

    I don’t see how the bank’s position has much to do with it if the owner cannot perform, or it’s very difficult for them to perform.

    I think what you might be confusing is that back in the situation you described, the owner would sell, because the loan was less than the value. That’s why it wasn’t an issue.

    Clearly you can have some bad actions with are ethical. Killing someone in self-defense is the best example of that. But those type situations are rare.

    I prefer to address this issue more in what is reasonable for the person to do. If paying the mortgage means no food on the table, then it’s reasonable not to pay the mortgage. I simply wouldn’t address it as an ethical issue, because that raises too many other issues. For example, in the food on the table situation, to be “ethical” to walk away would it be necessary for the owner to work 2 shifts 7 days a week?

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  7. 7
    NumberMonkey says:

    RE: Kary L. Krismer @ 3 – Well I guess I’m an unethical jerk. The (non recourse, first mortgage) contract gives you the choice to pay back the loan with cash or asset. Only a fool would give the more valuable of the two.

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  8. 8
    hoary says:

    I wouldn’t walk away from that condo… I’d run away!

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  9. 9
    LocalYokel says:

    RE: NumberMonkey @ 7

    Nah. You are being a business person or an investor. I find it strange when the label
    “home-owner” allows one to be held at a higher ethical and moral standard versus
    an investor who bought a rental or cre.
    Walk-aways = bad person, go straight to hell. Do ten Hail Marys.
    strategic default = wise, sharp business acumen, here have some more money to invest in.

    Go ahead Kary and tell some of the CRE folks who strategic defaulted that they are morally repugnant. We all need a good laugh.

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  10. 10

    By NumberMonkey @ 7:

    RE: Kary L. Krismer @ 3 – Well I guess I’m an unethical jerk. The (non recourse, first mortgage) contract gives you the choice to pay back the loan with cash or asset. Only a fool would give the more valuable of the two.

    Very few loans are truly non-recourse, but if you did actually have a non-recourse loan that might be a different issue.

    That the bank has one of multiple remedies that is non-recourse doesn’t make the transaction non-resource.

    As to the fool comment, again I’ll tell the story of my condo. I was underwater for several years (maybe 4), but sold it for 2x what I paid. If I’d held it for longer it could have easily been 4x. I had no need or desire to move, so the only foolish move would have been to stop paying the mortgage.

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  11. 11
    Scotsman says:

    RE: Kary L. Krismer @ 3

    I’m surprised your “inner lawyer” would even comment about ethics as opposed to sticking with contractual consequences which is really what this debate is about. For decades the banks got the best of it in a default situation. Now things have changed and they aren’t coming out as well.

    Most surprising is the heat focused on individual home buyers who chose to walk while pretty much everyone gives the thousands of LLCs that builders formed a complete pass when they fold up and default, or readily accept the defaults of major corporations as simply a cost of doing business. How about a little consistency in our outrage? For the individual, just like the LLC or the corporation, it’s a business decision that both parties walk into with their eyes wide open.

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  12. 12
    Andre says:

    By Kary L. Krismer @ 6:

    I don’t see how the bank’s position has much to do with it if the owner cannot perform, or it’s very difficult for them to perform.

    I know some homeowners put themselves in the hole and deserve their fate (particularly those that use their home as an ATM), but in other cases banks sold junk loans without disclosing the risks to the borrowers. You can’t ask the average Joe to be as knowledgeable as a Realtor, a loan officer or a banker (why would those people exist then?). I know it is the most important financial decision of their life, but it is also daunting, requires a ton of paperwork, and there are people supposed to help and advise them through the process of choosing a loan. When the only thing you hear is “why would you want to pay more?” referring to the monthly payment, you’ll have to recognize a lot of the blame must go toward the banks.

    I don’t see how the buyers were responsible for the bubble. I see responsibility in cashing our, that’s clear, but not at buying at the top and ending under water. Not everyone spends hours studying the market. Most people back then bought through Realtors that did not advise them properly, and predatory (lying) loan officers.

    As far as walking away, I see more ethics there than hanging on and defaulting, generating legal expenses to the bank from the foreclosure process which may end up costing more than the house itself. In some cases, walking away could be the best thing to do for them AND the bank…
    Even if you can pay today, you never know what tomorrow will be.

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  13. 13
    NumberMonkey says:

    RE: NumberMonkey @ 7 – Look at the reverse: the bank also has two options: take the monthly payments you make, or seize and sell the house and take the principal from the proceeds. Again, only a fool would take the lesser of those.

    Banks aren’t fools. If you your payment stream won’t exceed the value of the loan, they just take your house.

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  14. 14

    By Scotsman @ 11:

    RE: Kary L. Krismer @ 3 – I’m surprised your “inner lawyer” would even comment about ethics as opposed to sticking with contractual consequences which is really what this debate is about. .

    You’re sort of hitting on it. I’m trying to avoid the ethics. I have advised people that they should give up this house or that car, etc., but the discussion hasn’t been whether it’s ethical to do so. The discussion is over their options and the consequences of those options.

    If you’re going to bring ethics into it you might as well also bring in religion by asking: What would Jesus do? ;-)

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  15. 15

    RE: Andre @ 12 – I wasn’t taking “walking away” literally. I took that to mean just not making payments. I think most banks would prefer that you stay in the property until they actually foreclose.

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  16. 16

    By Kary L. Krismer @ 14:

    By Scotsman @ 11:
    RE: Kary L. Krismer @ 3 – I’m surprised your “inner lawyer” would even comment about ethics as opposed to sticking with contractual consequences which is really what this debate is about. .

    You’re sort of hitting on it. I’m trying to avoid the ethics. I have advised people that they should give up this house or that car, etc., but the discussion hasn’t been whether it’s ethical to do so. The discussion is over their options and the consequences of those options.

    If you’re going to bring ethics into it you might as well also bring in religion by asking: What would Jesus do? ;-)

    And would Jesus live in Puyallup?

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  17. 17
    Scotsman says:

    RE: Ira Sacharoff @ 16

    WJLP ?

    From the pictures I’ve seen he was a “big hair” kind of guy- I’m thinking Kent.

    I, and many of his followers, have been to Puyallup. All I can say is he’s been there.

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  18. 18

    RE: Scotsman @ 17 – This is starting to remind me of the bumper sticker: Who Would Jesus Bomb?

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  19. 19
    robC says:

    Ethical? If you are in the arena with other parties (lenders dumping risk on fed, appraisers giving the number that the client wants, Banks making CDO’s or other three letter words, ect) and you have a higher Ethical standard than them there is a word for that, CHUMP. You have a contract that says if I don’t pay you get my house. A simple choice which can be exercised any month for x years. Anyone out there paying into the black hole of (interest, insurance, taxes) on upside down properties is just creating passive income for the NON CHUMPS. Plain and simple. Don’t the Bankers just call it “release or return property to creditors” , sounds like a rational utility maximizer ‘s obvious move?
    .

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  20. 20
    EconE says:

    Hypothetical scenario:

    You: Homedebtor in a $200k Puyallup condo hoping for return of bubble prices.
    Your competition: Vulture investors.

    You: Pay and pay some more. Month after month, year after year.
    Investors: Buying the foreclosures in your complex for $50k

    Some time in the future…

    You: List your condo for $200k to get out.
    Investor: List condo next door to you for $100k.

    Investor: $50k profit. (less expenses of course)
    You: Still stuck paying. Month after month, year after year.

    Even further in the future….

    You: Try to list condo for $200k
    Your new neighbor: Sells condo for $150k

    Your neighbor: $50k profit (once again, less expenses)
    You: Still stuck paying month after month, year after year.

    Lather, rinse, repeat.

    Don’t forget to throw in a few major a$$e$$ment$ and property tax increases during that duration.

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  21. 21
    NumberMonkey says:

    RE: EconE @ 19 – Why in the world would you list your condo at $200k when foreclosures all around you are going for $50k?

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  22. 22
    EconE says:

    RE: NumberMonkey @ 21

    I’m just demonstrating that the owner is stuck.

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  23. 23
    drshort says:

    Most mortgages start off with the phrase:

    “I promise to pay…”

    There are remedies for non payment like forclosure, but each party is obligated to act in good faith to satisfy their contractual obligations. That concept of acting in good faith is sorta what seperates first world economies from the third world.

    While it might be financially better to walk away, it isn’t ethical if you’re able to pay. In that case, you’re just passing off your debts to someone else. It makes people feel better to think they’re sticking it to the “greedy bankers”, but usually it’s someone’s retirement or pension fund that is taking the hit.

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  24. 24

    By robC @ 19:

    Ethical? If you are in the arena with other parties (lenders dumping risk on fed, appraisers giving the number that the client wants, Banks making CDO’s or other three letter words, ect) and you have a higher Ethical standard than them there is a word for that, CHUMP.

    So ethics are variable depending on who you’re dealing with?

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  25. 25
    m-s says:

    So any “rational utility maximizer” (i.e. capitalist) is unethical.
    Not really. I don’t think ethics enters in at all. If you don’t do A (pay bank), bank does B (gets house). Its the level of the consequences that tilts the decision. If we still had debtor’s prisons, branding on the forehead, children sold, etc., people would be more likely to stay and pay. They would be inclined to be more “ethical”. (except maybe if the children were teenagers…)

    As it is now, we have seven years’ bad luck, like breaking a mirror. Is this consequence enough? For most, yes, I guess.

    The unethical ones are the liars. On the lending, borrowing, repackaging, purchasing end. You all have a list of your favorites.

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  26. 26
    TheHulk says:

    RE: EconE @ 20

    So what you are saying is – Sell now (Walk away *cough* *cough*) or be priced in forever??

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  27. 27
    HappyRenter says:

    If you make a big down payment, let’s say 50% of the price, would you still walk away?

    It all sounds like it’s not wise at all to make a big down payment. Just put down 3%, get a FHA loan and if the market goes down, you simply walk away. Somehow I feel like a fool if I buy a house and put down a large payment. Everybody around me puts down the least amount as possible. Is that a good thing? I’m confused.

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  28. 28
    robC says:

    Kary, What I am saying is that if you are in a ‘system’ or ‘game’ and you are following more rules than the others involved, you will lose. I think the rules of this game are spelled out in black and white, don’t pay = lose house.

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  29. 29
    m-s says:

    By HappyRenter @ 27:

    If you make a big down payment, let’s say 50% of the price, would you still walk away?

    It all sounds like it’s not wise at all to make a big down payment. Just put down 3%, get a FHA loan and if the market goes down, you simply walk away. Somehow I feel like a fool if I buy a house and put down a large payment. Everybody around me puts down the least amount as possible. Is that a good thing? I’m confused.

    Which is why, in the beginning, you pay much more interest than principal, for the luxury of not having much to lose. Banks are clever.

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  30. 30
    S-Crow says:

    I tried to call in to the show after Craig Blackmon was on the air but didn’t get through in time. It was also was nice to finally hear a real estate agent caller discuss the damage of strategic walkway and not act so cavalier about the issue.

    This is a difficult issue. But what is lost in the conversation about STRATEGIC walkaways are a few points:
    1) Many treat walkling away solely as a business decision. OK. If you reduce it to solely a business decision then YOU LOST. Did you have this conversation prior to buying a home as an “INVESTMENT.”
    2) People rarely discuss what the underlying issue is: Total household debt/leverage levels. If people had zero or very little debt load outside of the home they could manage the cycles. Just ask the 25-30% of homeowners who own their homes free and clear and have been through cycles.
    3) I see cases where people wish to maintain their lifestyle even after a short sale and comment “if they go after me for the shortfall I’ll just file bankruptcy”. It is like playing Chess.
    4) If I have extended job loss or health issues that wreck me financially it is not a strategic walkaway.
    5) I see loan applications from all corners of the country and many who are refinancing under HARP, HASP guidelines have LOTS of other debt load including $600/mo car payments— even reviewed one where people were paying $960/mo for two vehicles. When consumer debt and auto payments eat up a good chunk of your monthly income…..what then is the underlying cause of financial distress?
    6) Many people treat this issue as if housing values will never ever recover (is it possible that housing prices will never ever go back up? I suppose anything is possible.)
    7) The burden of mass strategic walkaway falls on the shoulders of us all. Part of ethical standards I have is to limit consequences of my own decisions to myself and immediate family. Racking up debt outside of the house to pay for things I cannot afford to pay cash for should not be the concern for others to clean up my mess.

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  31. 31
    Blurtman says:

    RE: Kary L. Krismer @ 3 – Double standard, eh? OK for businesses but shame on the home owner. Research Tishman Speyer, a $4.4 billion dollar CRE loan deadbeat. Guess what? They are still able to finance new CRE deals. Hello!

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  32. 32
    EconE says:

    I’d be willing to bet that the people doing the shaming of those who choose to walk either:

    A: own INVESTMENT property
    B: stupidly bought at the peak
    C: HELOCed their own homes
    D: Have income that is derived on a % of property “value”
    E: A combination of the above.

    It has nothing to do with ethics. Those doing the shaming are just talking their own book.

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  33. 33
    Scotsman says:

    Much ado about nothing. The rules have been in place for a long time. People naturally push up against the limits set by the rules as they seek to maximize advantages and minimize risks and losses. Now that the emphasis inside the limits of the rules has shifted everyone is up in arms. Unforeseen/unintended consequences? Maybe, but you can’t change the rules after the contracts are signed.

    It might be more interesting to talk about how the rules need to be changed for the future, if they need to be changed at all. Should the playing field become too one-sided no one will play. It’s a capitalistic system for all- the buyers, investors, banks, etc. The standards have been negotiated over time. Too many people on both sides forgot about the risks, that’s all. Welcome to reality.

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  34. 34
    LocalYokel says:

    I love it when people act like that their poop don’t stink.
    The lure of easy money is too much for most people.
    From the real estate agent who keeps on saying there is no bubble, to the mortgage guy
    pushing the NINJA loans, to the appraiser who only see repeat business, to the home buyer getting interest only loans, to the financial company wrapping these mortgages into mbs, to the rating agencies stamping AAA, to the fed govt saying all is well.

    We are all to blame but nobody is willing to admit any responsibility.
    That is your moral hazard, folks.

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  35. 35
    Mel Torme says:

    RE: m-s @ 29
    Which is why, in the beginning, you pay much more interest than principal, for the luxury of not having much to lose. Banks are clever.

    No, your particular point there is not a function of banks being clever. The amount of interest vs. principal that you pay in each monthly payment is only due to the math. If, for example, more than the mathematical amount was “allotted” to principal, then your interest amount would not be enough to equal the “Uniform Series Capital Recovery Factor” (long name for steady-payment amount for certain interest rate and certain pay-off period) for the interest rate and loan duration you signed up for.

    A = P [ i(1 + i)**n / (1 + i)**n – 1 ] , where A = annual payment, i = annual interest rate, n = number of periods, and P = Present value of the loan (i.e., loan value) My ** indicates something raised to a power, as I don’t know how to do superscripts here, and I’m reverting back to my FORTRAN daze.

    To make this into a monthly series, you could just call “A”, “M” instead, make “i” the monthly interest rate (you’d have to back it out of the compounded annual by taking the 12th root of (1 + APR), then subtracting 1), and make “n” the number of months instead of years ( 360 for a lot of us).

    If you work out how much principal you did pay in the first year by looking at your coupons (yes, a very small amount), it will be such that, when you subtract it from the principal, you are left with a 29-year loan (present value, P) that will satisfy the above formula at the same interest rate.

    So, as much as I don’t think bankers are a big boost to productive society, same as realtors, this is no scam or bad business, strictly math, M-S. The first person to charge interest in history would have figured this same formula out, had he had access to a calculator, slide rule, or stick and dirt (the kind that can do powers and roots ;-)

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  36. 36
    David Losh says:

    RE: Scotsman @ 11

    This comment makes sense.

    Rate this comment: Thumb up 0

  37. 37
    Lurker says:

    Good post, LocalYokel

    Rate this comment: Thumb up 0

  38. 38
    David Losh says:

    RE: Mel Torme @ 35

    It’s a matter of inflation, banks want present rather than future dollars.

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  39. 39
    David Losh says:

    RE: drshort @ 23

    In the Third World a debt is a matter of honor, here it’s a legality.

    Where to begin?

    You outlined what is perhaps the main point in getting people to pay. You are saying that people who don’t pay a mortgage are taking money away from retirees, rather than the banks, or Fund managers who set up these pension funds, and purchased Mortgage Backed Securities, probably based on the Triple A ratings.

    Sorry, but the banks made loans far in excess of any reasonable value so that the Notes that people signed, in good faith, were far in excess of the asset value. Banks know value of Real Property, it’s what they get paid to do.

    Banks, and Funds then sold these frivolous, worthless, pieces of paper for Real Dollars. It’s like a drug dealer laundering money.

    Now you want the people who thought they were buying an item of some value, a stated value, to continue to pay, even though the value of the asset was far below what they agreed to pay.

    The borrower had a reasonable expectation that the bank would lend based on a true value. The bank broke that trust by deliberately lending more than the property was worth so they could get a quick sale of the worthless Note.

    It sounds to me like banks engaged in a conflict of interest. Actually I think there are a number of criminal laws that apply, but because these entities were banks it was all legal.

    God Bless the First World, and the American Way.

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  40. 40
    TheHulk says:

    RE: David Losh @ 39
    Just to be fair, no one held a gun to the borrower’s head and commanded him/her to buy a house. There is more than enough blame to go around.

    My point is, banks will be cautious only if enough people exercise the strategic walkaway option. Goodness knows the government has already socialized most of the losses. It is only when they are forced to realize the losses that the reality of the risk part of the deal becomes obvious. If not, we will be back to loose lending standards in a flash.

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  41. 41
    m-s says:

    RE: Mel Torme @ 35
    Hi-
    Of course the math works that way, but it has the financial and psychological effect as I said. People should take that into account, as they should for the “opportunity cost” of any down payment, too. Meh.

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  42. 42
    Mel Torme says:

    RE: m-s @ 41 – Absolutely.

    P.S. My name’s not “meh”, it’s “Mel” with an “l”,
    P.P.S. and don’t call me Shirley, either.

    ;-)

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  43. 43
    Mikal says:

    RE: Ira Sacharoff @ 16 – I just saw Jesus heading for Los Angeles and boy did he look pissed.

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  44. 44
    Scott Weitz says:

    RE: Kary L. Krismer @ 3

    UNETHICAL?!

    Kary –

    First off, there are a ton of people with non-recourse loans in Washington. See RCW 61.24.100. You may argue judicial foreclosure, but the reality is that is a non-issue in WA currently.

    I pose these retorical questions to answer the ethics issue:

    1) is it ‘ethical’ to foreclose on someone and kick them onto the streets? I would argue yes, but banks do it all the time.

    2) is it ‘un-ethical’ to operate as the law and the contract you signed allows? Absolutely not, the banks knew the risk when they issued the loan.

    3) is it ethical to take bailout money, cut lending, commit accounting fraund, and then pay yourself a huge bonus because your firm does so well at taking money at 0% from the Federal Reserve and investing it at 2-3% at the Treasury Department?

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  45. 45
    meadows says:

    RE: Scott Weitz @ 44

    Now that is a good question….

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  46. 46
    Blurtman says:

    So in a classic boiler room operation, creative financial professionsals will run up the price of a low volume penny stock, get some momentum going, tout the heck out of the penny stock to unsuspecting investors, who are the marks in this endeavour. Knowing that the stock price is being manipulated, the pros in the boiler room bail quickly when their target price is met. See the Eddie Murphy/Dan Akroyd classic Trading Places for a humorous illustration of this practice.

    Whether you believe the housing bubble was manipulated simimarly, it is well accepted that the fraudulently rated mortgage backed securites seemingly turned lead into gold, driving the market for mortgages and inflating home prices. Further, several analysts blame Paulson and Company alone for blowing the bubble via his Goldman Sachs engineered housing market short play. Also, Magnetar similarly.

    If mortgage backed securities had been rated correctly, if companies like AIG had enganged in ethical behaviour, if mortgage originators had not engaged in fraud, then we would not be in this situation, irrespective of the sophistication or lack of sophisitication of the home buyer.

    This is the fundamental problem with Wall Street and Wall Street sympathizers. In their world, it is OK, even fun, to sell someone a “sack of sh*t.” And that is fine, but when they break the law, they must be jailed. That is not happening.

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  47. 47
    EconE says:

    By Kary L. Krismer @ 14:

    If you’re going to bring ethics into it you might as well also bring in religion by asking: What would Jesus do? ;-)

    I’m guessing that he’d forgive those that walk away.

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  48. 48
    HappyRenter says:

    RE: Kary L. Krismer @ 3
    I think the point that Kary is trying to make is that walking away is in principal unethical. However, the circumstances might justify that unethical move.

    I think that during the bubble the entire system (starting from the government) was setup in an unethical way which lead to a lot of unethical things like easy credit availability.

    I remember that my high school history teacher taught us about the distinction between ethics and moral. Ethics is something which is true globally, like killing is unethical. Moral is something which is true according to the local culture. One example is abortion. In most cultures life is defined to start with conception, thus abortion is equivalent to killing, which means that in these cultures abortion is immoral. (I’m pro-choice, but I like this example.) There are however cultures where life is defined to start with birth, thus in those cultures abortion is morally acceptable since it is not equaled to killing, although killing itself is still considered unethical. Returning to real estate, we can say that globally not paying back your debt is unethical. However, in the United States things like bankruptcy or foreclosure are morally accepted. In Dubai, for example, they are not morally acceptable and you will face draconian punishments. So, walking away from your mortgage is a matter of the local moral. I hope that the ethics/moral theory can be applied in this way to the walk-away example. If there are any historians in this blog, please correct me!

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  49. 49
    sp6859ch says:

    NON RECOURSE STATE: Look it up then discuss ethics this is just a simple contract regarding the walking away part. The loan is for the house the house is collateral for the loan. Regardless. Check out the difference in published loan rates in recourse and non recourse states.. See if they are a little higher in non recourse states to make up for the fact. Its pure lending house for loan.. that is if it is an ORIGINAL home loan owner occupied, or second home. There are TONS of homeowners that do NOT understand this. Just like they never knew when they had 20% equity they could call their lender have an appraissal and have the pmi removed….. We are not talking about a refinancedn home, because then you lose the nonrecourse most times and we are not talking about the second. The LOAN it is done where the seller can walk and the lender gets the home back NON RECOURSE they can’t come chase you for the deficiency and i guess if you want to get moral you should move out the first month you don’t make your payment and not live for free and not pay your taxes and hoa. .. Now if you feel bad and want to pay the bank thats up to you. It amazes me more people in non recourse states aren’t even aware of this maybe Tim does a little article clarifying what non recourse means in washington state..,. As always consult your own attorney i could be totally wrong….RE: Scotsman @ 11 -

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  50. 50
    ray pepper says:

    Dang I missed all this today hanging out in lovely Ellensburg. A few comments..

    I have not listened to the clip but my opinion has not changed:

    Puyallup is not bad..Its the WORST in Pierce County.

    Professionals telling people what they should do with their money for the “common good” is idiotic.

    Continuing to pay on upside down condos is pure stupidity. They will get far worse LONG before they get better.

    Yes, its your fault for buying. Why do you continue to punish yourself? Live in the home until the bitter end, save up your cash, and you will be far better off in two-three years with all the cash you saved. You can go right back and buy one of your adjacent units at another 50% off with all the cash you save or just get a lease with an option if you desire. There are buttloads of condo listings that would ADORE your lease option.

    Don’t continue to be stupid. Maybe its time to make the BEST financial decision you have made in years!!

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  51. 51
    David Losh says:

    RE: TheHulk @ 40

    The gun to the head argument doesn’t wash. President George W. Bush stood up, and in a speech was proud of the fact we had so many new home owners.

    People had a reasonable expectation that the banks, that they trust with their savings, would act in good faith,

    I’m extremely well versed in Real Estate matters. What was happening made sense. Trillions of dollars are sloshing around in the global economy. In 2006 there was $600,000,000,000,000 in the derivatives market. Hyper inflation made sense. Debt made sense. A globally expanding market place made sense.

    People had the right, the right, to expect that the collateral for the loan would be at value. The banks, all the banks, were making loans. The friend of the family Washington Mutual was making loans. They had been repeatedly turning me down for loans for twenty years, in 2003 I got two loans from them for two different properties.

    People had the right to expect the bank knew what they were doing.

    Now you’re going to tell me the bank didn’t know? Please. It’s people’s fault for not seeing a global economy that was poised for collapse?

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  52. 52

    RE: HappyRenter @ 48
    Great post, Happy Renter.
    I can’t tell anyone else how they should feel about whether something is unethical or not.
    If I lost my job or got very sick and couldn’t make my mortgage payments, I’d walk away from it and wouldn’t feel bad about it. As Tony Soprano might say ” You gotta do what you gotta do.”
    But:
    If I bought a home and was able to afford the payments, would I walk away simply because the value of the home had fallen 50%? Hell no, it’s just not in my character.
    I’m not going to say that it shouldn’t be done, or whether it’s immoral or not. It’s a personal belief. When I make an agreement, I try to keep it, even if I’m making an agreement with devils like the banking and real estate industry.

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  53. 53
    ray pepper says:

    RE: Ira Sacharoff @ 52

    “If I bought a home and was able to afford the payments, would I walk away simply because the value of the home had fallen 50%?”

    50%!! Heck yes! I would not only walk, I’d run so fast away. Most likely just as fast as I would run from a cavity search.

    http://www.youtube.com/watch?v=oqolwZoj8RA&feature=related

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  54. 54

    By Scott Weitz @ 44:

    RE: Kary L. Krismer @ 3 – First off, there are a ton of people with non-recourse loans in Washington. See RCW 61.24.100. You may argue judicial foreclosure, but the reality is that is a non-issue in WA currently.

    Incorrect. As I said before, just because non-judicial foreclosure without a deficiency judgment is an optional remedy of the bank, that doesn’t mean the loan is non-recourse.

    The bank could also elect to ignore the deed of trust and sue to obtain a judgment. Using your logic the banks having that option would make the loans unsecured.

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  55. 55
    ChrisM says:

    Maybe this isn’t very ethical of me, but I take into account the party I’m dealing with.

    If underwater, would I walk away from a private mortgage held by the little old lady across the street who is using the interest payment to support her retirement? Probably not.

    Would I walk away from a TBTF bank that engaged in fraudulent (in the non-legal use of the word, Kary) practices, received a ton of money in bailouts, and who, at best, suffered only *civil* penalties? In a heartbeat.

    History repeats itself, and I think we’re about to see more Jacksonian and Teddy Roosevelt-era populist rage at the banks. I got the chance yesterday to hear some of Bernie Sanders’ 8 hour filibuster (back in Dec 2010) and was amazed to hear how much I agreed with the guy.

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  56. 56
    Won't.I.Am says:

    What next, an uproar about people terminating their cell phone contracts early? Perhaps AT&T and Verizon were repackaging your deadbeat contract debt and selling them to orphanages for top dollar. Think of the children!

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  57. 57

    By HappyRenter @ 48:

    RE: Kary L. Krismer @ 3 – I think the point that Kary is trying to make is that walking away is in principal unethical. However, the circumstances might justify that unethical move.

    Close. I would rather leave ethics out of it entirely, and just ask if it’s reasonable.

    Is it reasonable for a homeowner to not pay their mortgage if the option is having their family go without food for days or even weeks? I think most people would answer yes, but I think you’d get different answers on whether it was ethical. Ethics are not something that necessarily change based on circumstances. For example, an attorney cannot ethically use trust funds if the alternative is his family going without food for days or even weeks.

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  58. 58

    By sp6859ch @ 49:

    NON RECOURSE STATE: Look it up then discuss ethics this is just a simple contract regarding the walking away part. The loan is for the house the house is collateral for the loan. Regardless. Check out the difference in published loan rates in recourse and non recourse states.. See if they are a little higher in non recourse states to make up for the fact.

    Last point first–that is an interesting question, but I really doubt there is a significant difference in interest rate between states like Washington, where the typical process results in no deficiency, and other states where they get judgments. Assuming I’m right, that really calls into question the other BS the banks claim about the effect of legislation on lending, because that’s a huge difference. Also, if there were a big difference in rate you’d think that some banks would offer a lower rate here with a straight mortgage that doesn’t allow the non-deficiency option.

    As to the other, from memory the bank has at least three options when a note secured by a deed of trust is in default. 1. Non-judicial foreclosure, which can occur within six months of default (maybe longer now with some of the added negotiation/mediation provisions in the act), and no deficiency. 2. Judicial foreclosure, which might actually result in a foreclosure faster, but which has redemption rights of either a year or nine(???) months if a deficiency is waived. For homestead property the redemption rights include the right to live in the property rent free during the period. 3. Bring suit and obtain a judgment and then execute on the judgment.

    Again, that is from memory, so it may be incorrect or out of date.

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  59. 59
    Cristian says:

    The discussion about “ethics” is surreal. Having a mortgage is not becoming the indentured servant of the bank. Furthermore, at the end of the day, the bank gets your down-payment, your monthly payments and the house. You get zilch. How exactly is that a problem, other than banks engaging in morally hazardous activities and issuing half a million loans for shacks in order to pay themselves billions in “bonuses”? What other way to keep banks from engaging in this kind of morally repugnant activity other then have them eat the loss?

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  60. 60
    David Losh says:

    I thought of this over night. How many people knew that banks had an easy sell of Notes to be packaged as Mortgage Backed Securities, and that pension funds were eagerly buying these up as fast as they were packaged?

    I didn’t. I didn’t know that the secondary market was so screwed up that no one, no one, was checking to see if it was at all viable. Why would I think that the securities market was so out of control? I never looked at that, it never occurred to me.

    Why would I think that the securities market could collapse and put millions of people out of work, and collapse the global economy?

    And why would I being considering that when I was buying a house that was going up in value?

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  61. 61

    RE: David Losh @ 59 – That’s a good post.

    I will say I was aware of these things being packaged and that I thought the people buying packaged seconds were fools. It’s sort of the flip side of my having thought about how it was better to avoid a second and instead pay PMI.

    Also, over the years I’d seen many small investors fooled by the claim that something was “secured by real estate.” Those words lured many into buying an investment in the same way “naked pictures of [insert name of star]” lure some into clicking on a computer virus. What amazes me is the size of some of the entities that were caught by those words. Again further proof that the MBA is the most over-rated degree ever.

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  62. 62
    ChrisM says:

    Imagine you’re in a basketball game, and the opposing team has determined that the referees will not call fouls. Under any circumstances. What does your team do?

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  63. 63

    By ChrisM @ 61:

    Imagine you’re in a basketball game, and the opposing team has determined that the referees will not call fouls. Under any circumstances. What does your team do?

    I’d love to someday see a professional coach walk his/her team to the locker room and forfeit the game. But you’ve sort of hit on a hot button issue for me with professional referees and the pull they have to limit any criticism of their work.

    I don’t think the answer is to start fouling, if that’s what you were going for.

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  64. 64
    ray pepper says:

    RE: ChrisM @ 61

    As a basketball Coach of 23 kids this year I answer easily. We foul like HELL and let em run!

    When the game gets straightened out next week we play by the rules!

    Gr8 post Chris…I will use this analogy at some point!

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  65. 65
    Scott Weitz says:

    RE: Kary L. Krismer @ 54

    Have you ever heard of that (even 1 time) on a one loan property? I see it all the time on 2nds, but the reality is the bank doesn’t do it. If they did, they would just foreclose ‘judicially’ as I mentioned…but would be subject to the ‘produce the note’ discovery request and the 1 yr redemption period….that would be a lot of fun for them.

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  66. 66
    NumberMonkey says:

    RE: Cristian @ 59 – Down payments are a very interesting subject, and an analysis of trends in down payments would reveal a hell of a lot of the banks underlying assumptions about mortgage performance.

    Down-payments are the “haircut” the bank requires to hedge against the possibility that they end up seizing devalued collateral. Low down-payments would be a sign that a bank thinks it’s unlikely that the end up foreclosing, or that even in the event of foreclosure they expect the house to be at least as valuable as the loan. High would indicate a higher likelihood of foreclosure, and/or a high chance that the house is valued less than the loan at the time of foreclosure. I bet you could look at the difference in down-payment requirements between credit scores and income levels to investigate the banks internal assumptions about those two risks.

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  67. 67
    S. Marty Pantz says:

    I listen to Ramsey frequently, especially when I commuted. Just the other night he was talking to someone about real estate. (He just loves real estate as an investment.) I cannot count how many times I hear him advise people recently to hold on to their property for another year or two, for when the market has rebounded. (I also remember a few years ago that he was one of the last to admit that the market had tanked nationally.) He always tells people to stay away from gold as an investment, because it is so volatile, and because over the years the return has been flat. Yet, at the same time, he will tell someone who is underwater on a California or Florida property that the good thing is, such property is either really hot or really awful (i.e., volatile). And most of us know the Case-Shiller numbers of how well RE has done over the years. http://www.ritholtz.com/blog/wp-content/uploads/2010/07/Case-Shiller-UPDATED.png

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  68. 68
    Julie Lyda says:

    Tim,

    Didn’t you mean to say that the number of condos sold so far “this year” is 5.
    I believe that the number sold in the last 6 months was 34.

    Not that it changes anything about the Puyallup condo market :)

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  69. 69
    Ross Jordan says:

    By NumberMonkey @ 66:

    RE: Cristian @ 59 – Down payments are a very interesting subject, and an analysis of trends in down payments would reveal a hell of a lot of the banks underlying assumptions about mortgage performance.

    Down-payments are the “haircut” the bank requires to hedge against the possibility that they end up seizing devalued collateral. Low down-payments would be a sign that a bank thinks it’s unlikely that the end up foreclosing, or that even in the event of foreclosure they expect the house to be at least as valuable as the loan. High would indicate a higher likelihood of foreclosure, and/or a high chance that the house is valued less than the loan at the time of foreclosure. I bet you could look at the difference in down-payment requirements between credit scores and income levels to investigate the banks internal assumptions about those two risks.

    That might be true, if the banks held the loans they wrote. However, in reality, they sell the loans they write to the GSEs as quickly as possible. So, other than meeting the minimum requirements that Fannie and Freddie set out for the loan, the banks don’t care how the loan performs. The down payment requirements that the GSEs set is largely a political function, and not a risk management function.

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  70. 70
    The Tim says:

    RE: Julie Lyda @ 68 – Nope, I meant five. I even provided a link.

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  71. 71
    Julie Lyda says:

    I see we used different search criteria. My search included townhouses. If I eliminate townhouses I still get 22.

    I wonder what is causing the difference?

    I don’t have time right now to investigate – maybe later this afternoon.

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  72. 72
    Lurker2 says:

    By ray pepper @ 53:

    RE: Ira Sacharoff @ 52

    “50%!! Heck yes! I would not only walk, I’d run so fast away… “

    Walking away at 50% seems to be a no brainer (at least for some) and this brings up an additional question – What is the threshold for walking away? When this property is down 15%, 20%, 40%?

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  73. 73
    JJ says:

    To be fair – Dave advises them to keep the puyullup condo because bad credit would ruin his security clearance at boeing and he might lose his job.

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  74. 74
    HappyRenter says:

    By Kary L. Krismer @ 63:

    I don’t think the answer is to start fouling, if that’s what you were going for.

    In that case, the name of the game would not be “Basketball” any more. It would be “American football”.

    Kidding aside. This brings us to a very important question. If in this country we would abolish all laws and all sort of law enforcement, would people still behave normally according to moral and cultural rules? It’s very difficult to know especially since the US is multi-cultural. But laws and moral are always kind of entrenched. For example, in Italy it’s very difficult to walk away from your mortgage but it’s also very difficult to get a loan. Also, Italians usually shy away from debt for cultural reasons. It’s ok to get a loan to buy a house but people look down at you if you had to get a loan to buy a car.

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  75. 75
    TheHulk says:

    RE: JJ @ 73

    Great! The guy is tied down to not one but two corporate overlords.

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  76. 76
    NumberMonkey says:

    RE: Ross Jordan @ 69 – What makes you think the requirements are political? I would expect a for profit corporation to act for as such, even if it has close ties to federal entities.

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  77. 77
    t-town says:

    @ Kary #3

    Kary, weren’t you a bankruptcy lawyer?

    What exactly is the difference in ethics between people walking away from their home vs people stopping payments on their credit cards and wiping out debt?

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  78. 78
    SeattleJo says:

    RE: ChrisM @ 62

    Remember the world cup game Uruguay vs Ghana. The rules specifically state that an intentional hand ball in that situation is an automatic red card. Luis Suárez knew the rules and used them to his advantage. He saved a sure goal and accepted his penalty, a red card and suspension from the final game.

    http://online.wsj.com/article/SB10001424052748703518404575343170784103184.html

    Some people thought it was a low down cheating move, others saw it as brilliantly playing within the confines (and penalties) of the rules.

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  79. 79
    Ross Jordan says:

    By NumberMonkey @ 76:

    RE: Ross Jordan @ 69 – What makes you think the requirements are political? I would expect a for profit corporation to act for as such, even if it has close ties to federal entities.

    Well the banks just don’t care, because they sell the loan to the GSEs as soon as they can, after issuing it (sometimes keeping the servicing of the loan, sometimes not). So the banks get cash for the loan they just wrote, including several thousand in profits, and then they can use that cash to issue a new loan to the next buyer. So the loan business, for the banks, is mostly about maximizing volume. The banks need to meet the minimum requirements that the GSEs set for the loans (otherwise they may be forced to re-assume the failing debt); but provided they meet those requirements, they don’t give a rats ass if the loan performs, if the borrower is happy and so on.

    The GSEs (i.e. Freddie/Fannie) are politically directed. Before this whole housing bust happened, they were directed to lower their lending standards, in order to promote the virtue of home ownership. That’s why we got down to 0-down loans in the first place. If you want to see how lenders behave in absence of a big government agency buying up the debts they issue, just look at the “hard money” lending industry. Those loans are really based on the underlying asset’s value, adjusted for risk – so you end up with 4-pt loans and 14% interest rates (and even those folks really want you to pay them back quickly, so they can recycle the loan).

    We can point to so many causes for the whole housing meltdown, but I think the most fundamental cause is (the politically directed) reduction in loan standards (and therefore loans issued for less than their long term cost, subsidized by the taxpayer).

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  80. 80

    By t-town @ 77:

    @ Kary #3

    Kary, weren’t you a bankruptcy lawyer?

    What exactly is the difference in ethics between people walking away from their home vs people stopping payments on their credit cards and wiping out debt?

    Yes I was, and I would also not put filing bankruptcy into an ethical/unethical discussion, so in some ways there is no difference. Again I’d use reasonable/unreasonable.

    But I guess it depends on exactly what is meant by walking away. If it’s walking away because you can afford to pay but don’t want to, that wouldn’t likely fly in bankruptcy–there are tests for substantial abuse. In the foreclosure situation you might risk a judicial foreclosure in that situation, although you’d probably have to be pretty high income for that to be much of a concern.

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  81. 81

    By Scott Weitz @ 65:

    RE: Kary L. Krismer @ 54

    Have you ever heard of that (even 1 time) on a one loan property? I see it all the time on 2nds, but the reality is the bank doesn’t do it. If they did, they would just foreclose ‘judicially’ as I mentioned…but would be subject to the ‘produce the note’ discovery request and the 1 yr redemption period….that would be a lot of fun for them.

    I sort of answered that already by saying you’d have to have a high income or other significant assets. I have heard rumors of some non-judicial foreclosures, but I’ve not seen any direct evidence of them.

    With some of the new legislation going through on mediation, etc., it wouldn’t surprise me that banks might start going judicial and waive the deficiency to get the 9 month redemption period. I’ve heard some of the legislation might stretch the nonjudicial process out to about 270 days.

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  82. 82

    Does anyone else find it ironic that those promoting short sales and walk aways point to Freddie and Fannie being willing to grant new credit in two years, when in two years Freddie and Fannie might not even exist? ;-)

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  83. 83
    NumberMonkey says:

    RE: Ross Jordan @ 79 – What evidence do you have (besides talk-radio conventional wisdom) of the source of reduced lending standards coming from congress? I certainly agree the reduced standards played a big roll in the crisis, but I think the causes were not with congress. Fannie and Freddy were passing those mortgages along just as fast as the issuing banks, and turning a tremendous profit while they did.

    The lending standards had everything to do with the expected zero-risk of homes losing value. Why have any standards when you expect to *always* extract the value, one way or another?

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  84. 84

    RE: NumberMonkey @ 83 – I don’t have a link, but I think Congress did push F&F into making more and more risky loans. Here’s an article which clearly blames government, but mentions Hud, Clinton and Bush more than Congress.

    http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html

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  85. 85
    David Losh says:

    RE: NumberMonkey @ 83

    He’s referring to Frank and Dodds, and Charles Schumer(?).

    In the run up of pricing Congress people were saying that the middle class, and poor were being left behind in what was called a “gold rush.” They foolishly advocated that lending standards needed to be more inclusive.

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  86. 86
    snagglepuss says:

    I looked on the John L Scott website and find more than 5 condos sold in Puyallup during the last year. There weren’t that many in downtown Puyallup, but up on South Hill, which is in the city limits, there were many more condos that sold. People forget that a lot of Puyallup is now up on the hill, not in the valley.

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  87. 87

    […] On the Radio: Walk Aways and Puyallup Condos – I’m generally a fan of Dave Ramsey’s anti-debt schtick, but in this segment he ended up advising a caller with a condo in Puyallup to “let this market recover” and “sell the condo in one year.” Um, news flash Dave. The real estate market—especially for condos in Puyallup—is not going to “recover” in any substantive way in just a year. Actually that segment was back in February, so we’re now just a month away from Dave’s predicted recovery. Good luck with that. […]

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