Why do people stay in their condo when they're 30% underwater?

LGeorge,

Are you suggesting when we reach year X, RE will inflate again?

"Isn't it logical to stop your mortgage payments, make banks take the loss, and rent a similar unit for half of your monthly outlay?"

Only if you have no moral compass and actually feel an obligation to live up to your contracted agreements.

As long as your income situation hasn't changed and you can still afford your mortgage payments, what difference would it make whether the apartment is underwater or ABOVE water?

matt, you're throwing around the phrase moral compass? you?

You'll have to give specific examples, but you probably wouldn't be renting for half your monthly outlay. Especially since PH is tax-abated. Also, if you walk away, how do you plan to ever get a bank to loan to you again if you ever decide to buy in the future?

Ok,
I'll play Devils Advocate..

1) Kids are enrolled in neighborhood school
2) Mortgage might be lower than rent
3) Future expectations on HPA
4) Avoids the stigma of ruined credit

"Also, if you walk away, how do you plan to ever get a bank to loan to you again if you ever decide to buy in the future?"

ALSO, if you walk away, how do you expect a landlord to give you a lease? I doubt you'll be able to RENT anything for quite a few years, either.

I'm curious as to where all these "walkers" are living now. With relatives?

Okay, here's an example from PH:

#303 is in contract for $710,000. If you put 10% down, 5.5% mortgage for Jumbo conforming, monthly outlay is $4,305 including common charge and abated tax.

Now go look at the rental section, #203, one floor was asking $2,750 per month.

If you put 10% down, your equity is long gone. If you walk away and just rent, you save yourself $1,555 per month! Almost $20k a year! Even if real estate goes back to peak in 5 years (that's a big if), you're still out almost $100k on rent vs mortgage difference without including time value of money difference. That's just nuts.

Who will rent to the "walkers"? Simple, just pay for a year in advance. Landlord will welcome you with open arms.

As for moral compass, you can always buy a new one with the money you're saving.

I believe that the bank can come after you after NY law but not 100% sure.

http://www.foreclosures.com/pages/state_laws2.asp?state=NY

Summary:
Judicial Foreclosure Yes
Non-Judicial Foreclosure Yes, but almost never used
Security Instruments Deed of Trust, Mortgage
Right of Redemption No
Deficiency Judgments Yes
Time Frame Usually 12-19 months

Judicial foreclosure is the process almost universally used in New York. The lender must sue the borrower in court and obtain a judgment of foreclosure.

To begin the process a summons and complaint is filed along with a lis pendens. The borrower has 20 days in which to appear in court to answer. If no action is taken by the borrower, the lender will move for a summary judgment.

If granted, the court will appoint a referee who will determine the amount owed and how the property shall be sold. The referee files his report with the court. The court confirms the report and enters a judgment of sale. This stage of the process may take from 12-18 months.

The notice of sale is published weekly for four to six weeks. The sheriff or referee may conduct the sale at the time and place designated in the notice of sale.

The officer conducting the sale will execute a deed to the successful bidder when the sale is complete. The successful bidder must deposit 10% of the bid price at the time of sale, and close with the balance due within 30 days. The officer shall then submit a report of sale to the court for confirmation. The lender may bid the total amount due. If no one else bids, the property reverts to the lender.

A motion for a deficiency judgment, if applicable, must be filed with the court within 90 days of the date of sale. The court will determine the market value of the property and award the greater of market value or auction price to the lender.

http://en.wikipedia.org/wiki/Deficiency_judgment

A deficiency judgment is a judgment lien against a debtor, defendant or borrower whose foreclosure sale did not produce sufficient funds to pay the mortgage in full. [1][2] This option may or may not be available to the lender, depending on whether they have made a recourse or nonrecourse loan.

The fuller, New York statutory definition is this: "the whole residue, or so much thereof as the court may determine to be just and equitable, of the debt remaining unsatisfied, after a sale of the mortgaged property and the application of the proceeds, pursuant to the directions contained in such judgment, the amount thereof to be determined by the court as herein provided.[3]

The plaintiff's attorney (in other words, the bank's lawyer) must make a motion to receive such a deficiency judgment. Otherwise, the amount gained from the sale shall be deemed the full amount owed, and the plaintiff has no right to collect the additional debt.[4] However, if the parties (mortgagor and mortgagee) have already agreed in their mortgage or promissory note, then the debtor could be liable for the full amount.[5]

A debtor who has a deficiency judgment should see an attorney for possible remedies, including bankruptcy[6], an exemption from creditors,[7] an appeal, or a motion. As with all legal research sources on-line, Internet users should take caution before applying such advice to your own case, and perhaps should consult an attorney, barrister, or solicitor.[8]

LGeorge when people start to realize what you are saying be sure to get all cash out of the bank before the runs start! Goldman realized it and just walked away from an entire building in Brooklyn

http://legalstudy1.blogspot.com/2009/08/foreclosure-in-new-york.html

§ 1371. Deficiency judgment. 1. If a person who is liable to the plaintiff for the payment of the debt secured by the mortgage is made a defendant in the action, and has appeared or has been personally served with the summons, the final judgment may award payment by him of the whole residue, or so much thereof as the court may determine to be just and equitable, of the debt remaining unsatisfied, after a sale of the mortgaged property and the application of the proceeds, pursuant to the directions contained in such judgment, the amount thereof to be determined by the court as herein provided. 2. Simultaneously with the making of a motion for an order confirming the sale, provided such motion is made within ninety days after the date of the consummation of the sale by the delivery of the proper deed of conveyance to the purchaser, the party to whom such residue shall be owing may make a motion in the action for leave to enter a deficiency judgment upon notice to the party against whom such judgment is sought or the attorney who shall have appeared for such party in such action. Such notice shall be served personally or in such other manner as the court may direct. Upon such motion the court, whether or not the respondent appears, shall determine, upon affidavit or otherwise as it shall direct, the fair and reasonable market value of the mortgaged premises as of the date such premises were bid in at auction or such nearest earlier date as there shall have been any market value thereof and shall make an order directing the entry of a deficiency judgment. Such deficiency judgment shall be for an amount equal to the sum of the amount owing by the party liable as determined by the judgment with interest, plus the amount owing on all prior liens and encumbrances with interest, plus costs and disbursements of the action including the referee's fee and disbursements, less the market value as determined by the court or the sale price of the property whichever shall be the higher. 3. If no motion for a deficiency judgment shall be made as herein prescribed the proceeds of the sale regardless of amount shall be deemed to be in full satisfaction of the mortgage debt and no right to recover any deficiency in any action or proceeding shall exist. 4. Notwithstanding the foregoing provisions and irrespective of whether a motion for a deficiency judgment shall have been made or, if made, shall have been denied, the court shall direct that all moneys remaining in the hands of a receiver of the rents and profits appointed in the action, after the payment of the receiver's fees and the expenses of the receivership, or any moneys remaining in the hands of a mortgagee in possession or an assignee of the rents and profits of the premises, shall be paid to the plaintiff to the extent of the amount, if any, by which the judgment of foreclosure and sale exceeds the amount paid for the property upon the sale.
§ 1391. Proceeding for share of unknown heirs. Sections 991 and 992 shall apply to an action to foreclose a mortgage on real property.

My point is if you still have income/cash, I don't think you can simply walk away. The bank will come after you.

Here's the question for you lawyers.
I'm fairly sure that if an owner of a condo defaults but has the money, the bank can still go after you. Anyone?

Carnegie, I agree with you. And I have some personal experience on this matter to support your position.

what do you guys think an LLC is for

Maybe they put 20% down and have a conforming mortgage?
Yes their equity is wiped out, but their monthly outlay isn't far enough from the rent on an equivalent apt to make it worth the massive hit on their credit. Also, you have to remember that rents can change relatively fast, up or down, but that their mortgage is fixed. Right now rents are low, but no-one can be sure where they will be in 3 years.

Only the following showed up as purely non-recourse states.

I see California is on the list which explains the screwed up mortgage scene the country is going through.. California is the lion share of virtually every securitization......

Alaska
Arizona
California
Connecticut
Florida
Idaho
Minnesota
North Carolina
North Dakota
Texas
Utah
Washington

the only question is how much lower they'll be. higher is not possible in that time frame. how many shadow units are going to be coming on the market in the next three years?

Okay, if banks can still come after your income, it obviously is a problem. So the lesson here is to use a LLC to buy any real estate?

Maly, even if you assume 20% downpayment in the example I gave above, the difference between rent vs mortgage outlay is still a very high $1,152 a month or 41% of the rent.

The people who have purchased real estate in nyc since 2005 are going to be slaves to the banks for the next 20 years.

An LLC for a primary residence?????
Maybe for an investment property.....

Well, not for nothing, some people buy real estate primarily to live in. (I know! Crazy, right?) I agree that it may be logical to just move out and take a lesser hit now rather than wasting money on a non-profitable asset. But for a lot of people it's a home first and an asset second.

You are forgetting the tax break, probably worth about $500 a month in that scenario. They even get a 5/1 at 4.5% interest. W
so now they might come out ahead by defaulting by what? $400 a month? Not worth it. The transaction costs will eat up such piddly sums. For people with bigger ans sillier purchases, it might be worth it.

Re: LLCs, take a look at 15CPW on ACRIS. Lots of sales in the name of an LLC. The mortgage docs might show whether banks are so simple as to make the LLC itself the only obligor. I doubt it. Apparently many of the LLC were set up to avoid publicity, but then the buyers went and signed the POAs.

what banker would allow LLCs? there's no clawback feature? oh.... Geitner's bankers... he should go back to baking cookies.

If you are Lloyd Craig Blankfein with an LLC trying to buy in 15 CPW(again). I suspect you will get your mortgage.

the idiots that run our gov still allow LLC's throw an FHA loan on top of it and all you got to ask yourself is is there ever ging to be a bottom?

an fha mortgage in 15 cpw. LOL

I would say that the question should be, why do people think that they can merely walk away if they make a bad investment? Where else can you do that?

drdrd, if you're a commercial borrower you certainly can. almost always. so what's good for the goose...

It's the law. some states are recourse states some are not. A lot of smart mortgage traders pay attention to this...

people will start walking away next summer for now they will just pray

In Manhattan the people that walk are those with no money. This isn't California...
A reason why Manhattan default rates are lower than elsewhere..

riversider, that does not address the moral question i am posing. why the fuck can developers walk away with no damage other than MAYBE to their reputations? why can banks get repaid by the taxpayers that they are screwing? just about any corporate entity can enter bankruptcy and expect to exit it in a better state, even if that state is being dissolved.

riversider that is hilarious. citi just released numbers that showed that their mod rates were higher in new york than anywhere else. guess why.

riversider that is hilarious. citi just released numbers that showed that their mod rates were higher in new york than anywhere else. guess why.

Non-Recourse State?

Riversider plenty of owners in Manhattan will be upside down by next summer and jobless.

riversider, that does not address the moral question i am posing. why the fuck can developers walk away with no damage other than MAYBE to their reputations? why can banks get repaid by the taxpayers that they are screwing? just about any corporate entity can enter bankruptcy and expect to exit it in a better state, even if that state is being dissolved.

A.R.
Corporations are different than people(non corporeal for one). Assuming lack of fraud, I blame the lenders here, for not taking DSCR & LTV seriously.

the pattern is that it is always a Conservative persons fault

Riversider plenty of owners in Manhattan will be upside down by next summer and jobless.

Sadam, I agree! Many that that bought in 05,06,07(assuming (10-20% down paymnet) will be under water.. So what? This does not mean they walk. It only makes sense for someone with no external funds. Otherwise they are subject to a judgment.

riversider, no they are not. not in the fundamental sense that they shouldn'y be given preferential treatment for fucking up, while the consumers who keep them alive are penalized for helping to keep them alive.

and yes it is the bankruptcy laws. citi isn't being generous, they can't foreclose for a huge amount of time, which is an interesting wrinkle in the price issue. do you think that owners that get favorable mods (although i doubt they are really happening, just mods that push things down the road), would then sell at a lesser amount if they can, or stay put?

A.R.
Banks have always done forbearance or modifications. The difference now is that the original loan usually had some due diligence applied. If this were the bank situation, they look at what makes most sense, take possession or work with the borrower.
What ticks me off is the current situation where borrowers got 100% LTV and were essentially renting with option to buy. The loans got securitized and if they get modified it comes out of Grandparent's pesnions which invested in the b-3 tranche of GSAMP 06-HE3..
And it concerns me that the people that were in power before the crises and are in power now( Summers & Geithner to name two), think Goldman Sachs & Co are more systematically important than John & Jane Doe who now get no interest on their savings, pay higher taxes and do not quialify for a cash for clunker....

Unless you are well-established, in most instances construction loans are guaranteed, usually by individuals, although the guaranty may have a dollar cap. Developers that walk away (a) pay dearly, (b) leave a lot more than a 10% down payment on the table, and/or (b) declare personal bankruptcy.

As for the moral question, it is your house. If you did not but it because you were willing to live in it at the agreed purchase price, you should not have agreed to it. You don't get to return that four year-old plasma t.v. that you paid $5K for simply because they now cost $1500.

riversider, i know that. and they've usually done them when it inures to their benefit. and in ny it does.

what pisses me off right now is that home builders like kb and hanovian of whatever the fuck their name is are gettting loans to build more houses. fuck yes. great. blame the damn homebuyers, we'll just keep this game going forever. do you really think that kb thinks they'll be able to compete against their own properties in foreclosure for a profit? fuck no. they don't care. they'll be bailed out, or extended and pretended to 2012 or prayed and delayed until 2014.

and we blame the poor ignorant fuck who spent tooo much on his or her house? perspective people. we need some perspective.

i'm pissed off about tishman getting about 100% (if you count costs to renovate) loan to buy a place for more thasn $5 frigging billion. but i'm also fairly peeved about the things you're peeved about as well.

actually, nyc_sport, they don't. the leverage has been amazing. absolutely amazing.

as for the moral question, it was whatever developer's decision (let's talk swig, shall we, for early conversation) to develop. do you think he's going to pay every cent he lost for his developments? even close?

Lgeorge,
you forgot to include tax benefit of paying a mortgage vs rent.

A.R.
i have no issue with the home builders getting loans except when it's gov't money. I have no issue with a stupid mortgage, except and this is the big caveat
when there was fraud and deception involved. It further vexes me that the government either encouraged it or stood idly by, having allowed the various regulators to be defanged or to incentivize the GSE'S to fund it.. I could go on and on...

LGeorge, as mentioned above, in your example the after tax cost is not $4305. And if you assume 20% down, your after-tax cost will probably be somewhere close to $3000 per month. Why walk away to rent to save a couple hundred a month in the beginning? That is long-term foolish. The only thing that may make you consider walking is if you think the value of the condo is going to plummet further in the future.

riversider, right now it's all government money.

and my point is since they'll be rescued, it was government money earlier, as well.

and now you begrudge some people who overpaid? really? i mean maybe they should have known better, but many really were the victims of affordability calculators and brokers and bubbles and the what not. the people who should have known the fuck better are the people making the investment decisions who had information about incomes and prices and affordability and that shit. the investors, the people with the development loans that eventually they'll walk away from. and the higher ups at the development cos aren't going to be starving.

A.R.
and now you begrudge some people who overpaid?

NO!

when there was fraud and deception involved

and this is directed at either borrower or lender as appropriate.

When a person buys stock, the broker has a "know your customer rule" Why isn't this same simple thing done with mortgages?
When the rating agencies gave their AAA stamp which said "NO CREDIT RISK".. did they look at ANY LOANS? Risk starts with the collateral. There are only a handful of raters. This was the narrow passage through wich all the junk passed through. If they were required to audit X% of collateral to make sure it was as represented , some of what occured might have been averted..

These are just two examples. I have others...

riversider, the fraud was rampant, and the lenders were complicit. so i don't really know who to blame. but the lenders were the professionals no? you think they had no access to specific numbers, or even general numbers, regarding affordability?

afffordability, vis a vis incomes. riversider, that would be your lenders a-1 no-1 indicator of repayment potential.

A.R.
I believe a lender had sufficient resources to determine if the loan could be repaid. I am swayed by William Black who says the CEO'S incentivized bad behavior.
I believe regulators looked the other way, in hopes of landing jobs in the private sector, etc etc
I believe the rating agencies were profit driven and monetized their role
I believe the AIG monotized their AAA

BUT I also think many home owners recklessly used their homes as piggy banks constantly borrowing against it and refinancing and rolling these loans, and they did know better.

The number of borrowers who were truly duped is probably just a fraction of the total. Too many thought they would sell in a few years and pay off the loan. Too many in California built pools. Too many bought boats, Too many bought with the intention of selling in two years after they got the 250k/500k cap gain exclusion.

riversider, i think many homeowners used their equity as piggy banks because they had no other fucking choice. not all, but many.

you give loans, tons and tons of loans, to people who can't afford them, but tell them they ought to be able to afford them, because that is the fucking lifeline of your fucking fabricated economy, and what do you expect?

and riversider, who really is to blame for the excessive loans? borrowerss may be stupid, but ostensibly their lenders have more info. i'm getting really fucking tired of this argument. the bottom line is that banks should have had a lot at stake, and they should have been at least somewhat careful.

"Judicial foreclosure is the process almost universally used in New York. The lender must sue the borrower in court and obtain a judgment of foreclosure."

Except in Manhattan, there are more Coops than Condos, and for Coops, it's exactly the opposite: judicial foreclosures are almost NEVER done on Coops.

Also, regardless of the law, in the THOUSANDS of Coop and Condo foreclosures I've seen, I've never seen a bank go after a borrower for the deficiency judgment in NY, except for 3 occasions where there was obviously fraud in the initial loan.

A.R.
OK, We're arguing about whether John made a mistake by going to Vinny the loan shark to feed his baby or buy a boat. I'm sure both occurred. I believe it's a different ratio than you. For lenders that cold-called and preyed on elderly or others I'll agree it was predatory, but a many looked for something that was to good to be true.

I think we agree more than you think.
I stated the lenders should have been subject to a "know your customer rule"
I stated the rating agencies should have audited a sample of the loans
Investors didn't do due dilligence(Wow this Hyman Minsky stuff haunts me)..

But if something sounds too good to be true it is.... Who the fuck said everyone has a god given right to own a home? And a big one no-less.

If you put down 10%. I'm sorry, the home goes, let some private money buy it and rent it back to you. It was never really purchased in the first place...

"Why do people stay in their condo when they're 30% underwater? "

because their emotional thinking still is that they are "in the apartment" for whatever their down payment was, and they are worried about their credit rating

"A.R.
I believe a lender had sufficient resources to determine if the loan could be repaid. I am swayed by William Black who says the CEO'S incentivized bad behavior.
I believe regulators looked the other way, in hopes of landing jobs in the private sector, etc etc
I believe the rating agencies were profit driven and monetized their role
I believe the AIG monotized their AAA

BUT I also think many home owners recklessly used their homes as piggy banks constantly borrowing against it and refinancing and rolling these loans, and they did know better.

The number of borrowers who were truly duped is probably just a fraction of the total. Too many thought they would sell in a few years and pay off the loan. Too many in California built pools. Too many bought boats, Too many bought with the intention of selling in two years after they got the 250k/500k cap gain exclusion."

I agree across the board.

riversider, your analysis is simplistic. i've always put 10% down. that hasn't affected my repayment in the slighest.

banks gave up any forms of sophisticated underwriting analysis when they gave up many other things. my loan wasn't a bad one, it was a great one. and it involved PMI even though it wouldn't have a few years later.

30yrs, really?

i guess the definition of dupe might depend on income level.

A.R.

You did 90% and were required to go the Private mortgage insurance route.. and for good reason. You were higher risk. I'm assuming your bank was somewhat responsible by requiring full doc? I can't imagine the PMI company not wanting that..

If I was buying mortgages without PMI at 90% LTV or CLTV I would pass. You may have paid, but you put yourself in a high risk group of borrowers...

What's so terrible about full doc and 20-25% down?. Statistics do not lie. High LTV loans default more, especially those with a second lien. This doesn't mean everyone in this category defaults... Just that they do so in greater numbers.

riversider, if a bank is forced to make underwriting decisions knowing that they are forced to live with those decisions, fine.

fucking please. you say what is wrong with certain loans? maybe nothing, but they sure as fuck wouldn't have supported our bubbles? and where are the current loans requiring 20-25% down? the fha loans, i believe well over half, only require 3.5% and then less of course if you "qualify" for a taxpayer assist.

i was really low risk, actually, because we were very high income for the loan. that used to happen in the good old days. people would be saving and saving and then, well, glory be, they could buy.

"riversider, i think many homeowners used their equity as piggy banks because they had no other fucking choice. not all, but many."

I don't buy that. What if the market had just gone up 1% a year? Then what would they have done? So how can we act as if this sucking out of HUGE amounts of equity (Capital) was used for non-capital spending? What happened across the board in this country is that people have been living well above their means for many years, and now it's 4AM, the lights have come on and the bill has arrived, and everyone is saying "Who ordered the 25 bottles of Dom Pérignon?" knowing full well they were drinking it all night long.

For some it was buying $250 Air Jordans and leasing Escalades with 22" rims. For others it was buying McMansions (PS Why isn't it MacMansions? ) and having a BMW and an Infinity SUV in the driveway. I'm sorry, but when you have set up a lifestyle which is out of whack with your income, and THAT is what causes you to "need" to suck equity out of your home to monetize it, then i don't think it's anyone else's fault but your own.

"and riversider, who really is to blame for the excessive loans? borrowerss may be stupid, but ostensibly their lenders have more info. i'm getting really fucking tired of this argument. the bottom line is that banks should have had a lot at stake, and they should have been at least somewhat careful."

Except no one is willing to admit that Barny Frank is Marie Antoinette, a 2 headed John W. Snow/Henry Paulson were Louis XVI and Alan Greenspan Louis XIV.

AR: Are you doing a little bit of inverse Grouchoism? ("You know those loans that I took out every time I bought something? Those were ridiculous! No one should be allowed to get loans like that").

A.R.
1)Incomes change. LTV is skin in the game. Income can increase or decrease after a home purchase
2) Not sure about the good old days...In the 1950's & 1960's average LTV's were way under 80%
3) Prior to Henry Cisneros and prior to GSE'S who assumed credit risk banks would not do 90% LTV. Just insane! Consider a ten percent decrease in home prices and a foreclosure... No wait! That never happens!!!

I also agree with 30yr about changing tastes that are not supported by incomes. This whole notion that a four wheel drive leased SUV is a necessity is just insane...This country has lived beyond it's means and financed it with foreign money. You can't argue with the balance in trade deficit. On aggregate we spend too much.

no, i'm thinking on my own about the bubble.

yes, tell the person in socal that they are dstitute because of the Chinese. maybe so but who gives a flying fuck when you're debt will be worth such and such over time anyway?

30yrs, really? you think that?

idiot. really.

AR: all that I'm saying is that you SEEM to be saying there is a problem caused by the offering of a product which you yourself took advantage of. But if you're going to call me an idiot for expressing what I think is a valid conclusion based on your posts in this thread, we really don't need to have any interaction any longer.

30yrs, fine.

riversider, values change as well. do you really think that the bank who gave mea 90% loan for a loan that was less than one times income, and still required PMI, was less prudent than today's FHA loans that we the taxpayer are guaranteeing? and those are today's loans, when we really should know fucking better.

and everyone is so excited about the young first-time buyers who are finally able to "get in the game."

and the homebuilders, who have plenty of access to lending, or so bloomberg reportss, have just ramped up buying property again.

oh yes, please, do blame this on the homebuyers. and the bankruptcy code that was of course changed to benefit them, not the banks.

riversider, did you watch that elizabeth warren video? the median home purchase is still a three bedroom, one bathroom. i think it might be a portion of a room larger. people pay less for almost everything now, except housing, education and health care, and usually in those areas they're getting less for what they are spending. but "they" are easy to blame.

sorry for the early morning rant, i can't seem to stop.

riversider, what was the default rate for loans made pre-bubble? plenty of people had very low down payments then, but the GSEs, banks and the PMI process then ensured that underwriting standards were much higher. much.

AR & 30yrs, lookit here. I watched the bickering back and forth all night, and I know I let it go on too long, but now I want the twos of you to shake hands and make amends. Or not. Never seen the f-bomb dropped by AR so much; must be important issue. Something I learned somewhere once is that these vehement theoretical arguments and positions are actually driven by experiences in ones own life or circle of people. I bet that's what's going on here.

From my perspective, pretty much most people I know who bought in the bubble years were doing so on speculation despite any logic in addition to wanting a home, or often as a separate investment: if you told them that the monthly nut would be higher than renting wih no chance of appreciation, most of them would not have bought. Many took on non-standard loans. In some cases, they were appropriate, in others it allowed themselves to speculate wih more leverage, in others it enabled bigger purchases. In all cases, they understood their mortgages. In all cases, they are still paying. So in my limited experience, I'm with 30yrs on this one. The real culprit was individual greed from the owners. Granted, the greed from the mortgage industrial complex didn't help either, but I don't think a mortgage broker explaining that they were maybe better off in a simpler structure would have changed anything. That being said, I am sure there were others unable to read through or understand what they got themselves into.

let me throw some more gasoline of the fire.

by and large, the people involved in making, securitizing and bundling the loans walked away with fortunes and in many (if not most) cases are still going strong.

the people who took the loans....well, they're paying the price and in many cases will be for years.

the condition was caused by the elders, not the children. we have government and regulations to aid people, not to ensure that there is a huge likelihood that they fuck up so that a few can get rich. how do you feel about the housing affordability calculators that used to pop up all over the internet? the one provided by msn.com, that told people that they could afford huge amounts, and that they would get a loan for those amounts? you really don't see this as an industry that fed on people's eagerness to own a home, with or without the speculation angle? yes some people were attemtpting to flip, speculate, whatever, but a huge number of screwed people just wanted a place to live.

actually, inonada, i have not personally been impacted by the bubble at all. other than selling a bit early in 2004 when i was fairly certain we were entering the mother of all bubbles. and renting since then. and more recently having an income that was probably higher because of the bubble, and now lower, but regardless has less buying capability. but for the past couple of years i could have bought fairly easily.

http://www.ft.com/cms/s/0/a2ba2378-9186-11de-879d-00144feabdc0.html

Second, Mr Bernanke was the intellectual champion of the “global saving glut” defence that exonerated the US from its bubble-prone tendencies and pinned the blame on surplus savers in Asia. While there is no denying the demand for dollar assets by foreign creditors, it is absurd to blame overseas lenders for reckless behaviour by Americans that a US central bank should have contained. Asia’s surplus savers had nothing to do with America’s irresponsible penchant for leveraging a housing bubble and using the proceeds to fund consumption. Mr Bernanke’s saving glut argument was at the core of a deep-seated US denial that failed to look in the mirror and pinned blame on others.

cc, i heard that rainieri's son is looking to set up shop. trading MBSs. he sees huge potential.

Coumbiacounty, there have been some interesting studies of the 1800's aclifornia gold rush. Turns out all the money was made by equipment suppliers (such as levi strauss) and land owners who rented out claim sites. The actual miners, on average, made about the minimum wage for the time.

I feel the same thing is happening in the current real estate boomexpect to hear. Buyers are the miners. Banks, developers and real estate agents are the suppliers and land owners. An interesting post boom study would be to estimate how much net wealth was gained by people buying 2001-2007. My gut feeling is that this wealth number is, on average, 0, or very close to 0. Gold rushes and booms all look different going in but end up the same. Ok, if I ever get that MacArthur grant I know what I'm going to do.

80sMan, i've spent the last 8 months or so researching a few different topics for book ideas. one area that i spent some time researching, but rejected because while the info that is available is interesting it wasn't sufficient yet for a book, was the demonization of the american consumer.

a study came out the other day that showed the foreclosure process was much more likely to cause severe depression than poverty.

George, if you are looking at this purely as an economic question relating to the mortgage with blinders on the point is well taken. However, these are loans people took out to buy something. They went to a bank, asked for money and personally guaranteed its repayment (providing the real estate as security for that obligation). Your question could easily be put to car or boat ownership. I take out a big loan to buy a boat, which depreciates faster than just about any other asset. In year 4 the resale value on the boat is less than the remaining principal on the note. Does that mean the boat owner is nuts not to abandon the boat? On top of that let's take your PH example. Presumably someone who bought a PH has a few bucks, a solid job, good prospects. You find it odd that he would not choose to torch his credit and abandon a home because during a real estate downturn his mortgage turned upside down? I find the opposite, that it would be rather foolish and short sighted to make the type of economic analysis you suggest (or cannot grasp why it isn't more fully employed).

Now, if I were struggling, had lost my job and my credit (and word) meant less to me than survival I would certainly walk away -- especially if I were spending and exhausting my savings to squeak a few more months out of a home I would likely lose eventually and had no equity in. Apart from this I don't find it hard to understand why people pay their mortgage during a recession.

I'm with you on regulations AR, and on the enriching of the enablers. However, the many sellers (like you) were enriched with the bulk of the money in aggregate, no?

inonada, i made money on my sale. but i can tell you that people in my "class" did much better in the 80s and 90s than the 00s, in terms of buying power in real estate and elsewhere. so, yes, in absolute terms the income was higher, and the profit was made, but it didn't go nearly as far.

and i got lucky. i made a profit buying in 2001 and selling in 2004, and buying in 1995 and selling in 2000. but i can't tell you how many otherwise intelligent people told me in 2004-2007 that i was crazy to think that prices might correct. many of those people bought. some are having a horrible time, and i only know one family that had an "exotic" loan (wamu suburban foreclosure). most people don't sell every few years. a market that is overpriced encourages that because people have to buy "starter" homes, it's all they can afford. and then they try to stretch further to move on up. and you get a shack in long beach CA that is trading for $700k. amazing. of course the buyer was an absolute idiot. but they really do know that, now. the bankers, not so much.

btw, the rainieri comment wasn't a joke. literally at least.

mktmaker, i understand your point about long term cost of destorying ones credit. There are significant cost associated with this action causes a lot of potential problems down the road. Your point on this is well taken.

As for the moral aspect and one's word, this is where I disagree with you. A loan is a legal contract which contains protections for both parties as afforded by the terms of the contract and the law. The contract clearly stipulates what happens in the event one stops making payments. The lender can then exercise certain rights as afforded to them by law. Both party entered into contract knowingly. Therefore, I don't see the moral aspect to this decision. I see it purely as economical.

As for your example of car and boats, your facts are incorrect. Most of the depreciation for a new car happens when you drive it off the lot. This is when the loan is upside down. After a year or two years, you typically have positive equity on your car. This is why auto loan was the first loan to come back after the credit crisis.

i have a great idea.... how about before i walk away from my apt i go on a massive shopping spree- when the bills come in screw it!!! let them come and get me. may not be good for the economy, will ruin my credit, will be hard to rent, humiliated at work (code of conduct) but the the hell it will benefit me

there probably will be some credit rating forgiveness program. too many people have bad credit, not good for the banks.

If I'm a lender and am somehow not able to know if my customer is a bad credit because there history has been blocked..I'd increase my rates...This isn't a police record..

Other than people who really were defrauded or understandably didn't realize the terms of their loans, I don't have sympathy for those who took loans which they should have known they couldn't afford, or couldn't afford once the loans reset. Or those who relied on their homes being worth more in 3-5 years and thought they would refi or keep rolling low monthly cost loans, or those who didn't know the terms of their loans but should have. The banks are at fault for their reckless lending standards, but that doesn't excuse the buyers who were also irresponsible.

rs, it was a joke

licc, how do you think that construction boom in lic occurred?

i'm sick to tears of elkhart. i know why they chose it, but i wish they'd move on. still, here are a few of those deadbeats you're talking about.

http://www.msnbc.msn.com/id/32555445/ns/us_news-the_elkhart_project

“I’d shovel horse poop,” she says wearily. “I haven’t even found one of those jobs available.”

Construction in LIC occurred because it is an amazing location for residential neighborhoods, and developers were not able to build homes there until the zoning laws changed. Developers had purchased properties there years before awaiting changes in the zoning laws. Once the City Council rezoned the area, the construction started. What is your point?

AR, I heard Chris Thornberg of Beacon Economics on Marketplace on NPR the other day calling for just that sort of program. It is no joke.

"THORNBERG: I don't think there is much of a solution that will realistically keep people in homes. A lot of people made bad financial decisions. I have been a fan of what I call the Mulligan rule. That would be basically a program under which Frannie and Freddie, which is, by the way, government owned, would be told for the next two years when someone comes to you and wants to borrow money to buy a house, you're going to look at all the things that you normally look at with one exception. If this person should have a foreclosure on their credit report for the last two years, you ignore it. "

no, construction occurred because there was easy money. for developers and buyers. much too easy money.

chasingwamus, stunning. but i'm not that surprised. really. they are desperate to reinflate.

Anyone thinking that downpaments of under 20% without PMI is prudent lending on the part of the banks is wrong. Pointing to low default rates in previous years of such mortgages is not valid, unless it's looks at periods of house price declines. What we are learning here and the title of this discussion highlights is that an underwater mortgage is a huge predictor of default. So why would a bank want to write a loan that has a high probability of being under water(especially if they have to hold on to it and assume the risk). The last few years of Minsky Ponzi lending was an abberation.. it assumed home prices never go down.

Last point, everyone thinks they are a good credit risk but not the other guy, So I can appreciate how A.R. feels. Clearly the 10% down is good for the borrower, it gives them the ability to have less money at risk and the ability to exercise a put on the house(to the bank) if they change their mind. This is exactly why a 100% LTV mortgage is not a loan, it's rent with option to buy. The closer you get to to 100% LTV THE more it's rent with option, the closer you get to zero percent borrowing, it's owning..

The reason why banks are looking at 25% down on ny condos these days, is they read the same stuff easy street readers do and expect some price decline over the next year.. Why is that so crazy? Maybe we all need to watch It's a wonderful life and pay attention to Mr. Potter.

riversider, loans had been made for YEARS with less down. decades. and they didn't default. a few may have, but they had very successful loan success rates. this time not so much. the difference is what mattered.

it's the total underwriting process.

and the difference for manhattan was the HELOC, which enabled borrowers to eliminate PMI. PMI was difficult to get, the 10% HELOC not so much.

riversider, i missed your PMI reference. sorry. but most people buy to get a home, not a place that they can later walk away from. home ownership and credit ratings are greatly important to most people. bubbles change mentality for some, but not most.

actually the government programs have always had low down payments, but they too had much tighter screening. and prices were much more in line with incomes, thus less risky.

George, the boat was a better example. I happen to know someone w/ a boat who is now keeping it on dry dock to save costs and owes more on the note than he can get for it on a sale. He is still making payments though, for the reasons stated above. For anyone to think that walking away from a huge financial obligation, declaring bankruptcy or the like will not haunt them going fwd is foolish. As an anecdote I happened to hear a guy on CNN the other day, a small business owner, lamenting how he could not get credit to expand in this mkt. He was explaining to the commentator how, despite a solid business plan, he could simply not get financing. The spin of the story was how tight credit is. Then, when asked, he did mention that his credit was poor due to "some issues in the past". Had to laugh. We deride the banks now for not "spending the bailout money" and hording it, yet we are in this mess in large part due to easy credit and loans to people who could not or would not pay it back. Money is being lavished on the banks, rather than let them fail, because they loaned money to Main Street that Main Street can't pay back. We then lambaste the banks for not relending to the same credit challenged people.

Perhaps not a moral imperative George but with that persistent view you can forget about the days of 5% or 10% down and many on Main Street will not become homeowners (or car etc.). Some of this may be a good thing, may bring housing prices down to affordable levels where 30% down makes sense. Hard to say but each time a homeowner walks away and a loan goes bad that represents less of a chance for the next guy to get one. You want more regulation, more "no recourse" states? That's fine too, just be prepared to pay higher rates on loans with larger down payments. We will all be paying for these defaults, mostly those who honor their obligations and pay their bills, we will simply end up subsidizing the rest w/ our premiums.

Country has not experience these kind of house price declines since the Depression. As long as home prices rise, you get in trouble you sell and walk. Full Doc is important but it's 2nd after LTV. Income data becomes stale very quickly. A conservative debt to income ratio can become irrelivant if there is a job status change or illness. When a bank or our gov't through the GSE extends high LTV loans they put investors and tax payers at risk.

And the reason why poorly written loans underwritten in 2000-2003 have defaulted less than 2005-2007 is those still have HPA built into them. In the early 1990's Chase applied an LTV haircut to jumbos even when done to their best customers. In the 1950's ltv's were way under 80%. Before Fannie/Freddie many people paid cash or borrowed under 50%

No idea why you believe there's no correlation between current LTV and rate of default(even among full doc).