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

mktmaker, you are correct. there will be long-standing consequences, and many realize it.

i'll give the details of my 1995 loan, then riversider can decide if we were a bad risk.

had owned apartment in Seattle for four years. zero late payments. some student loans, total monthly debt of about $300 no car. used first year's savings in NY to pay off most debt, excellent credit rating.

husband employed by top 10 biglaw firm for one year. salary of about $100k. firm had never fired young attorneys for anything other than cause (broke that record this year).

i was a legal assistant at a top 20ish firm. had been legal assistant for seven years. salary was in the mid-$50k range, with overtime $90kish.

total income $190k. apartment, 2 bed/1bath for $105k. total after tax monthly cost of about $1400, including PMI. either one of us would have qualified for the amount of debt on one income.

the numbers were even better for our $65k Seattle apartment, because the common charges were less than $300 a month. total after tax cost was less than $800. qualified on combined incomes in the $140k range.

we actually were just idly looking when we came across the 2 bed. we still owned in Seattle, had to sell to purchase (and got that into the contract), and really scrambled to make it happen. we would have had much more to put down the next year, although we likely wouldn't have found such a great deal.

"total income $190k. apartment, 2 bed/1bath for $105k. total after tax monthly cost of about $1400, including PMI. either one of us would have qualified for the amount of debt on one income. "

why were you putting less than 20% for a house that cost 1/2 of annual income? you only needed to put $21k to avoid PMI, slightly more htan 10% annual income. weird (or i didn't get the details right, or PMI rules changed in between?).

how much is/was that apartment worth at the peak?

morally wise, i don't get why is it ok for pension funds (like calpers) to inflate the RE mkt and then walk away from those speculations that failed... leaving tax payers on the hook twice (as that venture goes bankrupt and then through higher property taxes, as the $ lost has to be raised back to feed those public retirees)...

but then when the average joe get's a grasp of the math involved and understands that it would be best for his family to walk away... omg! the horror!!! what a corrupt irresponsible individual joe is!!!

Exactly right, high income for years and all they had saved was $20k for a down payment? Definitely a credit risk, as they were spending all their income. Lost job would have meant mortgage default quickly.

Yeah I don't get why all those people who made SO much saved SO LITTLE either. What were they thinking that the well would never run dry?

admin, we didn't expect to buy. i supported the husband through law school. i was the one paying the mortgage on the first loan, as he went to law school after we bought. so i guess that turned out to be a riskier loan for the bank than we presented initially, but still was easily within our means.

then we moved to new york, paid off almost all debt. we didn't think we would buy then, we anticipated waiting another year or so, but we lucked into the apartment (i accidentally rang the buzzer for the wrong open house and saw an apartment that was priced so low we could purchase). modern, did you get that? i used the income to put my husband through law school, which seemed like a good investment at the time, particularly as my parents were in the position of being able to support us if there was a job loss?

Low Level of savings is a red flag in lending. Too often a good income with no savings means something doesn't add up. Many loans currently defaulting are in the Prime Category. Full DOC with high FICO. One commonality is they borrowed above 80% CLTV(second lien was cheaper these last few years vs PMI).

Just because someone with a Law School diploma just landed a good job doesnt' make them a good mortgage credit(YET). I'm from Missouri.. Show me you can save some money and come up with a 20% down payment, then I'll believe you.. And if you lose your job or experience a job change, then as a lender I'm protected..

cc, i missed your post. about $900k.

the unit we bought was priced about $60-70k lower than others in the building. it wasn't renovated, showed horribly, reeked of desperation.

$160-200k was the price range we were looking in, and we would have done OK the next year, but this turned out to be quite the nice little find. i felt it was too small (high ceilings, good-sized living room, good storage, but small bedrooms, particularly daughter's, one bath, small kitchen) so moved to the loft in Chelsea. if i knew then what i know now i might have just stayed there. a bit small seems ok now at $1400/month. and it was quite pretty.

the buyers at One Hanson are down more then 30 percent now, they will start walkin next summer. Mass exodus back to the promised land of Manhattan

riversider, that was one loan the bank did well on. circumstances are individual. and again, historically small downpayments have been quite common. the bank always takes a risk, they have been in the business of determining what is appropriate risk for a long time. sometimes they get it wrong, very wrong.

we were full doc with high fico, and a purchase history. we had paid down huge amounts of student loans, which showed up on our credit report, and i would categorize that as proof of savings for a bank. we wrote a nice letter explaining that. as we had to.

and this was a coop, believe it or not. they don't usually allow 10% down, but they did for us. it wasn't a very prestigious building, but they still had some standards.

A.R. Glad it worked out for you. Using yourself as an example makes this way to personal. You knew your income and felt you could handle the debt load.

I don't you think you realize how much a role HPA had here in keeping defaults low all these years. This mortgage crises was a train wreck waiting to happen.

Anyway I'm done here..

"admin, we didn't expect to buy. i supported the husband through law school. i was the one paying the mortgage on the first loan, as he went to law school after we bought. so i guess that turned out to be a riskier loan for the bank than we presented initially, but still was easily within our means."

i see, somehow i took for granted you had the $20k but PMI was for some reason smarter to do. most people don't have a lot of spare cash a year after grad school anyway (hence many rely on mom&dad's downpayment). still lending to the starter mkt has to be a bigger risk for the bank than lending to those that have already well established careers.

why? people have real stories, lives. they're not just numbers, or people you can make assumptions about.

and what i felt was meaningless. it was what the bank felt, and the pmi company. and they were right. if we had become unemployed it wouldn't have been the 10% down issue that forced us to walk, it would have been the lack of income and yes, possibly savings. but i'm certain they had loss data they could trend and factor that showed we were an acceptable risk.

all i'm saying is that the collapse in underwriting standards was one that was done on a level that can't be explained solely by limited down payments. people don't usually just walk away for no reason. and if and when they do it is often devastating personally. but i like the headline story on MSN that lists the six reasons why you should be happy to get a job at mcdonald's. prefer it, even.

admin, i agree. we weren't the BEST risk, but we were a decent risk. and they made us have quite a bit remaining in savings, so it was a bit of a trade off.

I am always shocked how little people put down on their home purchases (and shocked at how bank credit standards allow it to happen). I can understand someone like AR, having paid for her husband's grad school, did not have the ability to put 20% down. But they had a track record of income, a top law degree in hand, and could explain their low level of savings. I could get that thru credit. It is the people who have been working for 10 years, not saved really anything, who now want to buy a home that they cannot afford, that shock me. Then they get the home and immediately start taking cash out of it to buy luxury items that are way out of line for their income level. Did the banks force them to do this or was it human weakness seeing their neighbor pull up with the new Lexus?

Many conservative people saw housing rising by double digits every year, continued to save money, live below their income level, and wished that they could buy but knew that they couldn't afford to at current prices. A reasonable person plugged the numbers into the mortgage calculator, made estimates about taxes and other costs, and ran back to their rental despite being able to borrow with little down. We all know how much we earn each month and that bonuses can evaporate. There were many people (especially in California/NV/AZ) who knew full well that they were gambling on price appreciation (fully abetted by the mortgage bankers) in an attempt to keep up with their neighbors/relatives/friends. I don't have sympathy for them. Were the banks wrong and unbelievably greedy, absolutely. Were both Dems and Reps responsible for creating programs to inflate housing prices, absolutely. But personal responsibility for contracts freely entered into trump all those other items.

AR, I know YOU think you were a good credit risk. Most borrowers do. But from the lender's perspective, with minimal savings and not much job history, you were definitely higher risk.

And I disagree that every law firm associate's job was always secure until this year. While wholesale layoffs were not done, every law firm in the past has quietly "suggested" to some lower-performing associates that they find another job. They didn't directly fire people but made clear you should move on, in many cases they left for lower-paid in-house jobs. So while I am sure you think that could never have happened to your husband, the lender has to take that possibility into account.

For those who said the developers just walk away with impunity, the Real Deal reported today about a lender suit against the developers, and three of its indivuiual investor guarantors, seeking $20 million principal and interest on a foreclosed Chelsea property.

http://therealdeal.com/newyork/articles/carriage-house-faces-20m-in-lender-suits-broad-channel-builders

"Exactly right, high income for years and all they had saved was $20k for a down payment? Definitely a credit risk, as they were spending all their income. Lost job would have meant mortgage default quickly."

Sort of like how much of a capital cash account we have for public projects after 8 years of tax revenue boom under Bloomie?

modern, we both had jobs that each would have covered the cost. we both would have had to have lost our large firm jobs and not find another one. and who said we had no savings? we didn't use all of our money for the down payment. we didn't have a really huge amount, not enough to put another $10.5k down and still have savings, but i'd never not have any savings. i'd have postponed purchasing under those circumstances.

and at this firm you didn't get asked to leave. you were given a case involving huge amounts of documents, where they were happy to let you rot. or you were assigned endless distributions to prepare if you were in corporate. at my firm people were fired left and right, awful place, but my position was fairly secure. another $10,500 wouldn't have prevented a default under very poor and unforseen circumstances, and it would have been very easy to sell at a profit.

30yrs. sorry i was so pissy.

"I am always shocked how little people put down on their home purchases (and shocked at how bank credit standards allow it to happen). I can understand someone like AR, having paid for her husband's grad school, did not have the ability to put 20% down. But they had a track record of income, a top law degree in hand, and could explain their low level of savings. I could get that thru credit. It is the people who have been working for 10 years, not saved really anything, who now want to buy a home that they cannot afford, that shock me. Then they get the home and immediately start taking cash out of it to buy luxury items that are way out of line for their income level. Did the banks force them to do this or was it human weakness seeing their neighbor pull up with the new Lexus? "

What is unfortunate is that the rules get made for the masses - usually the 97% who are idiots - and good people often get screwed by the well-intentioned rules.

This isn't just RE, this is life and politics.

"30yrs. sorry i was so pissy."

whew. it was going to be really hard not responding to 33% of the intelligent posts on this board.

OK, people are going to have to get used to hearing me say this over and over, because I can't help it:

AFTER the sub-prime blow-up and Fannie and Freddie were obviously toast, but some banks were making loans to people with 25% down and good credit, I saw an interview with Barney Frank where he actually said, "well that's good for people who have 25% to put down and good credit, but what about people with only 10% to put down and bad credit?"

THEY SHOULDN'T BE BUYING FUCKING HOUSES, THAT'S WHAT.

Barney Frank also claims he said people should rent. And it was the Republicans who pushed the housing agenda. Barney is not to be believed....and that can be taken in more than one way....

Wasn't it Barney Frank , Bill Clinton & Henry Cisneros who pushed those 3% down mortgages? All done for political gain.

"Barney Frank also claims he said people should rent. And it was the Republicans who pushed the housing agenda"

Do you have the quote?

Here you go!
http://www.thedailyshow.com/watch/mon-july-13-2009/barney-frank-pt--2

http://www.fdic.gov/bank/analytical/working/98-2.pdf

AND THEY DO DISCUSS LTV..

All theories of mortgage default stress a key role for homeowner equity, and empirical analysis
supports this emphasis. Since the most direct measure of equity is the loan-to-value ratio (LTV), we
expect to observe a strong positive relationship between LTVs and foreclosure rates, although the
5 A sample of literature relating to treatment of mortgage default as an option can be found in
Hendershott and Van Order (1987), Kau and Keenan (1995), and Vandell (1995). Several recent
4
relationship may not surface until several years after mortgage origination. As Figure 3 illustrates, rising
LTVs explain several, but not all, aspects of the foreclosure rate trend. In the early 1950s mortgage
lending was remarkably conservative, as witnessed by an average LTV of only 58 percent in 1952.
Rising LTVs throughout the 1950s suggest a transition to modern-era lending practices, when LTVs
have averaged over 70 percent. This transition explains the exceptionally low default rates of the 1950s
as well as rising rates in the early 1960s. Unfortunately, LTV trends fail to track foreclosure rates for the
two decades after the mid-1960s. A possible relation reappears in the late 1980s and 1990s, as slowly
rising LTVs again follow rising foreclosure rates. However, this most recent relationship is questionable
because of the close relationship between conventional and FHA rate trends, as noted in Figure 1. That
is, since FHA mortgages have had high LTVs for many years, and the FHA patterns in Figure 1 are very
similar to conventional patterns, it seems unlikely that rising LTVs are solely responsible for the rising
long-term trend in mortgage foreclosure rates

"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?"

An oversimplification. There was a looooooong delay between the first two buildings going up, and then all the other projects. Powerhouse was talked about over and over again for years.

It wasn't just the zoning, they needed a bubble, too.

Attraction of Long Island City was lower prices and access to Manhattan..

So if Manhattan comes down, What's the attraction of LIC?

riversider, that $65k purchase in seattle in 1991? 5% down. government-backed loan. first-time buyer fha program, i believe. no purchase history, half of the amount was a gift from parents, 26 years old. husband had had horrible financial situation, although i don't know if it showed up on credit report. no PMI. no default.

good jobs in stable industry. full doc, probably good credit history as husband's irs issue didn't show, i believe. large student loans, but zero other debt.

http://2.bp.blogspot.com/_pMscxxELHEg/SpPzHxGBlkI/AAAAAAAAGM8/fyWyXg1vrvE/s1600-h/CaseShillerQ22009PriceIncome.jpg

Another 10% down?

depending on which market. and incomes. and usually there's an overcorrection post-bubble. but that's one ugly chart.

I'm trying to find a good chart showing average LTV by origination year and percentage of origination above 90%. It appears 90% LTV issuance began an uptick around 1990 and really took off after 2000.

it depends on the loan type. jumbo is where things really changed. and you should look at PMI activity also. very little in the 00s, comparatively. whole level of underwriting scrutiny that just disappeared for more expensive homes. although it was still around in 2001, i suspect it largely wasn't needed around 2003 or 04ish.

i constantly rant about ltv. but remember that ltv for a properly priced asset is a very different beast than ltv for an improperly priced asset. add in very high unemployment rates, which here was caused by the bursting of the housing bubble, and you have a nightmare. just for analysis, you give someone a $90k loan on a $100k house, but absent the bubble, it's worth $60k, you've just done a negative equity deal. and if their income is $20k you're screwed. you can't have all, basically. the risk increases exponentially when you have the additional risk factors. the loans were made because the banks allowed themselves to assume that housing prices could not go down, which was a completely unsustainable assumption given incomes. they really did know better, but they had created investment instruments to trade this toxic crap, and the party was just too much fun.

If the house isn't properly appraised. LTV data becomes useless. Agree 100% If you are talking pricing of the mortgage not so sure. A borrower/loan deemed risky can be dealt with two ways(higher rate/lower LTV)..but if he's bad credit doubt he could handle bigger down payment. The higher rate works to a point, but if the the statistics have too high a probability of default, no rate will work. As I stated a few dozen times, the lenders, rating agencies and ultimate buyers of these loans did not have good data to base their decisions on and wrongly believed default rates would be low. Simple reason...With rising home prices and ever loosening Credit standards the risky borrower could refinance and even do an equity take-out before getting into trouble.

Market share of 90% LTV loans prior to 1990 was very small. Interest only mortgages were originally marketed to the very rich. The idea that this product was good for borrowers with limited flexibility was just absurd.

***************************

Minsky makes a distinction between three types of borrowers. The first type he labels hedge borrowers who can meet all debt payments from their cash flows.

The second type are speculative borrowers who can meet interest payments but must constantly roll over their debt to be able to repay the original loan.

The third group of borrowers Minsky labeled Ponzi borrowers; they can repay neither the interest nor the original loan. These borrowers rely on the appreciation of the value of their assets to refinance their debt.

According to Minsky, the financial structure of a capitalist economy becomes more and more fragile during the period of prosperity. In short, the longer the prosperity, the more fragile the system becomes. Minsky argued,

In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance.[2]

This framework of thinking comprises the essence of what Minsky dubbed the "Financial Instability Hypothesis" (FIH).

hmmmm from 1995 survey 69-70% LTV and i'm sure virtually no above 90% loans...
http://www.tenant.net/Oversight/RGBsum95/95msurv.html

Underwriting Criteria
Since 1993 the number of lenders tightening their underwriting standards has steadily declined. Past Mortgage Surveys revealed that most lenders had developed increasingly cautious lending criteria in response to higher delinquencies and default rates by landlords and to general economic conditions. In 1992, 50% of respondents had implemented tighter lending practices. The proportion was also about half in 1993 but dropped remarkably to 15% and 10%, respectively, for 1994 and 1995. This could be the result of fewer delinquencies and defaults in recent years stemming from tightened standards that lenders implemented previously.

Through 1994, lenders had reduced loan-to-value ratios for three straight years. This year, lenders reported their average loan-to-value (LTV) standard increased from 69% to 70% of building value. This modest increase in LTV is another favorable indication that the standards for mortgage financing may be loosening.

riversider, that discusses mortgages to multi-family property investors, i believe. done for the rent-stabilization board?

yep.. missed that..

riversider, what i am saying is risk factors are cummulative. i don't think it's such a stretch to conclude that most buyers would prefer not to lose their homes. i used to review underwriting files for a living. some did a good job, some didn't, and some ignored risk. you'll never guess which insurer was in the last category?

Yes, a big reason for matrix pricing of loans.... Unfortunately the mortgage guys see what this brought. Models have been thrown out the window. At this point LTV rules, although seeing FULL DOC is a useful second. FICO has been thoroughly discredited, except at the extremes(I.E. 770 FICO guys do default less than 580....but not much difference between 690 and 730..)..

We're seeing a big increase in Prime Mortgages experiencing default...One commonality is that many of these were done with a second lien(cheaper alternative to PMI during 05-07)

the fha program started during the depression. it is an appalling instrument of destruction currently, but for decades it allowed many classes of people (including me, as a first-time buyer) to purchase a home with little down. it could only be used for conforming loans, and i think the limits were the same as for Fannie but that's just a guess, so it wasn't widely used here during many time periods, at least in prime manhattan.

the second liens were toxic. financial innovation at its best.

and i'd be the first to admit that historically FHA loans have higher default rates. and in a few months, that will be the new subprime story probably. but not enormously higher default rates. and the borrower had to pay insurance costs for the loan.

right now LTV may rule, but even that is kind of meaningless with the appraisal process. yes, people have more in but if they get into trouble they likely still will be underwater and unable to SELL. this reinflation is seriously going to screw some buyers.

Credit was loose in the years leading up to the depression... Ditto for prior to crash of 1908.. Then as now, if lending was done more responsibly a great deal of pain could have been avoided. You cannot increase the amount of home ownership without putting people in homes that should not be in them.

From the OCC
http://www.fdic.gov/news/news/financial/1999/FIL9994.pdf

For the purpose of applying the Guidelines to high LTV residential real estate loans, a high LTV
residential real estate loan is defined as any loan, line of credit, or combination of credits secured
by liens on or interests in owner-occupied 1- to 4-family residential property that equals or
exceeds 90 percent of the real estate’s appraised value, unless the loan has appropriate credit
support. Appropriate credit support may include mortgage insurance, readily marketable
collateral or other acceptable collateral that reduces the LTV ratio below 90 percent

Insured depository institutions have traditionally avoided originating residential real estate loans
in amounts exceeding 80 percent of the appraised value of the underlying property unless the
amount above 80 percent was supported by private mortgage insurance, a government guarantee
or other credit support. However, this trend is changing. Consumers are increasingly using the
equity in their homes to refinance and consolidate other debts or finance purchases. By doing so,

they can generally obtain favorable repayment terms, lower interest rates, and tax advantages
relative to other forms of consumer debt, such as unsecured credit cards. These and other
factors have stimulated strong consumer demand for these loans.

Increased Default Risk and Losses. Recent studies indicate that the frequency of
default and the severity of losses on high LTV loans far surpass those associated with
traditional mortgages and home equity loans.3 The higher frequency of default may
indicate weaknesses in credit risk selection and/or credit underwriting practices, while
the increased severity of loss results from deficient collateral protection. In addition, the
performance of high LTV borrowers has not been tested during an economic downturn
when defaults and losses may increase

Limited Default Remedies. Traditional mortgage servicing and collection procedures
are not as effective when engaging in high LTV lending because the sale of collateral and
customer refinancing are generally eliminated as ways to collect these loans. A
delinquent borrower with little or no equity in a property may not have the incentive to
work with the lender to bring the loan current to avoid foreclosure. The borrower also
may not have the ability to fund closing costs to sell the property as an alternative source
of repayment. Therefore, high LTV lenders must intervene early to reduce the risk of
default and loss.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a_XpcU5pY0f4

“I am surprised by how quickly the market has become receptive to leverage again,” said Bob Franz, the co-head of syndicated loans in New York at Credit Suisse. The Swiss bank has seen increasing investor demand for financing to buy loans in the past two months, he said.

Federal Reserve data show the 18 primary dealers required to bid at Treasury auctions held $27.6 billion of securities as collateral for financings lasting more than one day as of Aug. 12, up 75 percent from May 6.

The increase suggests money is being used for riskier home- loan, corporate and asset-backed securities because it excludes Treasuries, agency debt and mortgage bonds guaranteed by Washington-based Fannie Mae and Freddie Mac of McLean, Virginia or Ginnie Mae in Washington. Broader data on loans for investments isn’t available.

...

The risk now is that new credit leads to more losses at a time when consumer and corporate default rates are rising. Company defaults may increase to 12.2 percent worldwide in the fourth quarter, from 10.7 percent in July, according to new York-based Moody’s.

U.S. financial institutions probably will report more credit losses as commercial real estate falters through next year, James Wells III, the chief executive officer at SunTrust, Georgia’s biggest lender, said in an Aug. 24 speech to the Rotary Club of Atlanta.

“If you lever up an asset at these already elevated prices, and the underlying fundamentals, like termites, start to chew through the performance of the security, at some point it becomes unsustainable,” said Julian Mann, who helps oversee $5 billion in bonds as a vice president at First Pacific Advisors LLC in Los Angeles.

and then they'll just get bailed out again. because they are too big to fail.