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Eric
02-03-2010, 07:28 AM
In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about reneging on a home loan.

“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”

After three years of plunging real estate values, after the bailouts of the bankers and the revival of their million-dollar bonuses, after the Obama administration’s loan modification plan raised the expectations of many but satisfied only a few, a large group of distressed homeowners is wondering the same thing.

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

In a situation without precedent in the modern era, millions of Americans are in this bleak position. Whether, or how, to help them is one of the biggest questions the Obama administration confronts as it seeks a housing policy that would contribute to the economic recovery.

“We haven’t yet found a way of dealing with this that would, we think, be practical on a large scale,” the assistant Treasury secretary for financial stability, Herbert M. Allison Jr., said in a recent briefing.

The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages.

“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”

Suggestions that people would be wise to renege on their home loans are at least a couple of years old, but they are turning into a full-throated barrage. Bloggers were quick to note recently that landlords of an 11,000-unit residential complex in Manhattan showed no hesitation, or shame, in walking away from their deeply underwater investment.

“Since the beginning of December, I’ve advised 60 people to walk away,” said Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Everyone has lost hope. They don’t qualify for modifications, and being on the hamster wheel of paying for a property that is not worth it gets so old.”

Mr. Walsh is taking his own advice, recently defaulting on a rental property he owns. “The sun will come up tomorrow,” he said.

The difference between letting your house go to foreclosure because you are out of money and purposefully defaulting on a mortgage to save money can be murky. But a growing body of research indicates that significant numbers of borrowers are declining to live under what some waggishly call “house arrest.”

Using credit bureau data, consultants at Oliver Wyman calculated how many borrowers went straight from being current on their mortgage to default, rather than making spotty payments. They also weeded out owners having trouble paying other bills. Their estimate was that about 17 percent of owners defaulting in 2008, or 588,000 people, chose that option as a strategic calculation.

Some experts argue that walking away from mortgages is more discussed than done. People hate moving; their children attend the neighborhood school; they do not want to think of themselves as skipping out on a debt. Doubters cite a Federal Reserve study using historical data from Massachusetts that concludes there were relatively few walk-aways during the 1991 bust.

The United States Treasury falls into the skeptical camp.

“The overwhelming bulk of people who have negative equity stay in their homes and keep paying,” said Michael S. Barr, assistant Treasury secretary for financial institutions.

It would cost about $745 billion, slightly more than the size of the original 2008 bank bailout, to restore all underwater borrowers to the point where they were breaking even, according to First American.

Using government money to do that would be seen as unfair by many taxpayers, Mr. Barr said. On the other hand, doing nothing about underwater mortgages could encourage more walk-aways, dealing another blow to a fragile economy.

“It’s not an easy area,” he said.

Walking away — also called “jingle mail,” because of the notion that homeowners just mail their keys to the bank, setting off foreclosure proceedings — began in the Southwest during the 1980s oil collapse, though it has never been clear how widespread it was.

In the current bust, lenders first noticed something strange after real estate prices had fallen about 10 percent.

An executive with Wachovia, one of the country’s biggest and most aggressive lenders, said during a conference call in January 2008 that the bank was bewildered by customers who had “the capacity to pay, but have basically just decided not to.” (Wachovia failed nine months later and was bought by Wells Fargo. )

With prices now down by about 30 percent, underwater borrowers fall into two groups. Some have owned their homes for many years and got in trouble because they used the house as a cash machine. Others, like Mr. Koellmann in Miami Beach, made only one mistake: they bought as the boom was cresting.

It was April 2006, a moment when the perpetual rise of real estate was considered practically a law of physics. Mr. Koellmann was 23, a management consultant new to Miami.

Financially cautious by nature, he bought a small, plain one-bedroom apartment for $215,000, much less than his agent told him he could afford. He put down 20 percent and received a fixed-rate loan from Countrywide Financial.

Not quite four years later, apartments in the building are selling in foreclosure for $90,000.

“There is no financial sense in staying,” Mr. Koellmann said. With the $1,500 he is paying each month for his mortgage, taxes and insurance, he could rent a nicer place on the beach, one with a gym, security and valet parking.

Walking away, he knows, is not without peril. At minimum, it would ruin his credit score. Mr. Koellmann would like to attend graduate school. If an admission dean sees a dismal credit record, would that count against him? How about a new employer?

Most of all, though, he struggles with the ethical question.

“I took a loan on an asset that I didn’t see was overvalued,” he said. “As much as I would like my bank to pay for that mistake, why should it?”

That is an attitude Wall Street would like to encourage. David Rosenberg, the chief economist of the investment firm Gluskin Sheff, wrote recently that borrowers were not victims. They “signed contracts, and as adults should also be held accountable,” he wrote.

Of course, this is not necessarily how Wall Street itself behaves, as demonstrated by the case of Stuyvesant Town and Peter Cooper Village. An investment group led by the real estate giant Tishman Speyer recently defaulted on $4.4 billion in debt that it had used to buy the two apartment developments in Manhattan, handing the properties back to the lenders.

Moreover, during the boom, it was the banks that helped drive prices to unrealistic levels by lowering credit standards and unleashing a wave of speculative housing demand.

Mr. Koellmann applied last fall to Bank of America for a modification, noting that his income had slipped. But the lender came back a few weeks ago with a plan that added more restrictive terms while keeping the payments about the same.

“That may have been the last straw,” Mr. Koellmann said.

Guy D. Cecala, publisher of Inside Mortgage Finance magazine, says he does not hear much sympathy from lenders for their underwater customers.

“The banks tell me that a lot of people who are complaining were the ones who refinanced and took all the equity out any time there was any appreciation,” he said. “The banks are damned if they will help.”

Joe Figliola has heard that message. He bought his house in Elgin, Ill., in 2004, then refinanced twice to get better terms. He pulled out a little money both times to cover the closing costs and other expenses. Now his place is underwater while his salary as circulation manager for the local newspaper has been cut.

“It doesn’t seem right that I can rent a place somewhere for half of what I’m paying,” he said. “I told my bank, ‘Just take a little bite out of what I owe. That would ease me up. Isn’t that why the president gave you all this money?’ ”

Bank of America did not agree, so Mr. Figliola, who is 48, sees no recourse other than walking away. “I don’t believe this is the right thing to do,” he said, “but I’ve got to survive.”

dBrong
02-03-2010, 12:39 PM
In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.....



I see only one conclusion: Our government (on every level) has so greatly mismanaged our country that they have destroyed the very frame work of what the US was built on. Consider these points:

Corporations were allowed to outsource manufacturing and intellectual jobs, to the point where there is 10% unemployment.
Allowing FreddieMac / FannieMae to make unsound loans
The housing bubble has turned home owners into speculators. Although these folks signed a contract to purchase a home, there was a very, very, very strong implication that with reasonable care the home would not decrease in value. I'd say more than a 10% decrease is reason to claim fraud / manipulation.
Giant corporations that pay low wages, with little benefits (health, retirement, etc) Walmart, Target, Home Depot, McDonalds, the list is endless. All low wage, go nowhere jobs.
Microsoft was allowed to establish itself as a monopoly in software and computing.
Bailout's for GM, Wall St, get socialism, while us little guys get to experience capitialism.
It's my guess that 90% of the products sold at Best Buy are made in China, Mexico, or Asia. Same for similiar giant stores.
We have spent the entire contents of the treasury.
We are bleeding cash, fighting endless police action type wars, with no certain outcome.
With 17% U6 unemployment, many people live in utter dispair. Young people can't get started, older people are losing their retirement savings.
But the most dangerous: Our government believes more laws, more rules, more programs, more government, is the solution.

In about 60 days the Tarp properties will hit the market. When this happens I predict it will drive down housing prices even more, and kill new construction.

This is not the country I wanted to give my grandchildren. The US is now a 2nd rate nation, soon to be a 3rd rate nation.

As I heard one commentator state: The US is becoming like Europe (with all the regulations, and unemployment) but we don't get nearly the amount of vacation :)

Eric
02-03-2010, 01:26 PM
I personally know four people who are "under water," mortgage-wise. Three years ago, I knew no one - not even indirectly - who was in that position.

I think this is the lull before the storm. The media has managed to put a temporary lid on the truth, but you can't cover up this sort of thing for more than a few months.

When summer comes and the mass defaults/walk-aways begin, we'll see some things this country hasn't seen in 70 years....

Adam
02-03-2010, 10:23 PM
I personally know four people who are "under water," mortgage-wise. Three years ago, I knew no one - not even indirectly - who was in that position.

I think this is the lull before the storm. The media has managed to put a temporary lid on the truth, but you can't cover up this sort of thing for more than a few months.

When summer comes and the mass defaults/walk-aways begin, we'll see some things this country hasn't seen in 70 years....
__________________

I resemble that and it's making my hair turn gray umm er, for me it's a battle. My next door neighbor is unemployed and looking crankier and crankier. Lot's of gloom and doom and sooner or later I'll be making some very difficult decisions. However as they say a man has to do what a man has to do.

Eric
02-04-2010, 07:05 AM
I personally know four people who are "under water," mortgage-wise. Three years ago, I knew no one - not even indirectly - who was in that position.

I think this is the lull before the storm. The media has managed to put a temporary lid on the truth, but you can't cover up this sort of thing for more than a few months.

When summer comes and the mass defaults/walk-aways begin, we'll see some things this country hasn't seen in 70 years....
__________________

I resemble that and it's making my hair turn gray umm er, for me it's a battle. My next door neighbor is unemployed and looking crankier and crankier. Lot's of gloom and doom and sooner or later I'll be making some very difficult decisions. However as they say a man has to do what a man has to do.


The critical (scary) point, I think, is that this is happening to people who have never before been on the margins of society; I mean, responsible, educated, professional - and employed - people.

Paul Craig Roberts (columnist) explains that since the 1970s, there has been a systematic undermining of the middle/professional class (the working class got it first). First, it took two incomes to maintain middle class status; then it took credit - financed by home equity loans.

Now all that is gone - the home equity value has disappeared and "good jobs" are hard to find, even for people with educations and 20 year resumes. They face working far below their experience/education level for much less money - and still can't bring in enough to stay above water.

swamprat
02-05-2010, 07:22 AM
The critical (scary) point, I think, is that this is happening to people who have never before been on the margins of society; I mean, responsible, educated, professional - and employed - people.

Paul Craig Roberts (columnist) explains that since the 1970s, there has been a systematic undermining of the middle/professional class (the working class got it first). First, it took two incomes to maintain middle class status; then it took credit - financed by home equity loans.

Now all that is gone - the home equity value has disappeared and "good jobs" are hard to find, even for people with educations and 20 year resumes. They face working far below their experience/education level for much less money - and still can't bring in enough to stay above water.

That is correct, but we should all still go to coooooooolege to get that educaaaaaation. See you in the hotel lobby.

swamprat
02-05-2010, 07:25 AM
I personally know four people who are "under water," mortgage-wise. Three years ago, I knew no one - not even indirectly - who was in that position.

I think this is the lull before the storm. The media has managed to put a temporary lid on the truth, but you can't cover up this sort of thing for more than a few months.

When summer comes and the mass defaults/walk-aways begin, we'll see some things this country hasn't seen in 70 years....


I don't think what we are going to see is going to be like 70 years ago. It is going to be worse. Today, people are alot angrier, but corporations are armed to the teeth. I'm afraid for the regular people in the USA. We are completely fucked.

Eric
02-05-2010, 07:34 AM
That is correct, but we should all still go to coooooooolege to get that educaaaaaation. See you in the hotel lobby.

You got it.

It's a no-win situation. Skilled blue collar jobs (construction, for example) are being farmed out to Turd Worlders, which depresses wages for all skilled blue collar workers.

White collar jobs require college (for the most part) which requires a massive investment ($50,000-$100,000 for a four-year BA) so you start out in massive debt, then find the jobs pay $25k and housing costs eat up 40 percent of your take-home pay.

Then you lose your job, or it is outsourced to Injia or China... or the threat of that forces you to accept a massive pay cut....

Meanwhile, inflation eats away at whatever you manage to save - and taxes take the rest.

But we live in the greatest country on Earth!