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duane1969
01-09-2012, 11:34 AM
As housing prices continue to decline many homeowners are choosing to default and allow their homes to be foreclosed. It is called strategic default. These people are essentially accepting that their credit will be trashed in exchange for getting out from under a major defecit.

According to the article 3 of every 10 defaults in 2009 were intentional.


Economists at Goldman Sachs recently forecast that after bottoming in 2013 house prices won't recover their 2006 peak until 2023.

http://bottomline.msnbc.msn.com/_news/2011/12/21/9614305-as-home-prices-fall-more-borrowers-walk-away

My primary concern is if this will lead to another bailout. If more and more homeowners start bailing on their mortgages and a stagnant housing market keeps those homes from being purchased from the mortgage company, how long until another trillion dollar bailout becomes along?

gladdyontherise
01-09-2012, 12:16 PM
This has been happening for a while, right? My mom's friend had owned a home for like 17 years or so and upgraded some parts of it, but recently had to let it go because the payments on the house got so high it cost more than the house was worth.

pghin08
01-09-2012, 12:53 PM
Great topic. I was actually discussing this very thing with someone from Goldman at the end of December. I'll leave a decent synopsis of that convo tonight. Totally swamped at work today.

duane1969
01-09-2012, 01:11 PM
This has been happening for a while, right? My mom's friend had owned a home for like 17 years or so and upgraded some parts of it, but recently had to let it go because the payments on the house got so high it cost more than the house was worth.

Yeah I don't think it is terribly uncommon. The issue is what will happen when those foreclosed houses have sat unpurchased for months or years. When a house that was worth $275,000 3 years ago, is worth $200,000 today and will be worth $175,000 in a year is up for sale, nobody wants it.

What is going to hapen is that mortgage companies are going to start going bankrupt because they will legally own these houses and be required to maintain them and pay property taxes resulting in a net loss even if they manage to sell the house for what was owed on it when they foreclosed.

Star_Cards
01-09-2012, 01:14 PM
I hate this. That's the risk of owning anything. They value could go down. Just because real estate prices have historically always gone up doesn't mean it's a given. That's the risk. No one made you buy a house for the amount you paid. I get that people sometimes need an out, but to give up your house because you made a bad purchase or bought at the wrong time shouldn't be a reason to stick someone else with your action. I have a house, it's not crazy expensive and I live in an area where housing prices are normal. I also have paid on the loan very aggressively, but have no clue what my house is worth. If it was worth less than what I paid for it I would never think of defaulting on it just because of that.


from watching HGTV a house like mine that needs work goes for 3-6 times what I paid for mine. Sometimes people need to be responsible about the things they buy. No one makes you buy a house and no one promises it will always go up in value. Even if it doesn't go up in value, so what. You're still building equity in it and would come to a point where you own it and don;t have the monthly cost of rent.

gladdyontherise
01-09-2012, 01:15 PM
Yeah I don't think it is terribly uncommon. The issue is what will happen when those foreclosed houses have sat unpurchased for months or years. When a house that was worth $275,000 3 years ago, is worth $200,000 today and will be worth $175,000 in a year is up for sale, nobody wants it.

What is going to hapen is that mortgage companies are going to start going bankrupt because they will legally own these houses and be required to maintain them and pay property taxes resulting in a net loss even if they manage to sell the house for what was owed on it when they foreclosed.

This has been happening for a while though also, right?

It may be me being naive, but I don't see why the mortgage companies can't work with the home owner and not raise their payments, especially if they've been making payments every month and paying on time for a period of time. Just doesn't make sense to me.

duane1969
01-09-2012, 01:18 PM
This has been happening for a while though also, right?

It may be me being naive, but I don't see why the mortgage companies can't work with the home owner and not raise their payments, especially if they've been making payments every month and paying on time for a period of time. Just doesn't make sense to me.

Bottom line. Mortgage companies are in it for the money and know they can get a government bailout to cover their losses. If the government took the safety net away you would see the mortgage companies changing their stripes very quickly.

pghin08
01-09-2012, 08:47 PM
As housing prices continue to decline many homeowners are choosing to default and allow their homes to be foreclosed. It is called strategic default. These people are essentially accepting that their credit will be trashed in exchange for getting out from under a major defecit.

According to the article 3 of every 10 defaults in 2009 were intentional.



http://bottomline.msnbc.msn.com/_news/2011/12/21/9614305-as-home-prices-fall-more-borrowers-walk-away

My primary concern is if this will lead to another bailout. If more and more homeowners start bailing on their mortgages and a stagnant housing market keeps those homes from being purchased from the mortgage company, how long until another trillion dollar bailout becomes along?


Okay. So when I was talking with my Goldman Sachs guy, we talked about the following:

- Strategic default will likely increase for the next couple years, but only moderately. Those who have been most effected by the 2008/09 crisis have done the damage. They've defaulted already. There may have been a wave of strategic default, but it is likely to be nearing its peak.

- One of the reasons we talked about was the stability of the job market. Believe it or not, December marked 21 straight months of private sector job growth. With corporate balance sheets carrying a record amount of cash (trillions of it), it remains only a matter of time before that money is infused back into the market. Which equals jobs. I know most people are pretty sickened by today's job market, but I strongly think we'll see a continued improvement here in 2012.

- Housing starts are up. This data always seems to get lost in the fracas. They were up 9.3% in November and the numbers are liable to show another increase in December. A lot of these were apartment complexes, but there was a jump in single-family homes as well.

- From a political standpoint, a bailout of the American homeowner would probably be extremely unpopular at this point. Where there is a lack of political will, there is no way.

- And truly (this is only my perspective), I think 2012 will be a bit of a bounce back year. Maybe I'm being an optimist here, but most of the crappy things that have happened (housing, political strife, Europe) has been priced into this market. There are too many good economic indicators that are being ignored right now. And this will have an undeniable effect on both the housing market and the possibility of a bailout. Nobody's home equity is likely to drastically decrease in 2012, and so long as the market covers that, it'll be really tough to institute a bailout.

To me the more interesting question will be the process of the government eliminating Fannie and Freddie, and the result.

http://blogs.wsj.com/developments/2011/02/11/republicans-welcome-obamas-fannie-freddie-plan/

duane1969
01-10-2012, 12:37 AM
Kurt I really, really, really hope you are correct. My wife and I are not even remotely considering any kind of default but we have talked about moving to Va Beach this summer and are currently tied to our house because the $80k that we had in equity as recently as 1.5 years ago has dwindled to the point that we might actually take a minor loss to sell right now.

pghin08
01-10-2012, 09:48 AM
Kurt I really, really, really hope you are correct. My wife and I are not even remotely considering any kind of default but we have talked about moving to Va Beach this summer and are currently tied to our house because the $80k that we had in equity as recently as 1.5 years ago has dwindled to the point that we might actually take a minor loss to sell right now.

The way we look at our homes may never be the same. It's far more of a liability than an asset anymore. It's like I've said before, people would buy $500K homes and think they were half-millionaires. And of course, they weren't. I will always put the majority of the housing crisis blame squarely on the shoulders of mortgage lenders/greedy bankers. However, we could have done a lot as citizens if we would have just used our brains a bit. You make $30K a year and you think you can buy a $400K house and everything will be fine? Come on. Of course, these mortgage lenders didn't care, they just wanted as many people in homes as possible, because they were just passing the risk of to investors anyways. It wasn't coming back on them.

I know I don't need to tell you how tough it is to sell in this market right now. From what you've said on here before, unemployment is a pretty big problem in your area, and as long as that's an issue, selling a house will of course be an issue.

Why the possible move to VA Beach? I thought you and the Mrs. were pretty secure in your WV jobs.

duane1969
01-10-2012, 10:07 AM
Why the possible move to VA Beach? I thought you and the Mrs. were pretty secure in your WV jobs.

You are correct, we are quite secure. We spent some time in Va Beach last year and fell in love with it. My wife's work experience and resumé gives her a near open-ticket to get a job in most any education system that she wants and salaries in Va Beach for our jobs would be about 20%-30% higher than they are at our current jobs (WV ranks 48th in the US in educator salaries). Our kids are all for it so it has become one of those situations where if the right opportunity presents itself then we are going to jump on it.

An example of the salary gap: A high school principal with zero experience in the Va Beach area has a starting salary that is comparable to my wife's salary with 10 years of experience working at the WV State Department of Education. So a principal with 10 years of experience in Va Beach would actually make about $15-18K more per year than she is earning as a state department employee.

pghin08
01-10-2012, 10:39 AM
You are correct, we are quite secure. We spent some time in Va Beach last year and fell in love with it. My wife's work experience and resumé gives her a near open-ticket to get a job in most any education system that she wants and salaries in Va Beach for our jobs would be about 20%-30% higher than they are at our current jobs (WV ranks 48th in the US in educator salaries). Our kids are all for it so it has become one of those situations where if the right opportunity presents itself then we are going to jump on it.

An example of the salary gap: A high school principal with zero experience in the Va Beach area has a starting salary that is comparable to my wife's salary with 10 years of experience working at the WV State Department of Education. So a principal with 10 years of experience in Va Beach would actually make about $15-18K more per year than she is earning as a state department employee.

That's a tremendous difference, geez. But truly, be thankful for the position you're in. Hopefully down the road, you'll have the financial freedom to move wherever, but with both you and your wife having good consistent jobs (not to mention the DB plans--or what's left of them!--that you'll have when you retire), you're in better shape than most.

To bring this back to the issue of strategic default, were a client of our firm to come to us with this idea (no one has), we'd probably advise against this. The act of voluntarily crushing your credit score would make it difficult, and subsequently, more expensive to buy another home/car/college, etc.

Interesting tidbit I picked up from a portfolio manager at JP Morgan yesterday about just how affordable the market for homes is right now. The average mortgage payment on a new home (as a percentage of average household income) is 10.3%, which is as low as it's been since the 50s and 60s. Couple that with the fact that consumers have rebalanced well (4th quarter of 2011 saw debt payments as a percentage of income drop to 11%, which is the lowest since the 1970s), and it bodes well for the housing market.

Heck, I'm struggling as to what I want to do. I'm unmarried (yet in a LT relationship) and I don't think I'm quite in the position to buy a house yet, but I really want to. It's so much more expensive to rent in this market.

Star_Cards
01-10-2012, 11:21 AM
The way we look at our homes may never be the same. It's far more of a liability than an asset anymore. It's like I've said before, people would buy $500K homes and think they were half-millionaires. And of course, they weren't. I will always put the majority of the housing crisis blame squarely on the shoulders of mortgage lenders/greedy bankers. However, we could have done a lot as citizens if we would have just used our brains a bit. You make $30K a year and you think you can buy a $400K house and everything will be fine? Come on. Of course, these mortgage lenders didn't care, they just wanted as many people in homes as possible, because they were just passing the risk of to investors anyways. It wasn't coming back on them.

I know I don't need to tell you how tough it is to sell in this market right now. From what you've said on here before, unemployment is a pretty big problem in your area, and as long as that's an issue, selling a house will of course be an issue.

Why the possible move to VA Beach? I thought you and the Mrs. were pretty secure in your WV jobs.

I don't view a house as more of a liability than an asset, at least not mine. Definitely not the guarantee that many people had assumed a house would be to go up in value like clock work. If you think about it that was kind of a uneducated view. At some point a 1500 square foot house is only going to be worth so much in a specific area. Either way if you look at it like you will stay in that house at some point you will pay it off and not having a living expense of rent is a huge benefit in my opinion.

I agree that a huge problem was the mortgage companies. Very irresponsible business practice to loan someone cash that they should know the person doesn't make enough to afford an item, but overall the person should know that as well. Although people living outside of their means is not atypical these days.

AUTaxMan
01-10-2012, 11:27 AM
Corporations are sitting on cash because of the uncertainty of the future of the tax code, and that will not change until a decision is made by congress and the administration in terms of long term tax policy.

pghin08
01-10-2012, 11:29 AM
I don't view a house as more of a liability than an asset, at least not mine. Definitely not the guarantee that many people had assumed a house would be to go up in value like clock work. If you think about it that was kind of a uneducated view. At some point a 1500 square foot house is only going to be worth so much in a specific area. Either way if you look at it like you will stay in that house at some point you will pay it off and not having a living expense of rent is a huge benefit in my opinion.

I agree that a huge problem was the mortgage companies. Very irresponsible business practice to loan someone cash that they should know the person doesn't make enough to afford an item, but overall the person should know that as well. Although people living outside of their means is not atypical these days.

In a practical sense, you're right, a house is definitely an asset. But from a financial planning standpoint, until you've paid it off (or are close to doing so), we have to treat it as a liability. You can borrow against your house if you absolutely need to (I'm not talking about refinancing, which a lot of people have done due to the drastic interest rate drop), but otherwise it's tough to recommend.

In case you couldn't tell, I'm a very debt-averse person. I overpay on my student loans every month (usually not by a whole lot, but still), and I plan to put at least a 20-25% down on my house, when I buy it.

AUTaxMan
01-10-2012, 11:30 AM
I agree that a huge problem was the mortgage companies. Very irresponsible business practice to loan someone cash that they should know the person doesn't make enough to afford an item, but overall the person should know that as well. Although people living outside of their means is not atypical these days.

A lot of that lending behavior was predatory, but a lot of it was also the result of federal government anti-discrimination arm twisting.

pghin08
01-10-2012, 11:33 AM
Corporations are sitting on cash because of the uncertainty of the future of the tax code, and that will not change until a decision is made by congress and the administration in terms of long term tax policy.

Long-term? Politicians making a "long-term" decision? That's pretty funny :winking0071:. I don't think long-term is in their vocabulary. And the tax code, I'm sure you know, is uncertain by its own nature. Though I agree the recent partisan hackery has played a role in the massive amounts of corporate cash.

duane1969
01-10-2012, 12:03 PM
To bring this back to the issue of strategic default, were a client of our firm to come to us with this idea (no one has), we'd probably advise against this. The act of voluntarily crushing your credit score would make it difficult, and subsequently, more expensive to buy another home/car/college, etc.


Question. Since you seem to understand this stuff WAY more than I do...If a person chooses to default, how long does the record stay on their credit report? I ask because I know of a woman who filed Chapter 13 and turned around the next year and purchased a $40,000 vehicle.



Heck, I'm struggling as to what I want to do. I'm unmarried (yet in a LT relationship) and I don't think I'm quite in the position to buy a house yet, but I really want to. It's so much more expensive to rent in this market.

I have a few friends who are in real estate and they have told me that this may be the best buyers market in decades. If you consider how much you pay in rent then it makes sense to get in now when houses are selling cheap and the interest rates are down.

pghin08
01-10-2012, 12:31 PM
Question. Since you seem to understand this stuff WAY more than I do...If a person chooses to default, how long does the record stay on their credit report? I ask because I know of a woman who filed Chapter 13 and turned around the next year and purchased a $40,000 vehicle.



I have a few friends who are in real estate and they have told me that this may be the best buyers market in decades. If you consider how much you pay in rent then it makes sense to get in now when houses are selling cheap and the interest rates are down.

I believe it's 10 years, but I'm not 100% sure. I'm not sure how she was able to do that, but honestly, I'm not a bankruptcy lawyer, so I'm just not knowledgeable enough on the subject. If she has a financial advisor, he needs to be fired though.

I'm far too young to adequately say that it's the best housing market to buy in decades, I just know that it's a good one.

AUTaxMan
01-10-2012, 03:45 PM
Long-term? Politicians making a "long-term" decision? That's pretty funny :winking0071:. I don't think long-term is in their vocabulary. And the tax code, I'm sure you know, is uncertain by its own nature. Though I agree the recent partisan hackery has played a role in the massive amounts of corporate cash.

Oh yeah. Also, because interest rates are so low, there is little incentive to invest.

Star_Cards
01-10-2012, 04:36 PM
In a practical sense, you're right, a house is definitely an asset. But from a financial planning standpoint, until you've paid it off (or are close to doing so), we have to treat it as a liability. You can borrow against your house if you absolutely need to (I'm not talking about refinancing, which a lot of people have done due to the drastic interest rate drop), but otherwise it's tough to recommend.

In case you couldn't tell, I'm a very debt-averse person. I overpay on my student loans every month (usually not by a whole lot, but still), and I plan to put at least a 20-25% down on my house, when I buy it.

that's a great behavior to get into. I always over pay on my house and had 20% down. That will save you some PMI payments too.

duane1969
01-10-2012, 07:47 PM
So how do you deal with a mortgage company that won't let you do that? My mortgage company sends me an invoice every month. If I overpay one month they just deduct it from the next month's invoice and won't apply it to my balance.

pghin08
01-10-2012, 07:53 PM
So how do you deal with a mortgage company that won't let you do that? My mortgage company sends me an invoice every month. If I overpay one month they just deduct it from the next month's invoice and won't apply it to my balance.

If you decide to do that, maybe you could call them. I'm sure there is some way that could apply that overpayment to your principal balance.

duane1969
01-10-2012, 08:50 PM
If you decide to do that, maybe you could call them. I'm sure there is some way that could apply that overpayment to your principal balance.

Nope. The first time I overpaid and they applied it to the next month's invoice I called. They said that they do not accept premium only payments and would apply any overpayment to my next payment. In essence, they are protecting their bottom line by ensuring they can get the entire interest on the loan.

tutall
01-13-2012, 09:13 PM
I believe it's 10 years, but I'm not 100% sure. I'm not sure how she was able to do that, but honestly, I'm not a bankruptcy lawyer, so I'm just not knowledgeable enough on the subject. If she has a financial advisor, he needs to be fired though.

I'm far too young to adequately say that it's the best housing market to buy in decades, I just know that it's a good one.

A BK will stay on record 10 years but many institutions will lend money as long as you have not included one of their debts in the BK in as short as 6 months... Generally you will be tier 3 or lower meaning higher rates/payments but it is definently possible.

tutall
01-13-2012, 09:15 PM
Nope. The first time I overpaid and they applied it to the next month's invoice I called. They said that they do not accept premium only payments and would apply any overpayment to my next payment. In essence, they are protecting their bottom line by ensuring they can get the entire interest on the loan.

You need to look into refinancing then. I take payments everyday and encourage overpayment. I personally recommend at minimum dividing your payment in 12ths and make the additional payment each month... I also recommend on all new mortgages to start bi-weekly payments as soon as your loan is booked as it will pay off for you huge in the long run