It’s Like They’re Reading My Mind

About 6 hours ago I posted that banks do what is good for them, and they don’t care about you. As if to help me prove my point, we now have an article in the LA Times that was put on it’s site 2-½ hours ago entitled “Trying to tap into home equity? We'll see.” This article tells us that Countrywide has sent letters to 122,000 customers telling them that they can no longer tap into their home equity lines of credit (HELOCs) because the values of their homes have decreased too much.

No warning letters Countrywide? No heads up? No, “Hey loyal customer, you might want to consider that you are going to need to find new sources of cash soon”? Gee whiz, that’s rather cold and businesslike.

The article goes on to say:

The move by Countrywide, the nation's largest mortgage company, is part of a pullback by lenders nationwide on home equity loans, which are often used to finance home improvements and consumer spending. Such loans, also known as second mortgages, were widely available until six months ago, when delinquencies and foreclosures began to soar. Now, with new evidence of sinking home values, many lenders are requiring that homeowners maintain a much larger percentage of equity in their homes as a cushion against financial problems.

The tightening of credit could help limit the effectiveness of interest-rate cuts by the Federal Reserve and an effort by Congress and the White House to put more money in the hands of Americans via tax rebates and other economic measures.

Lessons learned from this post:

a) The Bank is not your friend

b) The Bank is very worried about falling home prices

c) The Man (Fed + President + Congress) can’t do much to stop this train wreck.

The Morals of Walking Away from Your Mortgage and House

"You signed a contract Mr. Potter!"

To summarize all of the arguments I’m about to make, let me say THERE ARE NO MORAL ISSUES IN WALKING AWAY FROM YOUR MORTGAGE AND HOME.

But Mr. Blogger, these people made a promise. Doesn’t that count for anything anymore?

Excellent question. Business is the dominant life form in America. Business lays off 30 year employees because it is legal and economically good for the company. Business pollutes because it is legal and economically good for the company. Business lobbies congress for fewer regulations and less oversight because it is legal and economically good for the company. Business gives you a 0% credit card, and then raises the rate to 30% once you have a huge balance because it is legal and economically good for the company. Business had the US bankruptcy laws changed to make it harder for people to walk away from their credit card debt because it is legal and economically good for the company. In other words Business has no morals, and Business will do absolutely anything to anyone as long as it is legal and economically good for the company.

Well a funny thing happened recently. The housing market self destructed. And now tens of millions of people owe the banks more than their houses are worth, sometimes 100s of thousands of dollars more. The lenders and the borrowers agreed to the terms of their mortgage contracts. These contracts can come in a hundred different flavors, but basically they all say that the borrower has the duty to pay his mortgage, or he has to give his house to the bank. That is what the contracts say. They do not say that the borrower will go to Hell if he does not pay. They do not say that the borrower will go to jail. They say that the penalty for not paying the mortgage is the house. And therefore, if is legal and economically good for YOU, feel free to walk away from your house and let the bank have it.

I am not saying you should try to live in the house without making payments until you are evicted. That’s not nice. But if you and your lawyer (you need a lawyer to look at all of your loan documents) agree that it is in your best interest to walk away, then do it. And don’t feel bad. The bank doesn’t feel bad when it hits you with a giant bounced check fee, or with a credit card late fee. And it doesn’t feel bad about evicting people who can’t pay their mortgages. Why doesn’t it feel bad? Because what it is doing is legal according to the contracts that everybody signed. And so is dumping your sinking house back on that very same bank.

“Brownie, you're doing a heckuva job!”

I know nobody remembers any of the previous housing crashes, so let’s stretch our memories back to 2005. Remember when, during hurricane Katrina, President Bush praised the incompetent former horse show organizer whom he put in charge of FEMA with the immortal words, “Brownie, you're doing a heckuva job”? As they were doing their back slapping and press conferences, people were drowning in their attics for lack of any sensible federal response from the federal agency whose sole purpose was to help people in disasters.

Well I have a plan. When our “hard workin’” president says, “Bernanke, you’re doing a heckuva job,” I’m cashing in all of my worthless dollars for the relative stability of the Argentine Peso, and I’m heading south.

My tone has a bit of doom and gloom because I just read an interesting article online by Fortune, entitled “It’s going to be much worse,” where former partner of George Soros, Jim Rogers, says, "Bernanke is printing huge amounts of money. He's out of control and the Fed is out of control. We are probably going to have one of the worst recessions we've had since the Second World War. It's not a good scene."

As we’re all painfully aware, the Baby Boomers were born after WWII when every adult in the country decided simultaneously to create the most Spoiled Generation ever. That means that Jim Rogers is predicting the worst economic crisis in the Baby Boomers' lives. Gee, I hope none of them panic and start selling their tanking real estate and stock portfolios all at once.

Ka - Boomer

Let’s say that I am the perfect Baby Boomer. I was a war protesting, drug using hippy, because that is how I got attention and got laid in the 1960s. I promptly became a “No New Taxes” conservative when I got a job and actually had to pay taxes. I have voted against any spending, for every tax cut, and for free trade, because I was told that these things would make me rich.

Now I have no pension. There are no safety nets. But I have my stock-filled IRA and 401k, and I’ve got my house. And every expert in the universe has told me that:

a) House prices never fall, and

b) Stocks always go up in the long run.

The problem is that house prices are falling off of a cliff, and my long run isn’t so long any more. I want to retire in 5 years. I don’t want to wait 20 years for the market to come back. What should I do Mr. Blogger?

Well let me tell you a story of another bubble. The last bubble ( yes, despite the manipulation and lies by the real estate profession, there have been many housing bubbles in the U.S.) to hit California peaked in about the middle of 1989. Prices did not return to their peak levels for 10 years. That means that if you bought in 1989, you could sell it for the same price in 1999 or 2000. But if you wanted to sell in 1994, the bottom of the hole, you lost 20% to 50% of your home's total purchase price.

Now that was a cute cuddly little bubble compared to this one. Even though I have extensively researched the situation and the history, I am shocked by how bad it looks. And now we have the Fed, President, and Congress throwing everything and the kitchen sink at the problem over the course of 8 days. I’m guessing they know it is a train wreck and they’re trying to qualify themselves for “Heckuva Job” status for their failed attempt to save the day. But more on that in our next post.

And see what the LATimes says in this Jan30, 2008 article -

High anxiety for 401(k) investors

It's Worse Than That...

This blogger has noticed that for at least one year, 95% of all data releases and economic news has included the phrase “worse than expected.” How is it possible that basically every forecaster, every CEO, every economist, every reporter, and every soothsayer of any sort is surprised by everything? Author (he uses much lengthier descriptive terms for himself) Nassim Taleb does not beat around the bush by stating that the entire idea of forecasting is bankrupt, and that the predictions of forecasters are so universally bad that nobody should ever do it again. I am starting to agree, except that it’s very entertaining to see the heads of all the gobbling turkeys turn simultaneously in reaction to every noise.

But I digress a bit from the actual “news” of the day:

“Economy much weaker than expected” – CNN/Money.com – Jan30, 2008 (“Gross domestic product slowed to a 0.6% growth rate in the fourth quarter… Economists surveyed by Briefing.com had forecast GDP would slow to a 1.2%.”)

“UBS Takes a $14 Billion Write-Off” – New York Times – Jan30, 2008 (“Once again this is a negative surprise,” said Andreas Weese, a banking analyst at UniCredit in Munich. “I had assumed additional losses, but not of this magnitude.”)

Since everything is worse than any of the experts expect, why don’t any of the experts take a wild leap of faith, put together their best guess, and then make it much worse. They might get jobs based on their brilliant market predicting abilities. Of course the only problem with that idea is that they already have jobs, and their current jobs pay them to make ridiculously optimistic forecasts, and then say things like “nobody expected,” and “even the experts couldn’t have predicted.” Ah, well. That’s why you come here for your news.

Coming next – What’s a Baby Boomer to do?

Going Once, Going Twice, Sold to Nobody!

Wow.
I have been pouring over housing related stories and data since very early in 2004. I can tell you that the popping of this bubble is much worse than the last one which was in the period of 1989-1994. I have read articles spanning the last 20 years, and I am still being surprised by this one.

Here is today's shock: The Modesto Bee, in a December 15, 2007 article entitled Bargain Houses Largely Unsold, reports that of 1336 properties put up for foreclosure auction in California's Modesto, Merced, and Stockton counties in Nov 2007, only 17 of them sold. To repeat, only 17 of 1336 properties sold at foreclosure auctions that month. This happened even though very large discounts were being given on the homes from what the lenders were owed.

Here are some examples:
A home in Merced on West 22nd Street with an outstanding mortgage of $279,785 was offered at $153,000. This discount of more than $124,000 was not enough to draw even a single bid.

"Also last month, a Manteca home on South Sonora Avenue that had an outstanding loan balance of $487,956 was offered for a starting bid of $331,500. No one bid." A $156,000 discount was not enough.

"An Oakdale home on Ranger Street sold new in 2006 for $610,000. It went into default with an outstanding loan balance of $530,892. Last month at the foreclosure auction, the starting price was $395,000. No one bid." This house was offered for over $215,000 less than what is sold for a year earlier, and nobody wanted it. If you live on that street, you should be considering walking away.

Send your stories or good links to LetItSink@gmail.com

Foreclosures Up, Up and Away

We have another good, if not happy, article on CNN/Money today - Foreclosures Spike - And Will Get Much Worse. If you are upside-down in your home, and you are thinking about walking away to save yourself a lot of money, start planning today. Start your search for a good real estate lawyer who can review your loan documents, inform you of your state's laws, and make sure you don't do anything wrong.

If you are at the point where you need a lawyer, drop me an email at LetItSink@gmail.com. I would like to hear about your experiences. And I am also interested in putting together a list of trusted experts to help you all make the right decision. Your house and loan went wrong once. Don't let it happen again.

First Annual Home Price Drop Ever

They said we couldn't do it. All those Realtors, and real estate agents brokers. They said there had never been a down year in housing prices, and therefore implied there never would be. Everyone know home prices only go up. Except for the '89-'94 bubble pop. And the '79-'80 bubble pop. And all those other bubble pops.

But now it's happened. Check out this article on CNN/Money: Homes See First Annual Price Drop on Record - Jan24, 2008.

I wonder what they say about people walking away from their terrible mortgages? Surely people will keep dumping money into a black hole. Won't they? Wouldn't you?

So This Friend of Mine…

Mr. M I Presume

We’ll call him Mr. M. Mr. M lives in Florence, AZ in a two year old house of approximately 3300 sf, on about a quarter of an acre. Big and big. But he is not happy. It seems that homes in his subdivision that are currently being sold by the same developer have dropped in price by well over $100,000. Therefore Mr. M owes more on his house than it is worth.

Mr. M has an idea. He is going to buy a second home in the same area, and walk away from the first. His “credit rating” (read Holy Grail) my suffer, but who cares? He will have a house to live in which will cost him much much less than the one he is living in. And what do you need a credit rating for except to buy a house? Anything else that you are using a credit rating for (buying stuff with credit cards, or paying too much for new car payments) would be better done without credit anyway. So walking away from his house might save him $100,000 or more, and if he can’t get more credit cards and car loans, he’ll probably save another $150,000 in the next 10 years by not being able to buy junk he doesn’t need anyway.

Results may vary, but it might be possible to have your cake and eat it too.

Jim Cramer Agrees with Let It Sink!

I don't know how to take this, but Jim Cramer has said that if you are 20% upside-down in your home you should walk away. I don't tend to listen to people who scream about P/E ratios and Return on Equity, but I do agree with his comments in this video. Or should I say that Jim Cramer agrees with me? Click on the Cramer Bobblehead above and judge for yourself.

Are California Mortgages "No Recourse"? Talk to an Attorney

On Trulia.com, the Real Estate Search Engine, a reader asks if mortgage loans in California are "No Recourse," meaning that once the borrower turns over the house, he or she owes the lender nothing more.

Hemet Real Estate Broker Christopher Walker answers:

California does not provide recourse for "purchase money" loans with only rare exceptions. Purchase money is when you are taking a loan at the time of purchase. If you have re-financed your home, taken out a HELOC or other loan after the time of purchase, your lender may have the ability to collect from you even after foreclosure. It is imparative that you seek the advice of a competent real estate attorney immediately.

Excellent advice. If you didn't completely read and understand your mortgage when you signed it, then make sure you talk to an attorney before you give your house back to the bank. An attorney may be expensive, but you want to make sure that you cover all your bases.

The Votes Are In

Check out L.A. Land's reader opinion poll: Is walking away irresponsible or wise? The question is whether it is OK to walk away from a loan if you are upside-down (you owe more on your mortgage than your home is worth). About 60% of readers consider it to be OK, versus 40% who think it is not. Here are some of the comments:

jb said:

I agree with Keith and others - the contract is being fulfilled by walking (I will either pay the mortgage OR the bank will take the house).

Our government is pulling out all stops, trashing the dollar, simply to save banks. Let the banks fail, they used the full power of highly paid risk management professionals who then bought these mortgages like crack addicts. Someone please start a new bank called Post Housing Bubble Bank (PHBB) - I will send you all of my cd's even for a lower rate than others. You can replace WaMu and the like when they fail - as they should.

Dr. JwB comments:

I've been pondering and not commenting on this issue because I'm trying to decide if what I would do (walk away) makes me a terrible person.

Now the questions are: Given that the transaction cannot be undone, what does the least damage to this family? Does avoiding that damage justify the damage this does to other people (and what is that damage)?

The bank gets the house, which was agreed by both parties as fair value for the loan. The market gets a foreclosure sale at what would in theory be a more reasonable price (sooner rather than later). The family gets a ding in their credit, and maybe loses a little sleep because of guilt.

So what am I missing?

and goodfaith points out:

Strikes me that for homeowners who are underwater, this is a classic "efficient breach" of a contract... very basic contract law. It happens sometimes that it makes more sense to not follow contractual obligations because economic circumstances have changed. This is why in contract law there aren't punitive damages even for intentional breach of contract. So walking away, and incurring the known consequences of breach--foreclosure and reduced credit rating--is the rational way to do things, and I don't have a problem with it.

I think people do have a problem with people who "buy" homes with no intention of ever making a payment, and have basically entered into the mortgage contract in bad faith, expecting to game the system by taking advantage of mortgage law by living in a place for 12 months before it gets foreclosed. Should there be some extra liability for that kind of behavior? Maybe. But previous commenters who said that banks entered into these extremely high LTV deals knowingly is correct--they were sophisticated enough to know better.

The votes are in. If you're willing to take your lumps, i.e. you give back your house and get a very bad credit rating for a while, then do what you have to within the bounds of the law and the contract. Take care of yourself. The banks and hedge funds are certainly looking after themselves.

Put It This Way

What if I ran "Marty's Online Credit Repair Service?" And what if I told you that I could repair your credit? How many Thousand Dollar Bills would give me for that service? Would you pay me $100,000 for a better credit score? Would you pay me $200,000 for a better credit score? If so, email me immediately!!!

But if your answer is, "Gee Mr. Manager of Marty's Credit Repair, I don't think I would give you very many thousand dollar bills at all," then you shouldn't be willing to keep making payments on a house that is worth much less than you owe on it, just to maintain a good credit score.

Countrywide's Mozilo Barely Scraping By

One of those orange men stole my money!

In a Jan16, 2008 article, Reuters had this to say about Countrywide Financial Corp CEO Angelo Mozilo's pay package:

Mozilo stands to receive about $36.4 million if the company he founded is sold as planned to Bank of America Corp, according to regulatory filings and compensation experts.

and it goes on to say:

Mozilo ranks as one of the top-paid U.S. executives, getting about $387 million from pay and stock option gains from 2002 to 2006, according to U.S. regulatory filings.

Doesn't it makes you want to dig a little deeper, maybe stop feeding the kids, so you can keep paying on the mortgage that Mozilo sold you?

This Is What I'm Talking About

The Los Angeles Times yesterday, in their article Pain Goes Through The Roof, hit the nail on the head. It quoted upside-down home owner Leandro Hernandez of Chino Hills as saying:

"Foreclose me," he said defiantly.

Hernandez knows that an eviction is a lengthy process. "I'll live in the house for free for 12 months, and I'll save my money and I'll move on."

If this makes any sense to you, then this is your blog.