I was talking with a close friend today over drinks and he informed me that he and his wife have decided to foreclose on their home. I asked why and he stated that they are well over $150,000 upside down on their mortgage due to the housing market collapse and therefore cannot stomach having to spend the rest of their lives paying for a home that is only worth half of what they currently owe and no end in sight. I asked if foreclosure was his only option and he said that it was because he and his wife are both gainfully employed and cannot even refinance due to the value being so low compared to what they owe. Foreclosure is a word you hear constantly nowadays, yet I know next to nothing about this process. I was lucky enough to purchase my home way before housing prices skyrocketed out of control, so I really didn't know what to say to the guy besides the standard "I'm sorry to hear that bit". That said, Is foreclosure truly his only option in his current situation?  If so, does foreclosing really make better long term financial sense compared to just sucking it up and being happy you have a house to live in?  The fact that he and his wife are both employed and can afford to pay the note leads me to believe that the bank will simply pursue him for the outstanding debt no matter what. Then he will be homeless and have to pay the money he owes back anyway.

He's a good guy and is really at his wits end about the whole situation. Aside from telling him to consult an attorney which I did do, does anybody have any solid info, insight or words of wisdom I can pass along that might help him out?

So he can still afford to make the payments?  Sounds like he can.

WTF!?!?!?!  He thought it was a good deal at whatever he paid for it and he was happy to pay the amount he did for it.  He needs to suck it up and stay in the damn house.

So he is just going to 'decide' to stop paying for something he agreed to buy? Sounds like theft, not foreclosure.

It's pretty bad that an individual agrees to purchase a home and decideds to let it go to foreclosure even if he can afford it.

My Uncle's house got a foreclosure notice a few weeks ago. He's busting his ass all over the US working odd end jobs in hopes of saving his house.

Could try do a shortsale but usually you need a sob-story to tell (and prove to) the bank.

That's why this situation keeps getting worse and worse.

Years ago, it was nearly unthinkable to just throw the keys to the house back at the bank and walk away from it.

Now, we have TONS of people doing exactly that.

Your right and because of that widespread behavior sending home values into the toilet I think he feels that it's futile to continue throwing his hard earned money into a home that has turned into a black hole. I just looked at the local real estate listings in our area and 90% of them are foreclosures or short sales?....It's a real mess.

yep.  they drove the prices up because everybody and his brother was buying a house.  now the prices are coming back to what they should have been and people want to walk away causing the prices to go yet lower.

What is happening now is the inverse of what happened on the way up.




They were willing to pay a certain price for a place to live before, what is really the difference if they are wanting a place to live and not to try to profit?  

This happens to cars every day and people accept it.

He needs to do the right thing, take all of his remaining cash, and gamble it all in Las Vegas.

He does understand that housing markets are cyclical, right?  If he pays his bills like any other slob in ten years he'll have made his money back and be in the green.  That is unless he got an interest only ARM or some ridiculous other "creative financing" I know was super popular in Kali.  The good news for all the people who didn't get caught up in the real estate rat race is good credit seems like it'll be a rare and valuable thing in a few years.

Did his house payment go up, or is just the value has dropped?  If the value has dropped then so what.  As long as he's still paying the contractually agreed to amount for the agreed amount of time, what difference does it make what the value is?  He agreed to it. Is it the bank's fault his value dropped?  Why should they have to take it in the shorts for him?  Suck it up and deal with it.

What an idiot.  He can still afford his house.  I guess if it worth $50,000 more than he paid for it in 10 years, he would give the money to his mortgage company.

Every time I see a story like this, I am even more pleased with the decision my wife and I made to buy a very modest "fixer-upper" home. It's cozy, bordering on cramped, but it has increased in value by about 30% since we bought it 2 years ago.




It's been a lot of hard work, but well worth the effort.

You just don't understand.  All his friends told him you can't lose, housing only ever goes up, especially in Kali.  He saw all of them with their $80k/yr jobs living in $700K McMansions, getting huge HELOCs to buy all their boats, trucks, and toys.  The told him he was guaranteed to make a mint, so he bought the line of BS.  It's not his fault things didn't work out the way he wanted to.  Boo hoo!

yep. used to be everyone knew their banker, at least I did on my first home. I really would'nt dare to befriend that handshake and never did!

 Way back then he said he did'nt see any problems, he never did!

 the way I see it ( simple minded ) is your or your spouses  one week paycheck should carry the monthly house note.

  Thats the way a bussiness friend told me years back and I've always stuck with it!

You don't know much.
Heck, I can remember back in the early 80's here in Denver, people all over the metro area calling the banks and saying "your keys are inside, we're leaving" and them moving.
Because there were 1000's of condo's that people had paid 90,000 for that were not selling even at 30,000.
Same thing happened in California in the early 1990's.  I'm sure there are many many more examples, but those two I know personally.

It's not a moral thing, it's a business contract.
if the business contract doesn't make sense, then you stop the contract and pay the penalties.  (in this case, they lose the house).

There's nothing moral in being a debt slave.

It's a business, not personal.

You are exactly right and you also show what's exactly wrong with today's housing market.

Once upon a time, people bought houses and were only sold houses based on their means, not as a big investment gamble for both sides.



 

i don't generally ascribe to this formulation, but.

He's  either part of the solution of part of the problem.

People like him and self-serving analysis like that are
the reason we are in this mess.

man the hell up.

For a lot of people, especially in the expensive states like California, the home is more than just a place to leave, it a major part of one's retirement income. People pay high prices here because they know in 20-30 years, the value of their home will quadruple and they can use that money to fund their retirement, often moving to a less expensive state and living off the income from the sale of their California home.

If the home loses $150K-$200K in value, it takes substantially longer to recoup the loss. That's a lot of risk to take.

The problem is these loans should have never been made in the first place. The people who put virtually nothing down have no incentive to stay, so they walk. Can you blame them? I don't. There was greed on both sides.

If it makes financial sense to walk, he should walk. I don't see a moral issue here AT ALL. It's a business decision (and that's how the bank sees it as well.)

The house my grandparents lived in during the Depressions is worth about 15 times more (1,500 percent) than it was in 1936.  And they were upside down on that house until the end of WWII.  My grandmother lived there until 1972.  I'd keep paying if you can afford it.

Exactly

RETARDS....every last damn one of them AND the reason this country is in the shit-fix it is in now.....

You are right on.  There is never any guarantee when you purchase your house that it will gain in value.  You pledge to pay the bank x amount of dollars over x term for the house.  Period.

Taking the foreclosure route is shameful in my eyes, unless you are unable to make the payments due to circ. beyond your control.

That's what happens when you buy a house simply for an investment and not primarily as a "home".

My perspective is admittedly skewed as we plan to stay in this house for the long haul.  I have bought houses in the past with the intention of selling them in 5 years, but knew it was never a guarantee.

That is just utter lunacy to "expect" that sort of return over the long term and to base your retirement on it, as we can now see...



Wow, if you don't see any moral issue here, I don't even know what to say.  So all contracts should be left to the whims of either of the parties?  Just walk away without consequence..?

There is something moral about taking a chance, losing, and passing that loss over to someone else. I can understand that they are pissed about it, but if they can pay the mortgage, then they should.

There is always chance in real estate.

It would be lunacy if it were not true. In fact, it's been the norm for almost 100 years now.

In fact, in this state, the areas close to the major job centers have not lost a lot of value. Maybe 15%-20%. The areas in the sticks are suffering. No one wanted to live their in the first place, but many did it anyway just to get into a house.



It's a business decision. To think otherwise is unwise. One thing you can't count on is the lender views it that way. Miss a few payments and see how long it takes before they boot your ass out. They don't care if you and your kids are out in the street.

The wise individual treats this is a business decision. To keep paying an upside down mortgage is irresponsible, as one's first responsibility is to his family and financial well-being.

I long for the days when a business contract was a moral thing.

IE:  your handshake and signature meant something.

I'm talking about holding up your end of the bargain because it's the right thing, and you have the ability to do so.  

I'm not talking about no longer being able to afford your side of the deal.

You should not walk away from an agreement just because you don't like the current financial status of that agreement.

It is a business contract; sometimes you win, sometimes you lose.

The stakes are two high to lose in this situation. Most people have one chance to do it right when they buy a home. If it looks like one will never get ahead on the loan because of a major drop in home value, the smart thing to do is walk.

There is a consequence. He loses his house, and his credit goes to shit. It will be incredibly difficult to get a new home loan for quite some time, and renting isn't going to be easy (once they run his credit and see the foreclosure).  Additionally, the bank may wish to take him to court over the difference (he'll need to hire an attorney if this happens). If the bank forgives the difference, the IRS may consider it as income. This isn't just a "walk away, no worries" kind of decision.
The bank assumes some risk when they make the loan. One of those risks is that they buyer may fail to meet his obligations, and it's the bank's responsibility to charge accordingly. Sometimes they get it wrong. It's also the bank's responsibility to consider the home's future value, and again - sometimes they get it wrong. How much do you want to bet they didn't require him to put 20% down? They used to do that, for a reason.
That's my take, anyway. I don't have this problem myself, but I'm sitting here putting myself in his shoes. It's hard writing a check every month for a house that's $150,000 upside down, when you know you could be writing a check for $800 or $900 less. Sure, we can say "tough shitski", but I can appreciate his friend's position just the same.
I don't see this is a moral issue. The man is going to lose his house if he does this. If he somehow tried to not pay his mortgage *and* keep the house, I'd see a problem. The mortgage is secured by his home - that's the deal.
If he lost his house and it was worth $150,000 MORE than he paid for it, would the bank give him the difference after it sold at auction? Nope.
 

I bought a house so that I'd have something to show for my monthly housing expense

if it gos up in value great
if not, at least I can get some money back unlike renting where you have nothing.

if your desire is to make money off your property buy a house to rent out

I believe in many cases the mortgage brokers and banks knew these people were going to be in a world of shit once the bubble burst. That's why the mortgages were packaged as AAA investments and sold to as parts of 401k investment portfolios(relieving mortgage brokers and banks from any risk). Whoever bought the risk was told it was a golden AAA investment, when in fact it was simply a turd stamped AAA. Everybody knew about the bubble except the people buying the house and the AAA stamped TURD investments(people with 401k's)

The banks planned on reclaiming the house once the owner defaulted(losing his down payment and all notes paid). Jokes on them now because it's the other way around, the home values have tanked soooo far that the owners are throwing the keys at the bank.

The whole planed bubble was allowed to get waaaay to big, and blew up in their face . Had we not let the bubble grow, we would of been in a recession much earlier.

I think if you foreclose and the house sells it for.. say $150k less than you owed they will report that to the IRS as personal income to you. And now you owe the IRS taxes on $150k. I think you have to file bankruptcy for protection against that.


-Foxxz

That's my understanding, but I'd have to confirm it with an attorney (I don't really know for sure).



 

I was living in CA and being told the same thing.   I saw it for the bullshit it was.   Many did not.  I have a friend who sold his paid off $400,000 home (in a good neighborhood and in  excellent condition) to use a a downpayment for a $700,000 home next to some rail road tracks.   Why?  Some day it will be worth twice that.

He just got laid off.  And he's going to lose it.  All because he was chasing the pipe dream instead of being thankful for his paid off house.

Me?  I got the fuck out of Cali.

Build a house of cards and you can't get pissed off when the wind blows over the bottom floor.

A lot of $300,000 homes in Cali are complete shit that I wouldn't EVER want to live in.

If it sold for 150k more than he owed the bank, the bank refunds that money to him.  The bank only gets what it is owed in the end.

Even after the crash I still have over $200k equity in my house.

The consequences are or should be spelled out in the contract.  As far as walking away without consequence, I think there are some bankers that have done far worse and we got to cover the loses.  I have almost no sympathy for either party in cases like these.

Currently renting and thinking about buying...

I posted this in the end of the world thread but it also fits here.


"Ruthless Defaults"



Saturday, September 19, 2009
Report: Strategic Defaults a "Growing Problem"
by CalculatedRisk on 9/19/2009 11:55:00 AM
From Kenneth Harney at the LA Times: Homeowners who 'strategically default' on loans a growing problem

National credit bureau Experian teamed with consulting company Oliver Wyman to identify the characteristics and debt management behavior of the growing numbers of homeowners who bail out of their mortgages with none of the expected warning signs, such as nonpayments on other debts.
...
[Some results:]
...

The number of strategic defaults is far beyond most industry estimates –– 588,000 nationwide during 2008, more than double the total in 2007. ...


Strategic defaulters often go straight from perfect payment histories to no mortgage payments at all. ...


Strategic defaults are heavily concentrated in negative-equity markets ...
This fits with recent research from Guiso, Sapienza and Zingales: See New Research on Walking Away and here is their paper: Moral and Social Constraints to Strategic Default on Mortgages



Chris

That's just about the dumbest move he could possibly make.  His credit will be screwed for life, he'll never be able to finance another house or car.  When he goes into Burger King and asks for a Whopper with cheese, they'll ask to see the 98 cents up front.  



He's clearly not thinking.  The housing market fluctuates.  Sure, he's got negative equity this year, its not like he's the only one.  In two years, or five, or ten, it'll come back and that house will be worth as much or more than he paid for it.  



If you can afford the house, letting it go back to the bank is self-destructive and stupid.  

Well, that's cool then. I didn't know that.



It stands to reason then, that he'll owe the difference if he walks, yes? At the very least, I'd expect that the IRS would consider forgiven debt as income.





 

Kinda hard to say...
IF, he was just a garden variety dumbass and overpiad for a $400,000 house now worth $200K, I don't have sympathy.

however, you have to be a pretty big dumbass to pay$4000 a month to live next to a $200,000 with a montly payment that's HALF of what you're paying now.



If the bank won't deal- fuck em and let the bank have the house. Buy the one next door for half the price.

The agreement was- if you don't make the payments, they'll keep/take the house.

The agreement still stands.

sometimes you do everything right- and you still get fucked.

Ask me how I know.


Illegal deals with builder and rental management company turned 30% of neighborhood into rentals.
1989

Henry Cisneros and Section 8 flooded the neighborhood with ghetto people.
1994-1996

2 shootings at the local mall turn thriving 'new' area of town into a ghost town
1999

neighborhood never bounced back and never will.

Section 8'ers move in in droves.

While I agree that it may not be ethical to default on the house, I just can't seem to pity any bank.  Bankers stole 100,000 dollars from my grandmother when they went tits up.  All the while, swearing to her that everything was just fine.   I bet they sleep just fine at night.

A mortgage is a contract agreement, but to a bank it is an investment.  ALL investment has risk.  Don't write a loan if you don't want the risk of losing money.

It's ok.... Let him default on his loan. He probably owes around 155k like OP said, Banks sells home for 90k. Then the old owner has to pay the difference. So truly in the long run he's fucking himself over.

Some interesting responses most of which I fully agree with.

I definitely agree that when you sign a contract that it is your word as a man or woman to honor your commitment.

I also agree that you cannot reap and enjoy the rewards in a Bull market and then simply walk away from your commitments and contractual obligations in a Bear market.

That said, I also know that the financial mess our country is currently in (the housing market crash being one of the biggest factors) is obviously not a normal market "lull" and or Bear market. The plane crashed into the mountain!!! and did so due to greed, unethical behavior and at times totally illegal behavior of the financial institutions that were writing, buying and selling alot of these frivilous loans to people that couldn't afford last weeks newspaper. These institutions/people were making so much money that they didn't give a damn what was going to happen in the end. To add insult to injury: Now enters Obama lama ding dong bailing out the financial institutions with our Tax dollars, future tax dollars and great great grandchildrens tax dollars. Most of the bailout money going directly to the very same company's that got us into this mess in the first place.

On the other end of the bridge stands your average, honest, hard working American home owner like my friend (or any one of us) that had no clue what was going on behind the scenes and agreed to purchase a house priced at what was deemed to be a fair market value; that they could afford at a certain point in time (A bad time). They fully understood when signing their contract that the house could gain equity, lose equity and or stay neutral in price. They DID NOT sign a contract knowing or thinking (even in their wildest nightmares) that due to all of this unethical/illegal behavior going on behind the scenes in the financial world that the market would completely CRASH and that they would not only lose their 20% down payment, but all the money's invested in their home over the past five years AND an additional $150,000 BELOW what they currently still owe on the original mortgage. Someone in a situation like that WILL NEVER...NEVER..recover to a point where they could even dream of breaking even. Meanwhile they continue to work long hours paying an atronomical mortgage payment while current home buyers and investers purchase and move into the same house and nicer for hundreds of thousands dollars less; taking full ADVANTAGE of the same financial collapse that has ruined millions of lives.

Thank you for all the responses so far gents. Keep them coming and I will be sure and forward him the link to this thread.