There is a discussion over at Calculated Risk on whether it is “smart” to just walk away from a house that is worth less than you owe. Many states allow you to do that, without owing the difference. In those states, giving the house back pays the loan in full if it is a first mortgage. (Yes, it ruins your credit rating, but you could save hundreds of thousands of dollars.)
What about the moral question? Aside from whether it is smart or not, is it moral? I wonder if a better question is, when dealing with a big corporation, should you ask what the corporation would do if the shoe was on the other foot? I’m thinking about corporations that use the bankruptcy laws to get rid of union contracts and pension obligations, and that always do the “smart” thing at the expense of the employees, customers, public and even shareholders…
What do you think? Especially our conservative commenters?
Tag Archives: mortgages
Today’s Housing Bubble Post – Go Read
Go to The Agonist to read today’s housing bubble post: Most Clueless Banker of the Year Award. It is a comprehensive explanation of that happened, including a timeline.
[. . .]Like the real estate industry in general, banks believe and tell their customers that home values never go down. Their internal models are predicated on this assumption. Everything communicated to the consumer tells them that their home is a piggy bank of ever-increasing value. Withdrawing cash from the piggy bank is made as easy as possible. Consumers are given loans allowing them not to pay any interest at all and build up a balloon balance, which will assuredly be taken care of down the road by market appreciation. These option characteristics allow the banks to charge even higher points up front and stick penalty clauses into mortgages forbidding the homeowner from paying off the loan until the bank receives all fees due them.
Go read.
Today’s Housing Bubble Post – Stocks Plunge Worldwide
The problems of the housing bubble are catching up to us. The real estate crash has started, bringing big losses to the big financial firms — over $100 BILLION in write-downs so far!
And in the past few weeks the stock market has been catching on that things are not so great anymore. But today – with markets closed in the U.S. in honor of Martin Luther King Day – stocks have been plunging around the world. Markets in Asia down as much as 7%, even more. Europe as well. Canada down.
Dow futures are down dramatically – 540 points, more than 4% – which could mean a very bad day tomorrow – or not.
Stocks Plunge Worldwide on Fears of a U.S. Recession – New York Times,
“There is indeed some panic,” said Thomas Mayer, the chief European economist at Deutsche Bank in London. “What we’re seeing, in Europe and Asia, is that the markets are pricing in a recession.”
The sell-off was evenly distributed from West to East, with indexes plunging in London, Paris, Frankfurt, Tokyo, Hong Kong, Seoul and Bombay. The Frankfurt Stock Exchange’s Dax index plummeted 7.2 percent, its steepest one-day decline since Sept. 11, 2001. The 7.4 percent drop in Bombay’s Sensex index was the second-worst single-day tumble in its history.
Remember what I said about money market funds. Make sure that your money is in FEDERALLY INSURED ACCOUNTS.
Today’s Housing Bubble Post – Cashing In Before Crash
Also titled “I told you so!”
In the LA Times today, How we cashed in before the housing crash,
Our friends said we were crazy. Relatives asked whether we were in financial trouble. But in April 2005, my wife and I bailed out of the American dream. We sold our two-bedroom Pasadena condominium and became renters again.
We got nearly three times what we had paid for the place nine years earlier. It seemed to us like a staggering profit — and a sign that the market had been pumped up beyond reason.
. . .But at the time, a lot of people thought we had sold too early. To stay on course, I adopted a personal anthem. It was a Public Enemy song that hit big in 1988 during the previous real estate run-up: “Don’t Believe the Hype.”
Sold too early. And now they’re saying “We’re at the bottom.” Right.
Today’s Housing Bubble Post – Next Year, Not Just Subprime
So far we have been hearing about a “problem” with “subprime” mortgages that went to people with bad credit. Then we heard about problems with “adjustable” mortgages where the payments go up after a period of time and mortgages with no down payments and mortgages where the borrower didn’t have to verify how much income they really had. You can readily see where there could be problems with all of those.
My prediction for next year is that the problem will spread to regular mortgages given to regular people with good credit. The reason I think this will happen is that I think housing prices are going to fall quite a bit. If prices go to where they should be according to historical norms, or according to the historic ratio between rents and prices,or according to what always happens when bubbles pop, then they are going to fall as much as 40-50%. Maybe even more. (And never mind that the “boomers” are starting to retire and will not need the houses many of them have further increasing inventory and decreasing demand…)
So next year we’re going to see a LOT of regular people with regular mortgages go “underwater” — meaning they will owe a lot more than the current market price of their houses. In many states the regulations allow people to get out of their mortgages by giving the house to the lender and not have to make up the difference if the mortgage is for more than the house can sell for. And many will do exactly that. (Which will even further increase inventory and put pressure on prices.)
So next year I predict the credit crisis is going to get a LOT worse.
Today’s Housing Bubble Post – New Home Sales Fall More And Expected
A bulletin arrived in my e-mail this morning with the headline, “U.S. new-home sales fall more significantly than forecast in November” All I could think to say was “NOT”
No, everyone who actually learns about what is going on with housing is surprised that ANY new homes were sold, and that ANYone is stupid enough to buy ANY house until the price reverts to the mean. This is a popping bubble, people. If you buy a house now it will be worth a third less in two years. ANY house! Remember how many stocks went to zero after being “golden” for so long? This is what HAPPENS when bubbles pop. DUH!
Sorry.
U.S. Nov. new-home sales fall 9% to 647,000 pace – MarketWatch
Sales of new U.S. homes fell by a more-than-expected 9% in November to a seasonally adjusted annual rate of 647,000, the Commerce Department reported Friday. Economists surveyed by MarketWatch were expecting new home sales to drop to a seasonally adjusted annual rate of 710,000 in November. Meanwhile, October’s sales rate was revised downward, to rise by 711,000, or 1.7%. They were previously estimated to have risen to a seasonally adjusted annual rate of 728,000. In the past year, sales of new U.S. homes are down 34.4% nationwide.
Today’s Housing Bubble Post – Record National Housing Price Drop
U.S. home prices drop 6.1% year over year, Case-Shiller finds – MarketWatch,
Home prices in 20 major U.S. cities were down 6.1% on average in the past year as of October, according to the Case-Shiller price index released Wednesday by Standard & Poor’s.
Since October 2006, prices in 10 cities fell 6.7% — a record drop. The prior largest decline was 6.3% in April 1991.
. . . Miami sustained the largest drop over the past year, with a decline of 12.4%. Next came: Tampa, with a drop of 11.8%, Detroit with a drop of 11.2%, and San Diego with a drop of 11.1%.
This is only the beginning.
By the way, does this price drop take into account 4% inflation? If not the real decline was quite a bit greater.
Today’s Housing Bubble Post – All Those Buyers…
In for a Surprise… Go read it, but I just had to reproduce the chart here:
In August, 2006, I wrote a post Today’s Housing Bubble Post – How Far Can Prices Fall?
Suppose rents are $2000 a month for a 3-bedroom house. Subtract from that repairs, maintenance, etc., and let’s say you are clearing $1800. Instead of trying to calculate property taxes let’s just say $400 per month – which is lower than what they would be ($650) if purchased now but you’ll get my point in a minute.
So you’re clearing about $16,800 a year from your investment. Let’s say you are shooting for a 7% return. That means the house SHOULD be priced at about $240K, approx 1/3 of current pricing.
That’s SF Bay Area pricing, by the way. And prices tripled here in the bubble, so that sounds about right.
But I’m not going that far in my prediction. You have to account for ten years of inflation – which is higher than reported. Also the dollar drop means people from other countries will find higher prices cheap and the Bay Area is a premium place to live. And other demographic factors. But I don’t rule out a 50% drop. Prices here really shouldn’t be much higher than maybe $400K
Today’s Housing Bubble Post – The Bailout: Just Another Fraud
From today’s SF Chronicle, MORTGAGE MELTDOWN / Interest rate ‘freeze’ – the real story is fraud / Bankers pay lip service to families while scurrying to avert suits, prison,
It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of “teaser” subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.
But unfortunately, the “freeze” is just another fraud – and like the other bailout proposals, it has nothing to do with U.S. house prices, with “working families,” keeping people in their homes or any of that nonsense.
The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value – right now almost 10 times their market worth.
The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.
It’s widespread:
The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.
So why the “freeze?” What does that really accomplish?
The goal of the freeze may be to delay bond investors from suing by putting off the big foreclosure wave for several years. But it may also be to stop bond investors from suing. If the investors agreed to loan modifications with the “real” wage and asset information from refinancing borrowers, mortgage originators and bundlers would have an excuse once the foreclosure occurred. They could say, “Fraud? What fraud?! You knew the borrower’s real income and asset information later when he refinanced!”
Cuomo in New York is going after some of the fraud – the inflated appraisals, for example. If I had money in these mortgage-backed investments rated AAA I would be demanding MY money back – and if you are in a money-market fund, you just might be who I am talking about.
But you wouldn’t have any money in a money-market fund NOW, would you? You’re smarter than that.
Update – Mish’s Global Economic Trend Analysis says the fraud / lawsuit avoidance theory from the above article is “preposterous.”
The goal of the freeze is not to “stop bond investors from suing”. The goal of the freeze is to Peddle a Sucker Trap Disguised as Hope.
However, so few people will qualify for the program (see Little Hope For Hope Now Alliance) that no one can possibly claim it will stop much of anything, including lawsuits or foreclosures.
Go read.
Today’s Housing Bubble Post – Foreclosures At Record High
U.S. mortgage foreclosures at record high: Mortgage Bankers
A record number of U.S. mortgages were somewhere in the foreclosure process in the third quarter, with 1.69% of all residential borrowers facing the loss of a home, the Mortgage Bankers Association said Thursday. The percentage of homes that entered foreclosure in the third quarter also hit a record at 0.78%, the trade group said. Mortgage delinquencies, those loans with payments that were more than 30 days past due, shot up to a 21-year high at 5.59%, MBA’s quarterly survey showed. Although all types of loans showed an increase in foreclosure starts in the third quarter, subprime adjustable-rate loans remained the biggest problem, accounting for 43% of all new foreclosures, even though they comprise just 6.8% of all loans outstanding, the MBA said.
And the REAL wave of foreclosures is expected next year…
Today’s Housing Bubble Post – Is Your Money Safe?
Fallout from the bursting of the housing bubble is rippling further and further out. In the last few days three state government funds have realized they are in big trouble and are experiencing “runs.” And as a result, in the next few days we are likely to hear about the same thing happening in many other states. These are funds that cities put their cash into until it is needed to pay city employees, teachers, etc. The cities have people who understand finance watching the money, and they understood this so they started getting their money out. And because the fund had lost some of the money in mortgage-backed securities, it couldn’t give money back to all of the cities, and had to say “no more withdrawals until this gets sorted out.” The ones who asked for their cash first are OK, the ones who didn’t will lose out.
This is exactly what could happen to money markets and banks as people realize this is their money everyone is talking about in the news. YOUR money. Find out where your money is, your parents’ money, etc..
Florida moves to stop run on fund
The crisis underscores how the upheaval in credit markets could spread to affect mainstream investors, institutions and their employees. In recent weeks, local authorities in regions as disparate as Australia and Norway have reported similar problems.
[. . .] Most of the securities were short-term debt backed by mortgages and other assets, and issued by off-balance sheet investment vehicles, many of which have run aground in the credit squeeze. Lehman Brothers sold most of the distressed assets to the Florida fund, people familiar with the sales said.
and Florida freezes $15 billion fund as subprime crisis hits,
Florida halted withdrawals from a $15 billion local-government fund Thursday after concerns over losses related to subprime mortgages prompted investors to pull roughly $10 billion out of the fund in recent weeks.
. . . The decision shows how far this year’s subprime-fueled credit crisis has spread. Florida’s Local Government Investment Pool, which had more than $27 billion in assets at the end of September, is like a money-market fund that’s supposed to invest in ultrasafe assets to provide participants with a secure place to stash spare cash. But even these types of funds have been hit by the widening crunch.
“It’s spreading into areas that people didn’t expect and this is a good example,” Richard Larkin, a municipal bond expert at JB Hanauer & Co., said.
Maine Treasurer Criticizes Merrill for Subprime Bet,
Controversy is heating up in the state over who is at fault for having put $20 million, about 3 percent, of the state’s roughly $725 million cash pool this summer into an investment fund called Mainsail II — two weeks before its sterling ratings crumbled to junk.
The investment met all of the state’s investment criteria, but exposed the state to the mortgage market-related losses that have roiled credit markets for a few months.
And Run on Montana Fund,
Montana school districts, cities and counties withdrew $247 million from the state’s $2.4 billion investment fund over the past three days after officials said the rating on one of the pool’s holdings was lowered to default.
But don’t think for even a minute this is limited to state government funds. It’s just that the municipalities that had cash in those funds understood what was happening. MANY holders of money, especially money-market funds are in exactly the same situation, except the depositors in money-market funds are not necessarily as sophisticated as municipal finance officers, and don’t yet realize what all of this means.
But it is starting to hit the news.
How safe is your money market fund?,
Today’s Housing Bubble Post – How Far The Fall?
Calculated Risk: LA Times: How Far Will House Prices Fall?
If SoCal prices fall 25%, then prices in other areas – like Miami and Las Vegas – will probably decline a similar amount.
Keep in mind my own observation that houses near here are not selling even after a price cut of almost a third.
OTHER bubbles, like the “dot com” bubble, have seen prices fall right back to where they would have been without the bubble. In fact, haven’t ALL other bubble fallen like that? Why will this one be different? And that means you’re looking at 50% or more.