Walk away
May 9, 2010 5:48 PM Subscribe

Forclosure? This evening 60 Minutes did a segment on "walking away" from your underwater home... They featured a web site Youwalkaway.com (previously) which, this evening, is suffering from an overload of hits. Are we going to see an uptick in folks who have said enough...
posted by HuronBob (145 comments total) 14 users marked this as a favorite

For those wishing to hash out the morality of defaulting on one's mortgage: previously.
posted by indubitable at 6:07 PM on May 9, 2010 [1 favorite]

Before you walk away make sure your bank cannot or will not go after you. I know someone who is declaring bankruptcy after walking away because the bank is pursuing them beyond the lien. In some states they cannot. Even in the state where they can many banks will not as the cost is rarely justified. Nevertheless......
posted by caddis at 6:07 PM on May 9, 2010

I want to see people squatting in their own homes and daring the bank to prove that they own the note.

The Wall Street motherfuckers took all those mortgages and created financial monstrosities so complex that they cannot be unwound. In a very real and legally binding sense, the bank that wrote you the loan (and is demanding foreclosure in lieu of payment of that loan) probably does not own that loan any longer, and therefore do not have the legal standing to enforce the terms of the loan.

One woman had $460,000 in mortgage essentially written off when the bank couldn't actually produce a paper trail demonstrating that they still legally owned the loan. She kept her house. Now, if she ever wants to sell it, she may have trouble.

But yeah, I say squat in your own home and challenge the bank to demonstrate that they have the legal right to have the Sheriff's Deputies evict you and change the locks.

No note, no eviction.

Fuck you, bankers. The enduing myth of the Great Depression is the image of newly destitute bankers jumping from the upper story windows.

I know a lot of people this time around who are advocating they be given a bit of a shove.
posted by Pirate-Bartender-Zombie-Monkey at 6:08 PM on May 9, 2010 [87 favorites]

These people signed a contract in which they agreed to pay their mortgages. Likewise, the bank's side of that contract allows foreclosure in the event the buyer stops paying his or her mortgage.

Seeing as how the banks are the ones who drew up these contracts, I can't weep for them now that the terms are no longer favorable. Maybe they should have thought of this back when they were talking everybody and their brother into buying homes they couldn't afford. The one-sided "morality" they're trying to push is ridiculous -- it's not "moral" to double people's mortgages and then evict them, now is it?
posted by vorfeed at 6:13 PM on May 9, 2010 [14 favorites]

Yeah, just to preempt anyone who lays down a morality card here: it's explicitly legal to opt out of most mortgages. If you call someone immoral or otherwise use appeal to emotion to prove that people should honor their words or some nonsense, you're just making some mortgage fund lobbyist smile.
posted by Burhanistan at 6:21 PM on May 9, 2010 [19 favorites]

Yeah, different states have different rules. In some of them, walking away won't help.
posted by delmoi at 6:22 PM on May 9, 2010

I always love the conservative viewpoint in this story:

Businesses exist to make money regardless of morality.
Humans are morally obligated to honor contracts regardless of monetary hardship.
posted by DU at 6:23 PM on May 9, 2010 [58 favorites]

Youwalkaway.com membership

$199.00 "Silver" enrollment fee -- $19.95 monthly
$295.00 "Gold" enrollment fee -- $49.95 monthly
$395.00 "Platinum" enrollment fee -- $99.95 monthly

Seriously, do I laugh at this or cry?
posted by Avelwood at 6:32 PM on May 9, 2010 [15 favorites]

I suspect that, even though we're hearing that the economy is recovering, we're about to see a tsunami of people walking away.. I see it in my own neighborhood, where there are an increasing number of houses with unmowed lawns with notices pinned to the front doors...

I think we've just seen the tip of the iceberg on this....
posted by HuronBob at 6:33 PM on May 9, 2010 [1 favorite]

Some of our neighbors are currently in the process of walking away. All day they move boxes. All night they strip copper and plumbing. We don't know whether to hope that they only strip it or that they also try to burn it out of spite. What's better for our property value, a burned-out shell that's easy to demo or a stripped husk?
posted by infinitewindow at 6:42 PM on May 9, 2010 [2 favorites]

Avelwood.. I looked at that as well.. excessive... I don't know.. probably cheaper than hiring an attorney to walk you through this, and, compared to the cost of a payment on a mortgage (hell, we're at over $1k on my wife's house, and at about $1.3k on the house I own with my ex), that's pretty cheap to get someone to support you and help you through this process!
posted by HuronBob at 6:43 PM on May 9, 2010

Humans are morally obligated to honor contracts regardless of monetary hardship.

The 60 Minutes segment eschewed any financial hardships. It concerned strictly "strategic defaults," mortgagors who can afford to continue making their contractual payments but choose not to.

I haven't looked closely at the YouWalkAway website, but I'd be curious to do so with an eye toward tortious interference.
posted by cribcage at 6:43 PM on May 9, 2010

I suspect that, even though we're hearing that the economy is recovering...

"This Oakland economist believes the government's major economic indicators are lies. Most other economists think he's a crank. But then, most of them also thought the economy was healthy."
posted by Pirate-Bartender-Zombie-Monkey at 6:45 PM on May 9, 2010 [4 favorites]

Is there a way to proactively force the bank to prove they possess the note on my house? Because if nobody can bring forth the note on my house, maybe I can start saving mortgage payments right now.
posted by dances_with_sneetches at 6:45 PM on May 9, 2010 [4 favorites]

Before you walk away demand to see proof. A lot of the banks sold that loan and have no ability to prove you owe them your home.
posted by five fresh fish at 6:45 PM on May 9, 2010

The Wall Street motherfuckers took all those mortgages and created financial monstrosities so complex that they cannot be unwound.

How would one even find out if their bank still owned the note or had CDO'ed it off with a bunch of other mortgages?
posted by pjern at 6:47 PM on May 9, 2010

Infinitewindow: you got the means to buy the lot? Burn 'er down, have yourself a nice garden and swimming pool. The old foundation would probably make it easy to have an unconventional pool. Maybe even get yourself a grey water to swimmable water system going.
posted by five fresh fish at 6:52 PM on May 9, 2010 [1 favorite]

It's still cheaper to build new than it is to buy a house - the bubble has wrecked the real-estate market for the foreseeable future. People are demanding mansion-money for an average suburban home - because they paid mansion money for it during the boom. People selling land tend to be professional realtors, some of whom have been sitting on parcels of property for decades, so they're able to move with the market the way a home-owner underwater on their mortgage just can't.

Home buyers are reluctant to buy a foreclosed home, because they're still overpriced compared to new construction, and they don't come with a warranty that a homeowner or builder would provide to the buyer. Who want's an overpriced "as is" gamble when a modular home comes with a 30 year warranty on construction?

And while a lot of people would like to walk away from an underwater mortgage, in many cases, banks won't let them. They refuse to foreclose, and instead report missed payment after missed payment, indefinitely, pretty much ruining their credit for much, much, much longer than the 7 years a foreclosure stays on your record.
posted by Slap*Happy at 6:55 PM on May 9, 2010 [5 favorites]

Oftentimes the company that you send your monthly check (and that comes after you if you don't) is a loan servicing company -- they don't own your house, but they work for the people that do own your house.

That's not to say that this "paper trail" stuff is not true, but I suspect the problem is that the loan servicing company has trouble showing authority/agency to speak on behalf of the fractional owners. But it's a different issue than showing that they own the house -- the loan service companies do not own your house, and don't claim to.
posted by Mid at 6:55 PM on May 9, 2010 [1 favorite]

I suspect if walkaways do spread the banks will get their puppets in Congress to make it tougher to walk away and make life more difficult to those that do walk away like make it hurt one's credit harder and for a greater period of time. We can't have consumers doing this to the poor banks!

I would also suspect that legislation barring employers from running credit checks on potential employees may get torpedoed. We can't have these deadbeat walkaways get a good job!

Even though the banks do still own the house and can sell it to recoup some of its loss (and our tax law lets it write off the losses it does get!) or if it holds on long enough can break even. Oh, poor banks. It would be nice if while the bank owned the property they still had to pay homeowner association dues (and hire a landscaper to keep the front yard looking nice) and property taxes. Today in most places, they bank pays nothing. The sooner the bank unloads the house, the sooner they avoid those fees.

Ultimately, this will make getting a mortgage harder to get. Which I don't think is a bad thing. Not everyone needs to be a homeowner. Most "homeowners" are people who can't really afford the home and are actually just renting from a bank rather than a landlord. As a lifelong renter, I enjoy the benefit of having them fix the shit that breaks and the ability to walk away for a better place without worrying about market condition.
posted by birdherder at 7:06 PM on May 9, 2010 [2 favorites]

That's not to say that this "paper trail" stuff is not true, but I suspect the problem is that the loan servicing company has trouble showing authority/agency to speak on behalf of the fractional owners.

No, it's more than that. The LSC is just a bill collector, a hired gun.

Say the banks have 100 mortgages of varrying qualities, some high quality, some middle, some are junk.

Bank takes all 100 mortgages and puts them in a blender. Out comes a "collateralized debt obligation". It's similar to a bond. IThen that CDO get sliced into different "tranches" some billed as high quality, some as lower quality.

When you buy into a CDO, the bank is saying "You own a small slice of 100 mortgages, and have the right to a slice of the interest payments from each of those. You don't own any 1 mortgage, just a tiny slice of 100 all bundled together".

And these slices were sold all over the world, quite often fraudulently billed as being AAA (highest quality) by the ratings agencies who were hired by the banks to rate their products.

So your mortgage is legally owned by hundreds of parties all over the world who bought a piece of your debt expecting to be paid back, and each have to be negotiated with in order to resolve a foreclose. If they can be tracked down at all. really, this is what's going on.

Super Rich: The Greed Game by the BBC is a pretty coherent explanation of this whole mess.

Srsly... pushed out the window this time.
posted by Pirate-Bartender-Zombie-Monkey at 7:11 PM on May 9, 2010 [9 favorites]

I can't believe that people are worrying about their future credit ratings

Aside from the things where it really does often make sense to finance (homes, cars), a bad credit rating can keep you from getting a job or an apartment/rental as well. Sometimes it's worth it, but bad credit is more than just not being able to get huge credit card limits, it can affect your life even if you don't want to use credit at all.
posted by wildcrdj at 7:19 PM on May 9, 2010 [7 favorites]

It's still cheaper to build new than it is to buy a house

This is very location-dependent. The expected rebuild price in our homeowners' insurance is around twice what we paid for it. But we live in western New York.
posted by ROU_Xenophobe at 7:27 PM on May 9, 2010

but bad credit is more than just not being able to get huge credit card limits, it can affect your life even if you don't want to use credit at all.

This presumes we're not heading for a fundamental collapse of the system that will make things like "credit ratings" meaningless in the face of the Grim Meathoook Future.

Because if this guy is right and the gummint has for decades been systematically fudging the numbers to make the country look economically better off than it really is, then the damning Econopocalypse is is going to be worse than we're expecting.
posted by Pirate-Bartender-Zombie-Monkey at 7:31 PM on May 9, 2010 [4 favorites]

~~damning~~ dawning
posted by Pirate-Bartender-Zombie-Monkey at 7:32 PM on May 9, 2010

The 60 Minutes segment eschewed any financial hardships. It concerned strictly "strategic defaults," mortgagors who can afford to continue making their contractual payments but choose not to.

This should be perfectly fine. It's not like a bank wouldn't do the same thing if the situation were reversed.
posted by JHarris at 7:32 PM on May 9, 2010 [4 favorites]

The individual home "owners" can not be held accountable for the lax approach to loans the banks decided to take. The expertise to know how valuable a house is going to be twenty years down the line is almost entirely going to be within the realm of oddly-specialized financial modellers employed by the people who are giving the loans. If they want long-term profits, they need to use long-term planning. If they fucked up giving houses away to everyone, they should be paying.

I think that not being able to prove ownership is a damn fine way of having them pay.
posted by five fresh fish at 7:33 PM on May 9, 2010 [1 favorite]

Since it's so trivially easy to get a bad credit rating and extremely hard to get rid of it or to keep a good one, and since there is no apparent punishment for the complaining entity if the complaints turn out to be inaccurate or even outright false, it seems that bad credit ratings ought to be proliferating through the US economy to the point where it will mean nothing more than "X is not independently wealthy, or at least hasn't been for more than seven years or so". If everyone has "bad credit", no-one will have "bad credit".
posted by aeschenkarnos at 7:38 PM on May 9, 2010 [22 favorites]

I suspect that aeschenkarnos has NAILED IT!
posted by HuronBob at 7:43 PM on May 9, 2010

I can't believe that people are worrying about their future credit ratings. How fucked up does the world's financial situation have to be before people realize that buying things they cannot afford is a bad idea?

Yes. You might have shite credit, but you have a home. You won't be able to buy a boat, but you'll have a home. Screw your credit rating, retain the house.
posted by five fresh fish at 7:48 PM on May 9, 2010 [1 favorite]

I agree with the sentiment that the importance of credit ratings has been overstated (for most people). Around when I was graduating college, in 2006, I was vaguely worried about what my credit score was, but in the 4 years since then the only time I'm aware of where it made any difference was that the electric company waived a deposit when I first signed up. In that period I've lived in 5 rentals and searched for and got a job. None of my landlords even ran a credit report. I certainly can't imagine what benefit those monthly-fee credit score monitoring services that credit card companies and various sleazeballs (freecreditreport.com/experian etc.) hawk. I'm convinced that they play up the non-financing-stuff aspects of credit scores for their own benefit, but it's not necessarily reflective of reality.
posted by ghharr at 7:54 PM on May 9, 2010

Dear People Who Purchased Your Home For Too Much And Are Now Trying To Make The Bank Prove They Own The Note,

Fuck you.

Love,

Those Of Us Who Saw The Housing Bubble And Saved Our Money And Now Want The Market To Correct Itself So We Can Actually Buy A House
posted by mark242 at 7:55 PM on May 9, 2010 [20 favorites]

Mark242, I believe your anger is misplaced. The banks were advertising like fucking crazy "No credit? Bad Credit? No money down, no questions asked, own your own home!"

Fuck, the brokers were fraudulently signing people up whom they KNEW didn't qualify because the broker got paid for each completed transaction, even if it all later collapses because the broker approved someone whome they knew couldn't long-term afford the loan they were taking on, and quite often didn't understand the terms.

Google: "Predatory lending".

My sympathies, brother. But the squatters are not the ones who fucked you, nor the ones you should be pointing towards the windows.
posted by Pirate-Bartender-Zombie-Monkey at 8:01 PM on May 9, 2010 [18 favorites]

Mark242... the problem is that those folks purchased houses that they needed to purchase for the price that they were selling at.... :-\
posted by HuronBob at 8:02 PM on May 9, 2010 [1 favorite]

Google: "Predatory lending".

I get the subprime collapse. I get that-- but out here in California, _everyone_ was doing it. I know-- the LO's are at fault, the realtors are at fault, the banks are at fault, _and_ the people who signed on the dotted line are at fault. _EVERYONE_ is to blame here. You buy a house with a 80-20 5/1 110% ARM under the premise that "real estate always goes up" and real estate doesn't go up, guess what, you deserve a little bit of my vitriol.
posted by mark242 at 8:05 PM on May 9, 2010 [7 favorites]

Damn straight this is the bank's fault. No one forced them to make loans that were not representative of the true long-term value of the properties. They are the ones who possess the resources to determine the long-term value of an investment. They bear much of the responsibility for possessing homes that are not worth what they were valued.

Most of these houses are built like shit anyway. The people that manage to own their homes because no one can prove they don't, are going to be facing the problem of replacing those homes within the next twenty to forty years. Shoddy construction and crappy materials are going to bite them all in the ass.
posted by five fresh fish at 8:07 PM on May 9, 2010 [2 favorites]

The expected rebuild price in our homeowners' insurance is around twice what we paid for it...

Home-building isn't what it used to be, even 5 years ago. Modular homes are filthy cheap to buy, and if you don't customize the floorplan too much, filthy cheap to assemble. At the same time, you are buying something made in a factory, with factory warranty and QC, to agreed-upon specifications. Stuff that's a ludicrous luxury on a site-constructed home, like granite and hardwood kitchen, cork flooring, subfloor heating, double-pane soundproof windows - is a $5k or $7k upgrade (or less - stainless Whirlpool appliances came free with a coupon my folks got at a trade show).

It's not at the point where it's like buying a car from the dealer as opposed to buying all the parts individually at NAPA and hiring a mechanic to build it in your driveway, but it's not that far away, either. It's a pretty big sea-change in home building - modular homes have been talking tall, walking small for decades, but in the past 5 years, they're actually making good on a lot of the promise.

This is a big problem for home sales, and for the construction industry.
posted by Slap*Happy at 8:08 PM on May 9, 2010 [1 favorite]

The Wall Street motherfuckers took all those mortgages and created financial monstrosities so complex that they cannot be unwound.
What the originator did with the loan after making it did not change the terms. As a result, "Wall Street" has exactly nothing to do with your ability repay. If you can't repay, or don't want to, that's fine, but let's not blame "Wall Street". You took out a loan you couldn't afford, and now you don't want to pay it back.

That's great, though. I don't want to pay back my loans either, and if I can ever get out of it, I will. Let's not pretend we have the moral high ground, though. There is no moral ground.
posted by planet at 8:15 PM on May 9, 2010 [5 favorites]

If everyone has "bad credit", no-one will have "bad credit".

I have been wondering about this for years. As the credit card companies/banks have pushed to make things like bankruptcy for medical bills out of reach, and rabidly fought other sensible relief measures like cramdowns, what will it mean when a large chunk of the population is a bad credit risk?

I would love to think it would mean we'd all come to our senses and stop the invisible-debtor's-prison punishments, but I worry more that it will mean that there'll simply be an even wider gap between the solvent haves and permanently indebted have-nots. Cue any number of sci-fi dystopias built on this very premise.

My first run-in with the essential hypocrisy of punishing people for bad credit was when my father died leaving huge medical bills; my mother tried to negotiate long-term payment plans with the credit card companies she'd had to rely on for money while he was sick. She wanted to pay, and was working a good job, and so would eventually have been able to pay. They told her no, just declare bankruptcy.

She got back on her feet, restored her credit after 7 years, bought a nice house, started an internet retail home decor business. Then got sick and couldn't work, and of course, could no longer declare bankruptcy due to medical bills. Then the housing market went splat, her home business tanked, and after the medical bills, she had nothing. She died last year nearly penniless, living with my brother, despite 40 years of constant hard work, saving up, avoiding debt whenever possible, and being a person who, most of her life, had exemplary credit, was thrifty, and believed in doing her part.

It's not about stupid lazy debtors; I really don't think my mom is the exception. The system is rigged 20 ways to Sunday against even the most honest hardworking debtor.
posted by emjaybee at 8:19 PM on May 9, 2010 [80 favorites]

I was/am gonna spend a Question on finding this recentish article, but the one I'm thinking of argued that if one held the housing sector constant, that much of the growth of the postwar economy disappeared, certainly since the 70s. This was why "new housing starts" always got listed in the stats during the biznis news. Because so much of our economy was involved in building houses.

The article then went on to argue that the pool of qualified buyers of houses was not large enough to keep up with the pace of new housing being built which was one of the few things keeping the economy going.

Which is why they started giving mortgages to people who couldn't really afford them, because everyone knows that housing prices will rise forever, and no matter what you paid for it, there will always be someone who will pay more than you paid. Because when they sell...

Until it all went 'splodey.
posted by Pirate-Bartender-Zombie-Monkey at 8:20 PM on May 9, 2010

Mark242... the problem is that those folks purchased houses that they needed to purchase

No, they did not. Unless the US is so badly off that it's gone back to horse and buggy days, one can almost always choose to try finding a cheaper house somewhere else.
posted by five fresh fish at 8:24 PM on May 9, 2010

This is a big problem for home sales, and for the construction industry.

Not really. There's just not enough land in the cities to backfill with modular houses, and the construction companies get paid one way or another. And in the exurbs, it's really no different from the 1000 house tracts of identical boxes; the difference is just where the houses are built, on a factory floor or outdoors.

And anyway, "modular housing" has been around for over a century without threatening the contractor-industrial complex.
posted by dw at 8:26 PM on May 9, 2010

You took out a loan you couldn't afford, and now you don't want to pay it back.

This position presumes that the person taking out the loan understood the terms and were not mislead by their broker. In fact there's lots of evidence that brokers were acting fraudulently to get loans closed no matter what, because they got paid per loan closed, reasonable or not.

They were the professionals who (one might presume) had some sort of fiduciary duty to do right, as well as the professional understanding of how the system works. And quite often they funneled people who would otherwise qualify for regular loans into these subprime boondogles.

When the professional whose getting a fat payday if you sign on the dotted line says "You can afford this loan and get your children out of the cramped apartment into a home of your own just don't look to closely at the fine print..."

No brother, I disagree with your assessment.
posted by Pirate-Bartender-Zombie-Monkey at 8:28 PM on May 9, 2010 [6 favorites]

A lot of it depends on what you desire in a home. I've got a modern contemporary home that's designed, not kit. It's also heading on twenty-five years old. It's built using good materials; overbuilt, by today's standards.

I wouldn't trade this for one of the little boxes, little boxes, for all the tea in China. If a home is an investment, it needs to be more than a chipboard-and-glue unremarkable POS craphouse. Otherwise, rent it.
posted by five fresh fish at 8:33 PM on May 9, 2010 [2 favorites]

What the originator did with the loan after making it did not change the terms. As a result, "Wall Street" has exactly nothing to do with your ability repay.

Thing is, the reason that so many subprime mortgages needed to be produced (even if fraudulently) was specifically that Wall Street could securitize them.

They wouldn't have given away ludicrous loans to people who couldn't afford them or understand the terms if Wall Street wasn't beating on their door shouting "Give us more mortgages to throw in the blender, we're making a killing off these things!"
posted by Pirate-Bartender-Zombie-Monkey at 8:35 PM on May 9, 2010 [5 favorites]

It is unreasonable to expect your average American to have the ability to fully comprehend the long-term fiscal outlook the neighbourhood, the district, the city, and the county. It is not unreasonable to expect your average bank to have a clue.

There is undoubtedly a large number of people who should never have gotten themselves into this mess, and perhaps a lot of them should have been able to figure it out for themselves. Nonetheless it is the responsibility of those more informed to shoulder their share of the responsibility in passing the loan, and all the responsibility for having hawked these near-fraudulent "opportunities" in the first place.
posted by five fresh fish at 8:42 PM on May 9, 2010 [4 favorites]

In fact there's lots of evidence that brokers were acting fraudulently...

Yes, but that's not relevant to this discussion. Once again, the mortgagors in question here are defaulting "strategically"—not out of necessity, not out of an inability to pay their obligations, as in fact they are perfectly able to continue paying. They are just choosing not to, because the theoretical market-value of their homes has fallen below the amount they owe.

There were fraudulent loans given to people who, as you say, "couldn't really afford them." But these aren't those loans.
posted by cribcage at 8:46 PM on May 9, 2010 [2 favorites]

Mark242... the problem is that those folks purchased houses that they needed to purchase for the price that they were selling at.... :-\

Some of them, sure. But we sold our old house 7 1/2 years ago, a big old Dutch Colonial with high ceilings and beautiful woodwork and 2400 or so square feet, in a fancy neighborhood, to people who who financed 100% of the purchase price and asked us to pay their closing costs (we did, because they wanted to close fast and the closing costs were cheaper than carrying the mortgage while we did several thousand dollars worth of cosmetic repairs and improvements we had thought the house would need in order to sell). They were a young couple with no children and $0 for a down payment who bought a big house they probably couldn't afford when there were perfectly charming and decent--but smaller--houses for maybe 60% of the price two miles away.

You'd think they'd have been warned--they had been set to close on another house in the neighborhood and it fell through on the day of closing because the seller had so much debt on the house he couldn't bring enough money to the table to go through with the closing. Our realtor said that was starting to become more common. I suppose that was the early harbinger of the bubble popping.
posted by not that girl at 8:46 PM on May 9, 2010 [1 favorite]

Too small to bail-out
posted by HTuttle at 8:46 PM on May 9, 2010 [3 favorites]

I have been wondering about this for years. As the credit card companies/banks have pushed to make things like bankruptcy for medical bills out of reach, and rabidly fought other sensible relief measures like cramdowns, what will it mean when a large chunk of the population is a bad credit risk?

It would mean that the differential between prime and the actual interest charged would widen considerably. Eventually, it would be so wide that it would be essentially impossible for an average person to borrow money, at which point the banks would be forced into choosing between raising fees or cutting interest rates to break even. Or, some new banking entity currently unseen would rise up and offer low interest loans that would undercut the big banks so much they would have no choice but to reduce the differential. And with that, you'd see a new "normal" of what's "bad credit" emerge.

I think, too, that a lot of what we've been seeing here with debt has been, and I apologize for calling it this, a "blame the woman" attitude. That is, you stone the woman for adultery but let the man off the hook. Banks who wrote these crappy mortgages -- and even encouraged them -- aren't seen with nearly the scorn of the people who signed up for these mortgages, that They Should Have Known and How Dare We Let Them Off. And that attitude is why so many are staying in their homes despite buying at 2007 prices and not being able to afford them. I also wonder how much the banks are feeding this meme, too. I mean, if people started walking away left and right, a lot of safe banks now would be pushed into the FDIC danger zone, and a lot of big banks who are climbing out from under the TARP requirements by handing their reserves to the government would be caught with their pants down.

I mean, it's right to argue against moral hazard, and certainly I don't think rewarding failure is in the long term beneficial to our system. However, there's a disconnect here between the lender and the borrower's responsibilities. Long term if the lender treats the borrower with too much hostility there will be no borrowers, and no borrowers mean no interest payments, and no interest payments mean no big, fat checks for CEOs.

If the system leans too far toward usury, then the ultimate consequence is a system that will do without usury altogether. And while Islamic banks make plenty of money, they're just not the money spinners that Bank of America's mortgage division is. In fact, in a non-usury scenario, the banks essentially become starved of capital. And that's the ultimate consequence of where they're going with their desire to tighten bankruptcy rules. They're starving themselves of customers.
posted by dw at 8:51 PM on May 9, 2010 [3 favorites]

And I should say that I'm referring to people who are underwater. Strategic defaulters can bite my shiny metal ass. Short sale the mofo if you can't afford it, idiots.
posted by dw at 9:00 PM on May 9, 2010

This position presumes that the person taking out the loan understood the terms and were not mislead by their broker. In fact there's lots of evidence that brokers were acting fraudulently to get loans closed no matter what, because they got paid per loan closed, reasonable or not.
Fine. The borrowers couldn't read, or didn't want to. Or if they did read, they didn't understand what they were reading but signed anyway. I don't care. I'm not condemning them. I'm just saying they don't have the moral high ground.
posted by planet at 9:14 PM on May 9, 2010 [2 favorites]

I sort of agree with you, planet, in the sense that a mortgage contract isn't a moral document in the first place. Neither paying the full amount nor declining to do so is a moral issue. The mortgage contract says that you agree to pay a certain amount every month or if you either can not or will not pay that amount in the future, a certain set of consequences result.

Both parties agreed to the contract with full knowledge that either paying or not paying were possible future outcomes, and the consequences of both of those outcomes are spelled out in black and white.

What's the moral issue? It's no different than if you and I sign a contract saying that in a week I'll either pay you $10 for washing my car or $2 and you don't have to wash my car. If I decide to only pay you the $2 I haven't committed an immoral act and screwed you out of $8, I simply adhered to one of the choices spelled out in the contract.
posted by Justinian at 9:22 PM on May 9, 2010 [4 favorites]

That said, to be consistent we must also decide the foreclosing on someone who doesn't pay their mortgage is also not an immoral act. Both parties have the same moral obligation here; to adhere to the terms of the contract. If foreclosure and eviction is one of the penalties for failing to pay, it isn't immoral to foreclose and evict any more than it is immoral to fail to pay.
posted by Justinian at 9:24 PM on May 9, 2010

I want to see people squatting in their own homes and daring the bank to prove that they own the note.

I don't want people buying things on credit and then wanting to keep the thing and not pay for it.
posted by floam at 9:24 PM on May 9, 2010 [2 favorites]

What's the moral issue? It's no different than if you and I sign a contract saying that in a week I'll either pay you $10 for washing my car or $2 and you don't have to wash my car. If I decide to only pay you the $2 I haven't committed an immoral act and screwed you out of $8, I simply adhered to one of the choices spelled out in the contract.

I agree totally. But how about I take the $10 ahead of time and then when you ask me to come on over and wash your car or give you your eight dollars back, I say I'm not going to anything until you take me to small claims?
posted by floam at 9:31 PM on May 9, 2010

If everyone opts out of deals that they were fraudulently/inappropriately convinced to enter into, then the incentive to fraudulently/inappropriately convince others goes away.
posted by oddman at 9:35 PM on May 9, 2010

My feelings towards this practice of walking away have ranged from anger at the banks to anger at the defaulters, to my current feeling of ambivalence.

One thing does come to my mind, though, is this:

Regarding the guy in the 60 minutes segment, the young one, who could afford to pay his mortgage but was still walking away because his wife said "they were just throwing money away" and who also mentioned that they would rent "for a few years" I have to ask this: do they realize that as renters they have NO asset (even one that may be worth half of what they paid for it) and that they will lose that nice Mortgage Interest tax deduction (actually, they already have lost it as they haven't paid their mortgage for several months according to the segment). Have they factored these "costs" into their decision? Do they realize that even throwing their money away on a declining asset still gives them an asset, as opposed to being renters without a mortgage interest deduction? I honestly don't think they have. Do they not think being renters and paying higher taxes isn't "throwing money away?" They will, come April 15, 2011.
posted by jgsfcaus at 9:41 PM on May 9, 2010

Yes, but that's not relevant to this discussion. Once again, the mortgagors in question here are defaulting "strategically"—not out of necessity, not out of an inability to pay their obligations, as in fact they are perfectly able to continue paying. They are just choosing not to, because the theoretical market-value of their homes has fallen below the amount they owe.

I don't know about that. In my experience, the amount the bank thinks you can "afford to pay" often bears little or no resemblance to what you can actually afford to pay. For instance, the monthly payments on a lot of these ARMs have gone up from anywhere from 10, 20, or 30% to double or even triple -- if that happened to me, I could "afford to pay", but the truth is I'd be sinking fast.

Given the state of the economy, I doubt many lower-or-middle-class households can handle half-again-as-much or double monthly mortgage payments, no matter how things look on paper... especially not if the bank talked them into buying "as much home as they could afford" to begin with.
posted by vorfeed at 10:00 PM on May 9, 2010

I agree totally. But how about I take the $10 ahead of time and then when you ask me to come on over and wash your car or give you your eight dollars back, I say I'm not going to anything until you take me to small claims?

Absolutely; there's a difference between the people who put their keys in the mailbox and walk away and the people who just stop paying but keep living on the property until the sheriff escorts them out. I don't think the latter counts as "walking away". More like "squatting for as long as possible until the cops drag me off".
posted by Justinian at 10:02 PM on May 9, 2010

Fine. The borrowers couldn't read, or didn't want to. Or if they did read, they didn't understand what they were reading but signed anyway. I don't care. I'm not condemning them. I'm just saying they don't have the moral high ground.

Who does?
posted by mek at 10:02 PM on May 9, 2010

jgsfcaus: The calculus between rent and buy isn't as simple as you make it out to be. Asset or no, the scales fell way over to the "rent" side of the equation in a heck of a lot of markets when house prices were inflated so much. Which is when these mortgages were taken out.

It's better to end up with no asset and a bunch of cash than an asset that's worth half of what you paid for it so long as the cash is worth more than the asset.
posted by Justinian at 10:10 PM on May 9, 2010 [2 favorites]

Is there a jingle-mail equivalent for credit cards?
posted by Eideteker at 10:15 PM on May 9, 2010

Yes, Eideteker, it's called "horrible credit scores for ten to seventeen years."
posted by infinitewindow at 10:33 PM on May 9, 2010

those folks purchased houses that they needed to purchase

What is that supposed to mean? Nobody *needs* to purchase a house. You are not entitled to fair and equitable treatment from the bank or a reasonably priced home in a good neighborhood. Go pay rent like the rest of us, or buy a different house in a less desirable location. People chose to pay these ridiculous prices, they chose to sign loans with terrible terms. Nobody forced them to sign these mortgage contracts. If they want to walk away and take the credit hit, fine, but don't try to say they don't deserve it.

It really comes down to greed. On you side you have the lender saying "Nobody in their right mind would sign this mortgage contract at that price" while on the other hand you have the buyer saying "Nobody in their right mind would lend me this much money to buy this house considering my credit and employment history." The buyer thought they could flip it and make some cash in a few years, and the lender or eventual owner of the loan assumed it was going to get paid back. Both of them thought they were getting the better end of the deal, but in the end it was the guys who bought the default insurance and made fees on the CDO transactions that made the real money.
posted by sophist at 10:34 PM on May 9, 2010 [2 favorites]

Justinian: good point, I see what you are saying. I just wonder if people fully realize they won't have as big of a bunch of cash after walking away from their mortgage. However, I realize this is a bad reason to keep paying for an asset declining in value. Might as well just treat any small amount of equity as a sunk cost and move on; it aint' worth the high price to hold onto it.
posted by jgsfcaus at 10:38 PM on May 9, 2010

Mark242: Walkaways help your situation, since the more homes there are on the market, the lower the prices are going to be pushed. Someone hanging on to a house that is underwater actually slows the correction you are hoping for.

Very few people in my market have abandoned their mortgages, and that means that while prices have dropped from their crazy peak, they haven't even come close to where a linear increase would have put their prices.
posted by Jimmy Havok at 10:38 PM on May 9, 2010

I don't understand why there is any anger for people walking away from their mortgages. The banks successfully managed to grab trillions of dollars from our government. They will be stealing money, from me, through my taxes, for the rest of my life.

Personally, I would like to see everyone stop paying. All at once.
posted by psycho-alchemy at 10:43 PM on May 9, 2010

Personally, I would like to see everyone stop paying. All at once.
I'm pretty certain you wouldn't like the consequences.
posted by bystander at 10:45 PM on May 9, 2010 [2 favorites]

jgsfcaus -- the couple in question had paid 400K for a house that was now worth 80K.

In the face of that, both the 'tax deduction' argument and the 'assets are assets' argument make no sense at all.
posted by jrochest at 10:46 PM on May 9, 2010 [1 favorite]

You know, agreements like this spell out the benefits of staying and the consequences of leaving, so why wouldn't leaving be an option? If a corporation can drop customers after promising them something (like an ISP offering "unlimited service" and then dropping heavy users), why can't customers similarly break off an agreement when it doesn't suit them? So long as they are willing to take what comes with that, then it seems like they are only behaving as corporations would in the same circumstances - acting to maximize profitability.

To turn this around, I wish that people and corporations would both uphold their word, but that takes both sides behaving honorably.
posted by zippy at 10:58 PM on May 9, 2010 [1 favorite]

I don't know about that.

Then you didn't watch the segment. This is not about what "the bank thinks." These mortgagors admit, flat-out and on-camera, that they could afford to keep paying their debts. They are making an informed decision to walk away from those obligations because, again, the houses' theoretical market value (in other words, what they could sell for today) has fallen below the amount these people owe.

Folks have turned this into yet another thread about the big bad banks and how they misled poor folks. And I guess that's fine, except for two things: (1) MetaFilter has already had that conversation lots of times, and none of y'all so far have added anything insightful to that conversation that hasn't already been said twice; and (2) it really has no bearing on the 60 Minutes segment that forms the basis for this thread, which was a story about well-off people choosing to abandon their debts.
posted by cribcage at 11:01 PM on May 9, 2010 [3 favorites]

So your mortgage is legally owned by hundreds of parties all over the world who bought a piece of your debt expecting to be paid back, and each have to be negotiated with in order to resolve a foreclose.

No, this is wrong. The mortgage is 100% owned by the CDO (each CDO is its own corporation), what the hundreds of investors own are shares (slices) in the CDO.
posted by atrazine at 11:02 PM on May 9, 2010 [2 favorites]

Ha ha ha. Mortgages. Home ownership. Those things are for old people.

I mean, seriously, I'm thirty, and I often wonder if many people younger than me will ever be foolish enough to try to buy a house. Even most people my age see the whole deal as a massive mistake not to be indulged in. Maybe ten years ago that kind of thing made sense, but now? What person under thirty would ever want to own a house at this point? What's the sense in doing something so insane?
posted by koeselitz at 11:10 PM on May 9, 2010 [7 favorites]

But yeah, I say squat in your own home and challenge the bank to demonstrate that they have the legal right to have the Sheriff's Deputies evict you and change the locks.

Better yet, let's make an interactive map showing where everyone living in their million dollar house rent-free is, together with information showing how much they used from a home equity line of credit and what kind of cars and TVs they own, so everyone in America who is not living for free after destroying the economy can show up at those jerks' houses with pitchforks and torches.

The irresponsible deadbeat free-rent McMansion dwellers are not the heroes here. And if you're one of them, you better hope you don't ever meet me.
posted by The World Famous at 11:14 PM on May 9, 2010

But where are the $400k houses selling for $80k?
I keep seeing suggestions that the property price bubble is burst, but actual sales don't seem to be happening at $80k in former $400k neighborhoods.

In the 60 Minutes piece, the couple's $400K purchase was now worth $85K, if I'm not mistaken. This was in Arizona; I believe in Phoenix. The younger couple's house value had fallen by 43% (according to the guy) - also in Arizona.

I know people around Fort Myers, FL who've lost 75% - 80% of their house value.
posted by Dee Xtrovert at 11:28 PM on May 9, 2010

What person under thirty would ever want to own a house at this point? What's the sense in doing something so insane?

If you intend to live in the house and are not buying in an overinflated market then there are still a lot of good reasons. For one, you get a tax break on the interest you pay, but more importantly, you pay into an asset that increases in value, if for no other reason than you're paying down your debt on it. You can borrow against this. It might not seem important right now, but imagine if all the rent you paid were into something you owned. Someday you may need a lot more money than you can afford, and taking out a second mortgage is not an option if you rent. Not everyone bought an overvalued house, by the way. Most people own houses that were purchased long before all this happened and have increased in value.
posted by krinklyfig at 11:31 PM on May 9, 2010 [1 favorite]

Put it another way. If you look at it long term, it's the best way to put away your money other than retirement for most middle class people. This assumes you're not buying a $400,000 home that was worth half that ten years prior. If you add up all the interest and upkeep, you end up way ahead in most cases. Of course, it takes commitment and some savvy to make sure you're not throwing your money into a hole. One strong indication that you should run away is whenever the realtor and/or mortgage broker talks about not worrying about the payments after your ARM resets, because you can just sell the house at that point for a profit. Unless you intend to speculate, you should wait or look for houses elsewhere.
posted by krinklyfig at 11:42 PM on May 9, 2010

that they will lose that nice Mortgage Interest tax deduction

I've never fully understood why people are always so excited to pay a dollar in interest to get $0.20-$0.36 back in April.

Sure, if you're doing it anyway, any money back is nice. But to buy or hold a house just for the tax deduction seems like cutting off your nose to spite your face.
posted by hwyengr at 11:54 PM on May 9, 2010 [1 favorite]

What's the sense in doing something so insane?

When renting, you have to deal with landlords, noisy neighbors in the same building, practically no freedom to style the abode in which you live and to live how you please. I think there is some sense in home ownership which goes beyond a purely zero-sum, economic calculation.
posted by Blazecock Pileon at 11:55 PM on May 9, 2010 [2 favorites]

Then you didn't watch the segment. This is not about what "the bank thinks."

My point was that the segment doesn't apply to everyone in the "strategic default" category. The segment talks about strategic foreclosure in general, especially during the youwalkaway.com section; when you've got Morley Safer saying "it's a trend the banks fear could catch on with average homeowners", it's not just about the people shown in the segment. By conflating a few wealthy homeowners with strategic defaulters in general, and by ending with someone who refuses to walk away because "it's about morality" followed by a defaulter saying "I don't feel responsible", 60 Minutes is painting a picture... and it's not necessarily an accurate one.

Besides, the segment leads with: "he says he tried to talk his bank into renegotiating his mortgage, but because he earns enough to keep paying, the bank said 'no deal'". This is partly about what the bank thinks -- if they didn't want "well-off people choosing to abandon their debt", there was something they could have done about it... and chose not to.
posted by vorfeed at 11:59 PM on May 9, 2010 [1 favorite]

Regarding the guy in the 60 minutes segment, the young one, who could afford to pay his mortgage but was still walking away because his wife said "they were just throwing money away" and who also mentioned that they would rent "for a few years" I have to ask this: do they realize that as renters they have NO asset (even one that may be worth half of what they paid for it) and that they will lose that nice Mortgage Interest tax deduction (actually, they already have lost it as they haven't paid their mortgage for several months according to the segment). Have they factored these "costs" into their decision? Do they realize that even throwing their money away on a declining asset still gives them an asset, as opposed to being renters without a mortgage interest deduction? I honestly don't think they have. Do they not think being renters and paying higher taxes isn't "throwing money away?" They will, come April 15, 2011.

Assume the following:

The couple bought a $262,000 house with 10% down. (That was said on 60 Minutes.)
Because they said that they were in a rush to enter the rapidly competive housing market, there was some overt sense that they'd overbought relative to income. A mortgage broker told me, several years ago, that a $60K income with 10% down could get you a $300K house, which blew my mind. Obvious, regions differ and so do interest rates and qualifications and all, but let's say that the couple had an income of $70K when they bought their house. I'm assuming a 7% loan (30 year, non-adjustable) and taxes / insurance of $5400 a year.

Their monthly payment would be between $2000 and $2100 a month. Let's call it $25,000 a year. In the beginning, their principal and insurance would be about $350 a month ($4200 a year), so they'd be able to deduct around $20,800 in interest and taxes. This is an amount greater than their standard deduction for a married couple, so let's assume that they have another $5000 in Schedule A deductions. In other words, they can write $25,800 off, instead of the standard $11,400 if they didn't itemize.

In other words, their owning a home - at least early on, before principal becomes a larger part of their payment, decreases their taxable income by an extra $14,400.

What does this mean? Well, assuming no other deductions or income, their "normal" taxable income would be $51,300. Their tax would be $7,695.

With home ownership as above, their taxable income would be $36,900. Their tax would be $5535.

In other words, their tax advantage in owning a home would be $2,160 a year.

But home ownerships costs something above renting, too. Maybe not always $2,160 a year, but maintenance, painting, repairs, lawn and tree service would eat up a lot of that extra expense. Consequently, one can make a good argument that owning a home, in their presumed case, offers very little tax advantage - less than $200 a month - and much of that is eaten by additional costs.

Considering that, in Arizona right now, they could rent a decent place for $750 a month and save an extra $1000 - $1200 a month over owning . . . well, it's a good deal for them. In ten years, they could save (if you factor in interest) close to $150,000. Their credit would be better, and it's entirely likely that their old house would still be selling for under $200K. In other words, by walking away, they could nearly own a house outright in ten years - no mortgage, credit restored! By staying in their house, they would likely still be underwater with no savings at all!

You could adjust these figures somewhat, but the results come out about the same. The post I quoted above says they would have "no assets" if they walked away. But - assuming they save the extra money - they'd have real assets (i.e. cash) after one month! In a deeply underwater house, they have no assets in real terms, because their house is worth less than what they owe. They're actually worse off . . because they would be throwing money away for many, many years before they even "break even" (in other words, before they actually do own something more than debt.)

They're stupid for entering the housing market as they did. There's no honor in walking away. But in terms of longtime strategy and financial well-being, it's a perfectly logical and intelligent choice for them.
posted by Dee Xtrovert at 12:03 AM on May 10, 2010 [13 favorites]

Yes, walkaways can help the reduce house prices jimmy havoc, but not when they keep the house off the market by living here. Ideally, people will start walking away more often either keeping or losing the house, but then many keepers will be evicted too. I'd also hope the IRS pursues people who keep their home after the bank loses the mortgage, thus forcing more keepers into abandoning their home. Yey correction!
posted by jeffburdges at 12:13 AM on May 10, 2010

The World Famous: The irresponsible deadbeat free-rent McMansion dwellers are not the heroes here. And if you're one of them, you better hope you don't ever meet me.

Sheesh, are you like 12 years old? I guess the called for reply would be "You and whose army?"
posted by JackFlash at 12:34 AM on May 10, 2010

I don't get this fascination with "owning assets". I live in Europe and I rent.
What's so great about buying a house, paying for credit for the next twenty years and getting swamped with repairs after ten years as the house gets older and older?
As for the word "owning", it sounds nice, but it's not like you can put a house in your pockets and carry it off if there's a war or something. Sure, you can resell it, but not necessarily at a good price - you're subject to the market's whims (and then you'd have to buy a new house).
posted by Omnomnom at 12:47 AM on May 10, 2010 [3 favorites]

I'm going to call it now. Those who did not buy a house during the bubble did so because they either did not have the means to buy a house during the bubble, or because they bought a house before the bubble. Almost everyone who claims they saw the crash coming is probably lying to you.

It's obvious in retrospect, but only in retrospect. I did see the crash coming, but only because I was a kook, so far outside the mainstream, I may as well have been a goldbug. My reasoning was this: a house should only cost 3x salary, therefore the average house should only cost 3x the average household income in an area, and a mortgage payment should be slightly more than what a family of four can afford in a three bedroom apartment rent. This is because while a house is an investment, it's also where people live.

Man, I was called stupid, I was argued with, denounced and had a zillion links to articles sent my way by friends, family and colleagues - and you know what? In the face of overwhelming expert opinion, I was starting to change my mind. I was already at the point where I stopped bringing up the subject, and about to investigate a no-money-down mortgage on a tiny condo.

So if you saw the bubble collapse coming, why didn't you rake in cake by short selling building suppliers? The answer is because you didn't have the means to short-sell the building suppliers, or because you believe in standard financial advice: you can't time the market. In both cases, your argument is undermined.

The standard financial advice, from people who got paid to dispense actual financial advice, was to buy now before you were priced out of the market, and re-finance after 3 or 5 years. Sage and clever advice blown to bitty bits when the credit crisis hit. I didn't see the credit crisis coming - I believed housing would just be on a long, slow slide to correction. Nope. Armageddon.

You can claim that you knew all this was coming as you look down your nose at "irresponsible" home buyers. I just won't believe you.
posted by Slap*Happy at 1:51 AM on May 10, 2010 [6 favorites]

noisy neighbors in the same building, practically no freedom to style the abode in which you live and to live how you please. I think there is some sense in home ownership which goes beyond a purely zero-sum, economic calculation.

Noisy neighbors has nothing to do with whether or not you buy the place. You can have noisy neighbors with a condo you own. You can rent single family dwellings if that's your thing.

And freedom? As a renter, I can change rooms, choose to live in another part of town and be there next month without much hassle, or leave the area entirely, whatever. A house or condo is a lead ankle weight that must be sold.
posted by floam at 2:56 AM on May 10, 2010 [3 favorites]

bought the place
posted by floam at 2:59 AM on May 10, 2010

Well, Omnomnom, I also live in Europe, and I own my apartment (bought 2 years ago for a steal, and at a 4.8% fixed rate over 25 years). I get a tax break on the mortgage interest I pay. I purposefully bought an apartment in a building that dates from 1953, made of massive blocks of quarried stone. (The walls are two and a half feet/80cm thick.) It's already been through modernization as regards plumbing and electricity. As for the structure itself, it is, pun intended, rock solid. It was built the same way as those places from the 1700s and 1800s that are still standing. My floors are terracotta (tomettes) and stone. They're the original floors, barely show their age, and are a snap to care for (soap with linseed oil). My walls are, as noted, stone. I pay the same amount monthly on my mortgage and building maintenance fees as I would to rent a place the same size - except that rent would go up, but my mortgage never will, and if I stay here for another 23 years, it will be paid off. If I leave, thanks to improvements I've done (I cleaned up the floors, actually, and am also in the process of repainting, and undoing a few non-structural mistakes the previous owners did), I will very probably, if not certainly, earn back what I've paid. You don't get that with a rental; at best, depending on where you live, you can save more than you would with a mortgage, since it's not everywhere that a mortgage payment is the same as rent.

More to the topic of the post, here in France you cannot pay more than 1/3rd (33%) of your net income in rent or on mortgage payments. It is illegal. Banks cannot give you a mortgage for more than that; landlords cannot rent to you if the rent is more than 33% of your income. As a buyer/renter, you're required to provide the details of your income and any other debts you hold. If you lie/withhold key information, you can be held responsible for it; if the bank or landlord knowingly asks for more than 33%, they can be held responsible. It helps prevent many of the worst problems seen in the US, though credit cards are slowly gaining ground. That said, we don't have credit ratings, because in order to get those credit cards, it's the same deal - you're required to provide proof of income and any other debts you hold. Credit providers cannot knowingly indebt you beyond what you can pay; if you withhold information to get around that, it's your problem, though courts will do what they can to make repayment feasible. Medical bankruptcies? Don't exist. (That whole "socialized health care" thing.)
posted by fraula at 4:13 AM on May 10, 2010 [10 favorites]

If you're thinking of walking away, first check to see if your state is a "recourse" or a "non-recourse" state. Or something in between. Basically, can the bank go after you for more money if you walk away from the house, or are you off the hook once you surrender the house?

loansafe.org thread
posted by etherist at 5:31 AM on May 10, 2010

about 2 weeks after katrina, i called my bank to find out what was going on with my mortgage since i'd heard that monthly payments were being forgiven for the time being. turns out they weren't forgiven, they were tacked on to the end of the mortgage--with interest. the conversation went something like this:

'i need to talk to someone about my mortgage payment.'

'what's the loan number?'

'00xxxxxxxxxxxxxxx.'

'hmmmm ... let me transfer you another department,' and then the phone would disconnect & i'd start over. when i *finally* got to the right department:

'ma'am, we don't have loans beginning with those numbers.'

'BUT I'M HOLDING THE LOAN PAYMENT BOOK IN MY HAND AS WE SPEAK! WHO HAVE I BEEN PAYING ALL THESE YEARS?' note: this fit in perfectly with the 'am i ever going to wake up from this nightmare?' scenario started by the storm, the evacuation, the relocation, etc.

turns out that not my mortgage, but my entire bank was in the process of changing hands. the records hadn't kept up.

they managed to fix that right quick, though. when flood insurance paid out about 2 months later, they paid directly to the mortgage company, which meant i now owned my flooded out home but had zero money to do the repairs. (homeowner's insurance cut me a check for $5k for roof damage & then dropped me like a hot potato before i could even contest the payout.)

i almost ran, not walked, away. it was overwhelming. but, ya'know. fema & the feds came through & now i've got a renovation project that will probably take the rest of my life. but walk away to walk away? my mom would have killed me.
posted by msconduct at 6:06 AM on May 10, 2010 [3 favorites]

Both parties agreed to the contract with full knowledge that either paying or not paying were possible future outcomes, and the consequences of both of those outcomes are spelled out in black and white.

If walking away is an option based on the contract, why would it hurt your credit rating? Or is that one of the spelled-out consequences?
posted by kirkaracha at 6:25 AM on May 10, 2010

In other words, their tax advantage in owning a home would be $2,160 a year.

Good analysis, but, you missed a card. Allow me to add a few words. Three of them.

In other words, their federal income tax advantage in owning a home would be $2,160 a year.

Now, what are they paying in property tax? You mention paying taxes and insurance, but if the "point" is the tax write off, if you save $2160 a year in federal income tax and pay $3500 per year in property tax, you've, uhh, lost.
posted by eriko at 6:47 AM on May 10, 2010

So if you saw the bubble collapse coming, why didn't you rake in cake by short selling building suppliers? The answer is because you didn't have the means to short-sell the building suppliers, or because you believe in standard financial advice: you can't time the market. In both cases, your argument is undermined.

It's perfectly possible that one could see a correction coming but not be willing to risk mis-timing it on potentially ruinous shorts. Shorting TOL and not buying a house are drastically different moves.

I know a woman who saw it coming and sold her investment property in '06. Not quite the peak but still well into inflated territory. The house in question is again roughly worth what it was then.
posted by Skorgu at 7:34 AM on May 10, 2010

Almost everyone who claims they saw the crash coming is probably lying to you.

Probably not such a hot idea to publicly admit you're on the positive slope of the intelligence curve. I'm no financial guru and I was warning about the mortgage-backed security-bubble seven years ago.

So if you saw the bubble collapse coming, why didn't you rake in cake by short selling building suppliers?

Building suppliers? No, if you thought there was a bubble you'd bet against the CDOs, except, oh, you couldn't do that because those funds were hidden from the public and only available to the assholes that rigged the system in the first place.
posted by Civil_Disobedient at 8:05 AM on May 10, 2010 [3 favorites]

I've never fully understood why people are always so excited to pay a dollar in interest to get $0.20-$0.36 back in April.

Sure, if you're doing it anyway, any money back is nice. But to buy or hold a house just for the tax deduction seems like cutting off your nose to spite your face.

Yes, if that's your sole reason for home ownership, you're an idiot. Most people don't think like that, though. If my option is paying $1750 a month in rent, or $2000 a month for a mortgage payment, and I'm deducting all that interest from my federal return (early in the life of the loan, it's 80+% interest, so $1600 a month x 36% federal tax = $576 - $250 price differential between renting and owning = $224 extra every month)

You have to spend a huge amount of your income on housing regardless of your situation. Might as well take advantage of the tax situation, eh?
posted by Mayor West at 8:06 AM on May 10, 2010

What person under thirty would ever want to own a house at this point? What's the sense in doing something so insane?

I certainly understand this perspective, and I think recent troubles have aptly demonstrated the downside of homeownership (I know several people who have had houses on the market for 2 or 3 years, or even more, after relocating to another state for work, for instance). On the other hand, having--and eventually paying off--a mortgage on our fairly modest house is part of my long-term financial planning. At this point, if we only make scheduled payments, our mortgage will be paid off when our oldest child is 19. That will free up about $1000/month right at the time our kids are heading to college or otherwise exploring the world, and will need our financial support. As a renter, you never get to that point.

Of course, we've ridden out the bubble pretty well. I don't think we could easily sell our house, based on other houses in the neighborhood that are on the market, but while it hasn't increased its value, it doesn't seem to have lost much either. We still have equity.

It's not insane; like all financial decisions, it's a balance of risk and reward. You buy a house and the reward is that you get to do pretty much what you want with it, have pets, eventually not have a payment anymore. The risk is that you might not be able to sell it easily if you need or want to move, that it may not appreciate in value or may lose value, that the neighborhood may change and become less desirable, that you may drown in repair and maintenance costs. A lot of people have been smacked in the face with the risk side of that equation these last few years, after a long period of time during which it got easier and easier to buy a house and a mythos developed that it was always a good idea for everybody because houses always go up in value.
posted by not that girl at 8:24 AM on May 10, 2010

You can claim that you knew all this was coming as you look down your nose at "irresponsible" home buyers. I just won't believe you.

I didn't know it was coming. But I drove around my region--mid-Michigan, FWIW--looking at the new developments going up and asking myself, "How can there be so many people around here who can afford houses that big and expensive?" It just made no sense to me, and I'm not someone who is carefully watching financial indicators or anything. I'd just lived here for 20 years, knew what the economy was like. It was very interesting to me when the bubble burst and developments sat full of unsold homes and I realized the answer to my question was, "They can't! There are not so many people around here who can afford homes that big and expensive." All I was doing was paying a little bit of attention, and I knew something was out of whack.

At the same time, I had experience with irresponsible home buyers: the people who bought our house, who financed 100% of the price. A friend who bought a house on a ARM and dismissed my concerns about the possibility that it might not be as easy to refinance when the interest rate reset as she assumed it would be. People did make bad individual choices.
posted by not that girl at 8:34 AM on May 10, 2010 [1 favorite]

We waited until this year to buy, even though we probably could have (easily) qualified for a mortgage on a starter home here in Seattle in 1999.

At one point I looked at the market and thought, "This is ridiculously overheated. The market is flooding with speculators, and they're driving the price of house out of the reach of the average Seattleite. It's going to have to crash, and soon. I'll sit it out until then."

That was 2002.

Mind you, had we bought in Seattle in '99 we would have made a killing by the time had we sold the moment we realized that our house was too small for three people. But that time would have been early spring 2007 -- the exact moment the Seattle housing market peaked. And, in fact, we did look then, only to discover that what the mortgage company would give us could buy nothing in Seattle proper, and in fact the first place we could find a house with the right combination of bedrooms and convenience was in Everett... almost 30 miles north of our jobs. We bowed out, rented a larger place, and then spent the last six months looking for the right place.

I shudder to think how underwater we'd be now had we bought in 2007. We'd be even worse off had we bought in '99 and traded up in 2007 -- which a number of my friends did. The good news is they have kids and won't be moving for a decade, but they'll still probably be selling for less than they bought it for clear into 2020.
posted by dw at 9:04 AM on May 10, 2010 [1 favorite]

Because if this guy is right and the gummint has for decades been systematically fudging the numbers to make the country look economically better off than it really is, then the damning Econopocalypse is is going to be worse than we're expecting.

Related (to the unrelated John Williams thread): nobody's mentioned Kevin Philips...

Numbers racket: Why the economy is worse than we know

Also: Bad Money.

No, if you thought there was a bubble you'd bet against the CDOs, except, oh, you couldn't do that because those funds were hidden from the public and only available to the assholes that rigged the system in the first place.

Too true.

Banks Bundled Bad Debt, Bet Against It, and Won
posted by mrgrimm at 10:44 AM on May 10, 2010 [1 favorite]

If walking away is an option based on the contract, why would it hurt your credit rating? Or is that one of the spelled-out consequences?

In the full scenario you were commenting on, which is about car washing, I or anyone else could start trustedcarwashers.com and could assign a numeric rating to each car washer based on past performance.

We could do so whether or not this was ever mentioned in the contract between car washer and car owner.

We could also open an ice cream stand or juggle kittens and chainsaws.

Contracts cannot, and do not, contain all possible future states of the universe (to do so would, for non-trivial cases, require at least the information capacity of the universe itself, which would require the contract to be at least as complex and encompassing of matter and energy as the universe, leaving nothing left to describe.)

However, then the contract would have to completely and accurately describe the current and future states of the universe, and we know from the uncertainty principle and the halting problem that this is, for most cases, impossible.
posted by zippy at 10:48 AM on May 10, 2010 [1 favorite]

If walking away is an option based on the contract, why would it hurt your credit rating? Or is that one of the spelled-out consequences?

Breach is an option in every contract. Think of your credit rating as a report of how likely you are, based on past conduct, to breach certain types of contracts.
posted by The World Famous at 10:49 AM on May 10, 2010

not that girl: I didn't know it was coming. But I drove around my region--mid-Michigan, FWIW--looking at the new developments going up and asking myself, "How can there be so many people around here who can afford houses that big and expensive?" It just made no sense to me, and I'm not someone who is carefully watching financial indicators or anything. I'd just lived here for 20 years, knew what the economy was like. It was very interesting to me when the bubble burst and developments sat full of unsold homes and I realized the answer to my question was, "They can't! There are not so many people around here who can afford homes that big and expensive." All I was doing was paying a little bit of attention, and I knew something was out of whack.

Exactly. If you saw all the cars and trucks and boats and huge, cheaply made new houses everywhere it boggled my mind that anyone wouldn't notice that either everyone hit the lotto, or else something was seriously wrong. For crying out loud, turn on HGTV c. 2003-2007 and watch any show at all.
posted by paisley henosis at 11:01 AM on May 10, 2010

Seconding not that girl, only in SoCal and later in Seattle. Granted, I can't point to a time when I had the money to comfortably by a home, but as both a veteran and a teacher I knew loan officers (on a personal basis) who tried to show me how I could swing the loans. I just didn't want one, though. It just didn't feel right. Unless you've got the money to deal in properties (plural), the idea of buying a home to live in and then sell it seems counterintuitive to me.
posted by scaryblackdeath at 11:12 AM on May 10, 2010

In northern Rhode Island, my wife and I (renting just outside Rte. 128 in Mass.) bought a small Cape in 2000. We'd planned to stay for only a few years. But we kept marveling at how BIG and FANCY and CLOSE TOGETHER and CHEAPLY MADE all the new houses were, and we sat tight -- and said to everyone, "When is this going to crash? It's unsustainable!"

I wish we could say we were poised to strike whern the bubble popped, but the prices didn't dip *that* much here (and we had another baby) so we're still in our little Cape. Maybe next fall...
posted by wenestvedt at 12:23 PM on May 10, 2010

So if you saw the bubble collapse coming, why didn't you rake in cake by short selling building suppliers?

Because some of us don't invest in anything?

Yeah, I "knew"* there was a housing bubble, and I "knew" it was going to crash badly, and yes I had the money to buy a home (if you're willing to suspend disbelief and call 5% a down payment) and enough income to pay the mortgage.

but damn, Slap*Happy, you make it out as if there are no people who don't always try to maximize their current financial situation by investing money. I'd say most of us don't.

I have tens of thousands of dollars in my savings account getting 1.9% interest. And you think that anyone who "knew" there was a housing bubble and didn't short sell building stocks is a liar?! Say what? I don't even have a trading account and, while I know what selling short is, I'll be damned if I'm going to bother with it.

I "knew" the dot-com industry was going to implode in 1999, and I didn't sell short then. In fact, I didn't even sell my stock in my old company and ended up losing big in taxes.

Yes, many Americans are financial idiots. And yet the non-"idiots" were the ones putting all their money into X.com and overpriced homes. *shrug*

I realize my financial "ignorance" will ensure I keep working til death. Those are the choices we make, I suppose.

also, fwiw, I still think there's a significant bubble, and I refuse to overpay or go into debt for 50 years to buy a house.

/renterslowlysavingmoneythatisslowlydevaluating

* read: "suspected very strongly"
posted by mrgrimm at 12:39 PM on May 10, 2010

What person under thirty would ever want to own a house at this point? What's the sense in doing something so insane?

Not everyone under 30 makes life decisions based on fear, or a misunderstanding of others' mistakes, or ignorance of basic financial strategies.
posted by coolguymichael at 12:58 PM on May 10, 2010

Put me down for "moved to a booming area in the late 90s, saw that home prices then were crazy compared to rents, and sat out as things got even more insane." Wound up putting a large amount of my income into retirement and cash, rather than mortgage and property tax payments. Over most of the last decade, had I bought a home, I would now be underwater.

I realized I could rent a comfortable house in a good neighborhood for half of the mortgage and property tax payments.

The monthly mortgages on nice homes were clearly unaffordable to most, and that rents didn't approach the monthly mortgage costs strongly indicated that the prices were unsustainable.
posted by zippy at 1:09 PM on May 10, 2010 [1 favorite]

On the tax deductions for owning a home, what Dee Xtrovert says it's essentially correct, but there are a few twists she left out.

Let's say you have two identical families with identical incomes. One buys a house at $200K with 20% down, the other rents an identical house. The home owners are paying $1100/month in mortgage + taxes, the renters are paying $1000/month. For the sake of argument, let's say the homeowners and renters insurance rates are the same. And finally, let's assume that the homeowners can expect $2000 in work a year on the house on average (some years more, some years less, but let's stick with this for the moment.)

So, we've created an ugly situation for the homeowners. Their insurance + interest in year one barely exceeds $10K. Now, with state income/sales tax deductions and charitable giving they can exceed the $11,400 standard deduction, but assuming $1500 in tax exemption and $2000 in charitable giving, that gets them to $13,500. Say they're in the 25% bracket; that's $2100 in excess deduction, so $525/year in taxes back.

Now their payment, if we mete it out, is down to $1046/month. But they're also kicking in that $2000/year for repairs, so that's $1212/month. That's a $200+/month gap in favor of the renters.

However... inflation comes into play at some point. And inflation will do two things:
1. Raise rents
2. Raise the standard deduction

So after roughly five years on 3% inflation the homeowners will see their standard deduction rise to $13,215, almost wiping out their tax refund, while being down to a balance of $147K on the mortgage and seeing their set-aside for repairs rise to $2300. The homeowners are paying $1291/month. The renters are now playing $1160/month. The gap has shrunk, though.

Year ten of 3% inflation and rent is now $1343/month. The homeowners, again assuming a 3% annual bump in repair costs, are now paying $1323/month and have $30K in equity. So now the homeowners are paying less. That suggests by year 20 the homeowners will have caught and passed the renters in terms of overall housing costs during that period.

What's the upshot? Well, renting isn't better than buying if you plan on buying and holding a long time. Rents move with inflation and with demand; mortgages don't. If you're buying a house with every anticipation of holding the place for 10 years or more, it's a wash vs renting.

Now, I did leave one factor out of this calculation. I assumed that housing prices didn't change during this period, which is a little silly given that it means three things:

1. Housing prices do change, and change considerably.
2. Rents respond to housing prices.
3. The homeowners aren't accumulating equity (or going underwater).

The reality is that rents rise and fall with demand, housing prices rise and fall with demand, and homeowners accumulate and lose equity depending on housing prices. But this does suggest that even in a market where housing prices remain flat for years on end, eventually buying does pay off.

So it's not a question of whether buying is better than renting, because eventually buying becomes a better deal than renting (provided the market isn't in a generation of continual collapse). It's a question of whether one is in a position to buy and hold for a decade or more. And that's the mistake everyone made -- believing that housing is something you should be flipping every 5 years or so.
posted by dw at 1:24 PM on May 10, 2010 [3 favorites]

dw's analysis is interesting, but some of the assumptions were not true for my local market. Here, rents were perhaps 50% of mortages during the peak, and definitely did not respond in proportion to the increase in home prices.

I know, insanity, right?

I imagine that the disparity is this: renters pay for what they think a place is worth to live in, while buyers pay for what they think the place can be sold for. The latter is speculative, and if everyone (or at least Mr. Market) thinks prices are going up, then it may seem like a good idea to pay more for a place than it's worth on the rental market.
posted by zippy at 2:10 PM on May 10, 2010

dw's analysis is interesting, but some of the assumptions were not true for my local market. Here, rents were perhaps 50% of mortages during the peak, and definitely did not respond in proportion to the increase in home prices.

Yep. This. dw's analysis is spot on, except for the prices assumed are not those of the "boom" or of today (where I live, anyway).
posted by The World Famous at 2:15 PM on May 10, 2010

NYTime's rent-vs-buy calculator.
posted by floam at 2:39 PM on May 10, 2010

To Dee Xtrovert, jrochest, Justinian, and everyone else engaged in this discussion: Thanks for helping me re-find my brain to engage in an interesting and active discussion. I have been caught in Reddit mode, where I either get responses saying "TL;DR" or " you are an idiot" or "WTF?". Good job, and thanks; let me find my brain and remember to engage it before commenting here on mefi! Interesting stuff, all!
posted by jgsfcaus at 4:12 PM on May 10, 2010

So it's not a question of whether buying is better than renting, because eventually buying becomes a better deal than renting

This is true but, as you say, only if your timeline is long enough. And as Keynes said, in the long run we're all dead. I live in Los Angeles. Do you know how long your timeline had to be before you were better off with buying a $700,000 condo vs renting for $1600 a month? Keep in mind that the condo would have HOA fees of a few hundred bucks and property taxes of roughly $600 a month. So that's $1000 a month before you even get to the mortgage and upkeep.
posted by Justinian at 4:35 PM on May 10, 2010

dw's analysis is interesting, but some of the assumptions were not true for my local market.

They're not even true for MY local market. It's an incredibly simplistic model, but I did it mainly to get the point across that buying does pay off eventually, but only if you hold the house long enough, and only if you're buying in a market that's not in a state of collapse (e.g. inner city Detroit).

In Seattle rents have gone way up and way down over the last decade. After the dotcom bust rents dropped considerably. The housing bubble and interest rates combined to push rents up 10% a year or more in the mid-2000s. Now rents have fallen again due to the recession, but they're still up from 10 years ago.

The 10% differential between rent-buy was based on my investigations into equivalent rents in the neighborhood I just bought in. Our mortgage + insurance + tax payment each month works out to about 1.1x the rental cost for an equivalent-sized house in that neighborhood. The differential in other areas is wider, and certainly the differential between a house and an apartment is going to be much wider.

Floam's link to the NYT's calculator demonstrates what I was trying to say -- in most cases, you'll get a better return on buying so long as there's inflation and/or a market that gives you a long-term return on what you paid in.

But here's the thing -- the actual long-term return on a house works out to about what inflation is or a little less. Once we've digested this market cratering, I think we'll return to that, a 1-2% annual return. Buying a house is a poor investment compared to the stock market.

I don't think there's any shame in renting. I think it's a question of how much risk you're willing to take on and whether you'd rather be tied down to a house or free to float from rental to rental. We saw an opportunity to buy, so we took it. We've been looking for a place we can settle for 10-15 years. I don't think I'd do this if we were in the Bay Area or NYC.
posted by dw at 5:05 PM on May 10, 2010

I live in Los Angeles. Do you know how long your timeline had to be before you were better off with buying a $700,000 condo vs renting for $1600 a month?

Never. But that's a bit apples to oranges, isn't it? Would you really trade up from a $1600/month rental to a $700K condo? I certainly wouldn't. At 5% interest and 20% down that's a full $1000/month more for just the mortgage, so that's $2000/month with HOA and taxes thrown in. So, $3600/month total. So you're either getting an incredible steal at $1600/month, or you're certainly too poor to afford $3600/month.

LA's current rent-buy ratio is right about 15. Below 15 it starts to make sense to buy vs rent. But again, this assumes comparable sized spaces and a uniform market across the entire area, which it's just not.

Seattle's rent-buy ratio is still hovering above 20. But when I compare the rent cost of a similar houses to the one I just bought, I get a rent-buy ratio closer to 16. If I compare smaller houses to smaller rentals, it's well over 20. That suggests that buying isn't totally insane, just mildly delusional and prone to rationalizing your decision in the comments section of a community weblog.
posted by dw at 5:28 PM on May 10, 2010

So it's not a question of whether buying is better than renting, because eventually buying becomes a better deal than renting

That depends on your rate of return on other investments, and your marginal tax rate. Not having a significant amount of money working for you in other markets for 30+ years may be something you never catch up on. Most of the rent vs. buy calculations default to the assumption that your investment returns are roughly comparable between real estate and stock-market/mutual funds, when the actuality is that even a relatively unmanaged S&P index fund investment crushes the average rate of return in the real estate market (

This does ignore intangibles such as being able to modify one's home to suit, keep pets, or shield assets from bankruptcy in states where your home isn't subject to bankruptcy (IANA Bankruptcy specialist).
posted by BrotherCaine at 6:33 PM on May 10, 2010

"A lot of it depends on what you desire in a home. I've got a modern contemporary home that's designed, not kit. It's also heading on twenty-five years old. It's built using good materials; overbuilt, by today's standards.

"I wouldn't trade this for one of the little boxes, little boxes, for all the tea in China. If a home is an investment, it needs to be more than a chipboard-and-glue unremarkable POS craphouse. Otherwise, rent it."

An average 25 year old home is going to be a poorer machine than an average new home. Code has advanced significantly in that time. You may have an exceptional home, many are built every year, but it is disingenuous to compare that home to an average new home.

"But home ownerships costs something above renting, too. Maybe not always $2,160 a year, but maintenance, painting, repairs, lawn and tree service would eat up a lot of that extra expense."

In a properly functioning market; IE: not a bubble; it's rarely cheaper to rent an equivalent property over buying. How can it be? A landlord not only incurs all the expenses of a home owner they have to deal with people who trash their place and they have to make a profit. If landlords aren't making a profit then rentals will disappear. In fact I think this is the #1, anyone can see it, indicator of a housing bubble: It's easy to find a rental for cheaper than buying the same place.
posted by Mitheral at 7:41 PM on May 10, 2010

Google: "Predatory lending".

Google: "Caveat emptor".

Google: "Fiduciary duty".

Google: "Self-respect".
posted by oncogenesis at 7:47 PM on May 10, 2010

In a properly functioning market; IE: not a bubble; it's rarely cheaper to rent an equivalent property over buying.

Not at all, actually.

A landlord not only incurs all the expenses of a home owner they have to deal with people who trash their place and they have to make a profit.

It used to be that people sometimes paid off their house entirely or made significant equity over several years before moving to a different house and renting out the old one. And a lot of those people are still renting their houses out.

Likewise, it used to be, just a couple of years ago, that people bought houses assuming that the value would skyrocket in just a year or so, so they got interest-only loans that didn't actually pay down any principal for several years. Those people rented houses out for much less than the cost of ownership, since they severely underestimated the cost of ownership.

Likewise, if someone has a house that they cannot sell except for a massive loss, they might rent it out for something less than what the house costs them each month, just so that they don't lose the house. That's happening now, as well.

If landlords aren't making a profit then rentals will disappear.

Disappear? What, like they'll vanish in a cloud of smoke and cease to exist? Real estate is not a liquid asset that a landlord can just dump whenever the rental market becomes unfavorable. And it is generally irrational for a landlord to decide that it is better to make nothing on a property rather than make something less than the profit that they would like to make.

Most significantly, the question for the landlord when it comes to rent prices is not how much it would cost to buy the house today, but how much it actually cost that landlord. So, as home prices plummet (which they haven't truly done yet - and they will), the cost of buying a house today will decrease. That will push down rent prices until they are substantially lower than the cost to the landlords (who didn't buy the houses today, mind), because it will impact demand.

When the supply of rental properties is relatively inelastic (e.g. landlords can't dump their properties easily) and demand drops (e.g. the people renting see house prices dropping and decide that it might be cheaper to buy), guess what happens to rent prices?
posted by The World Famous at 7:55 PM on May 10, 2010 [1 favorite]

To the original post:
Shouldn't we be seeing less people walking away?

Underwater mortgages begin to stabilise.

""As house prices grow again and borrowers pay down their mortgage debt, negative equity levels will begin to diminish,” Fleming added. “The typical underwater borrower is likely to regain their lost equity over the next five to seven years.”"
posted by Omnomnom at 5:53 AM on May 11, 2010

"It used to be that people sometimes paid off their house entirely or made significant equity over several years before moving to a different house and renting out the old one. And a lot of those people are still renting their houses out."

Sure some small percentage of the landlords are going to subsidize the rent of the tenants. Let's even say that 10% of the market is this way, that still leaves 90% generating cost recovery revenues.

"Likewise, it used to be, just a couple of years ago, that people bought houses assuming that the value would skyrocket in just a year or so, so they got interest-only loans that didn't actually pay down any principal for several years. Those people rented houses out for much less than the cost of ownership, since they severely underestimated the cost of ownership."

This is exactly the caveat I outlined. These people paid too much for a bubble priced house; of course rents aren't going to cover their costs.

"Likewise, if someone has a house that they cannot sell except for a massive loss, they might rent it out for something less than what the house costs them each month, just so that they don't lose the house. That's happening now, as well."

Again, bubble purchase. This is my whole point. If a person buys a house and then can't rent out that house for enough to cover their expenses they have in the vast majority of cases paid too much. The only significant exception to this is in speculation and the only times when speculation makes sense is when the housing stock is going to be converted away or the location is going to change. Speculating that residential housing that will remain residential housing is going to significantly appreciate is a fools game.

"When the supply of rental properties is relatively inelastic (e.g. landlords can't dump their properties easily) and demand drops (e.g. the people renting see house prices dropping and decide that it might be cheaper to buy), guess what happens to rent prices?"

They go down of course because housing prices have gone down. Eventually landlords who bought at bubble inflated prices, assuming they aren't independently wealthy, are going to go broke not meeting their costs. The properties the own will be sold at a price that will allow the new owners to make money off the tenants (IE: the tenants will now be paying more than what the house costs the landlord).

Let's compare housing and rental income to groceries. If the corner store sells everything at a 1% loss then it won't be long before the corner store isn't there anymore. Sure, you'll have a few backyard gardeners selling stuff below market rate. And you have organizations giving food away or otherwise subsidizing it. And the store might have a few lost leaders. But the majority of their stock has to make money or the store goes out of business.

"Disappear? What, like they'll vanish in a cloud of smoke and cease to exist? Real estate is not a liquid asset that a landlord can just dump whenever the rental market becomes unfavorable. And it is generally irrational for a landlord to decide that it is better to make nothing on a property rather than make something less than the profit that they would like to make."

There are two parts here. For the second yes the bottom long term floor of price is where the landlord breaks even. But even in that case the landlord's costs are higher than the home owner's and so proportionally are the renters. As for the first, properties are going to sit empty even when there are homeless people living on the street. Bizarrely rents often increase in a declining market because supply decreases because houses sit empty for a month or two or longer while they are being sold or dispersed via bankruptcy (plus all those houses sitting empty because they are foreclosed on). And the people who used to live in those houses are looking for rental accommodation so demand goes up.

This assumes of course that the home owners aren't moving every 12 months or something. If one requires that kind of flexibility then you are better off renting even in the long term.
posted by Mitheral at 8:04 AM on May 11, 2010

In 2003, we bought a beautiful, moderately priced, 1920s house in Tulsa with a very low interest rate. In 2008 when hubby's job went pear-shaped (along with most other jobs in Tulsa), we moved to Dallas. Neither place saw much of a housing bubble or house-flipping except in a few high-end McMansions, but the recession killed the economy in Tulsa, and critically wounded it in Dallas.

When we sold our Tulsa house, we had to price it well below what it would have sold for a year before . . . not because it had been overvalued, but because everyone was in a panic and houses were not selling at all unless they were undervalued. We sold pretty quickly, and for slightly more than we paid five years earlier, but after realtor commissions and repairs, we lost money on the deal and used up the bulk of the savings we would otherwise have used for our next down payment.

In Dallas, all but two of the dozens and dozens of houses we looked at were in foreclosure or pre-foreclosure. All but two of them had foundation problems - some of them bad enough that I wouldn't take my kids inside because they looked too dangerous. Turns out Dallas had a year of drought followed by a year of heavy rains which just kills foundations on clay soil. Then the recession hit and people could no longer afford to make repairs on their houses, and then could no longer afford to pay for the houses (especially as property taxes increased when City/County budgets got worse). The houses in our price range were too badly damaged for us to get a mortgage on them (and banks won't make repairs on foreclosures- it's cheaper for them to just wait for someone to pay cash). The rental market was tighter than the real estate market - all those people who had defaulted on their loans were now renting - and since housing prices had remained reasonable throughout the bubble, rent on a 3-4 bedroom house was substantially higher than a mortgage payment would be.

We ended up buying a house we hate, because we couldn't find an affordable rental and it was one of the only two houses that were even possible after months of looking. It was a pre-foreclosure that was run down and in terrible shape and required quite a bit of work (and money) to make it liveable. In just a couple of years, we have substantially increased its value - except that the real estate market is so depressed and flooded with foreclosures, that there is no way it would sell for anything near its value. And we're paying a much higher interest rate than on our previous mortgage.

So Tulsa and Dallas homebuyers mostly behaved themselves and skipped out on the bubble, but are now dealing with the fallout anyway. Thank you ever so much to the Coasts for screwing us over.
posted by Dojie at 8:05 AM on May 11, 2010

When we sold our Tulsa house, we had to price it well below what it would have sold for a year before . . . not because it had been overvalued, but because everyone was in a panic and houses were not selling at all unless they were undervalued.

You're using the terms "overvalued" and "undervalued" in a problematic way.

So Tulsa and Dallas homebuyers mostly behaved themselves and skipped out on the bubble, but are now dealing with the fallout anyway.

If the prices were at a level that could not be sustained, they didn't "skip[] out on the bubble." Their inflated prices were not as severely inflated as those in the worst markets in the country. They were, nevertheless, artificially inflated. Did people in Tulsa and Dallas use the risky and unprecedented financial instruments characteristic of the bubble to finance their houses? Did they borrow more than they would have in the absence of those financial instruments? If so, they didn't behave themselves or skip out on the bubble.
posted by The World Famous at 9:30 AM on May 11, 2010

Mitheral, that's great in theory, but a hell of a lot of rental properties are generating losses that offset other capital gains (in stocks), and the owner's don't care because they are hoping the house will gain enough value to turn a profit when sold, or the house is just a hedge on the risk of a stock market catastrophe. In CA at least, the only non-broker I met who definitely made money on rental properties year over year bought all pre-foreclosure properties, and haggled down the owners. I'm sure there are other areas where the investment pattern is more rational, but I wouldn't make any assumptions without talking to the local accountants who see a couple hundred schedule Es with losses, or with gains because the house /building was bought outright instead of mortgaged.
posted by BrotherCaine at 10:39 AM on May 11, 2010

House values did not change much here while they were spiking and plummeting elsewhere. We could have sold our house for a higher price . . . eventually. But there were just not a lot of buyers out there, and we would have been paying a mortgage on an empty house for some time. It wasn't a correction of artificial inflation - it was artificial deflation.

I'm sure there were plenty of problematic mortgages in Tulsa. I know there were in Dallas - although mostly among the very well-to-do. There are always people who spend more than they should. But when you're facing job loss or pay cuts, inflation and increasing property taxes, it doesn't make much difference if your mortgage is risky or the epitome of responsible lending practices - when you're broke, you're broke. In our case - the previous owner bought a fixer-upper, lost his job, moved to Houston and tried to sell his house here for a year before he lost his new job too and was a week from foreclosure when we made our offer. Maybe his mortgage was unreasonable or maybe not - but it wouldn't really have mattered.
posted by Dojie at 11:16 AM on May 11, 2010

In a properly functioning market; IE: not a bubble; it's rarely cheaper to rent an equivalent property over buying.

This is absolutely true. We would have to pay at least $200 more a month than our current mortgage payment to rent a similarly sized house in our area. .
posted by Dojie at 11:26 AM on May 11, 2010

We would have to pay at least $200 more a month than our current mortgage payment to rent a similarly sized house in our area.

Did you buy your house today? Did you have no down payment? Do your total costs of ownership include nothing other than your mortgage payment? If the answer to any of those questions is no, then the fact that your current mortgage payment is less than current rent for a house like yours is irrelevant to the question of whether it it is cheaper to rent today than to buy today.
posted by The World Famous at 11:31 AM on May 11, 2010

No - we bought our house less than two years ago - and it was true then too. We looked. We did have a very small down payment - but the bank offered us a no-money-down loan, which would still have been cheaper than renting. Yes, our total costs of ownership include some home repairs and maintenance - but much much less than $200 a month. The bulk of the money we have put into the house has been on things which will eventually increase the resale value and make the house a better fit for us - which would not be an option in renting.

There is risk in buying that we wouldn't face in renting and it would be much easier to get in or out of a house - but in this particular market which didn't see a bubble - buying is definitely cheaper than renting.
posted by Dojie at 11:51 AM on May 11, 2010

Most companies don't have no recourse defaults - silly policy.
posted by databuff at 5:17 PM on May 11, 2010

You're using the terms "overvalued" and "undervalued" in a problematic way.

Explain, please.

The discussion of rental prices misses one thing: rent will be pushed toward the margin, that is to say, most landlords will charge something close to the income they could get from the money they would get from selling the property (and that has to take into account all the costs of selling, including taxes). So when property values are high, they'll either charge high rents or sell, and when property values are low, they'll charge low rents because they can't make much from selling.

The majority of landlords aren't in a position where they have to cover a mortgage, since for the most part they bought long ago and inflation has trivialized that cost or they've paid it off. If they can't cover the costs on a property, they aren't really in a position where they can raise the rent to do so, since they're competing with other landlords (and the real estate market) and have to keep their price at least close to what everyone else is charging, so in that case, they'll either sell or carry the loss in hope of making it up down the line.
posted by Jimmy Havok at 2:30 PM on May 12, 2010

Explain, please.

Dojie said: not because it had been overvalued, but because everyone was in a panic and houses were not selling at all unless they were undervalued

"houses were not selling at all unless they were undervalued" makes no sense. The house's value is what a buyer will pay. During the bubble, houses were "overvalued" because the type of financing commonly used allowed people to buy a house at an inflated on-paper price without actually paying that price.
posted by The World Famous at 2:42 PM on May 12, 2010

I suspected that was what you meant. Under that definition of "value," there's no such thing as "undervalued" or "overvalued," since price = value. That means there's no such thing as a bubble, either. By your definition of "bubble," any sort of financed transaction is a bubble, since the buyer isn't ponying up the money immediately.
posted by Jimmy Havok at 2:55 PM on May 12, 2010

Under that definition of "value," there's no such thing as "undervalued" or "overvalued," since price = value.

Actually, as I explained, there are circumstances when the value and the on-paper price are not aligned.

By your definition of "bubble," any sort of financed transaction is a bubble, since the buyer isn't ponying up the money immediately.

Did you miss the part of my response where I discussed the bubble?
posted by The World Famous at 2:59 PM on May 12, 2010

Now you've split "price" and "value" again. I'm of the opinion that your use of "undervalued" and "overvalued" are more problematic than Dojie's.
posted by Jimmy Havok at 3:15 PM on May 12, 2010

Now you've split "price" and "value" again.

By adding nothing to my previous comment and merely referencing it in response to your misunderstanding?

I'm of the opinion that your use of "undervalued" and "overvalued" are more problematic than Dojie's.

I haven't used those terms at all. So, unless you think that there's some problem with my not using those terms, your opinion makes no sense.
posted by The World Famous at 3:22 PM on May 12, 2010

When we sold our Tulsa house, we had to price it well below what it would have sold for a year before . . . not because it had been overvalued, but because everyone was in a panic and houses were not selling at all unless they were undervalued.

You know, being from Tulsa and having family still living in Tulsa, I'm a bit looking askance at this statement. Tulsa's crash was nothing at all like the rest of the country. In fact, the Tulsa market lost very little value. Zillow right now is showing the market pretty level.

Just to be sure, I looked up my two brothers' houses in Zillow, and both their estimates show that having bought in mid-late 2008 they're still seeing bumps in their estimated sale price. Of course, Zillow is just an algorithm, but the accuracy is pretty decent.

But you're saying you sold a 1920s house... so Maple Ridge? Sunset Terrace? Maple Ridge was overheated for a long, long time, so a correction was in order. Look at the value graph on this house, for instance. Maple Ridge houses run between $200K and $2M, so they occupy the top third or so of Tulsa's housing stock. So they will sell slowly and be more susceptible to price swings.
posted by dw at 3:38 PM on May 12, 2010

And even in the good times in Maple Ridge, it took my mother four years to sell her house. It's pretty normal for Maple Ridge houses to sit for years just because Tulsa doesn't have a surfeit of six-digit income households.
posted by dw at 3:54 PM on May 12, 2010

You know, being from Tulsa and having family still living in Tulsa, I'm a bit looking askance at this statement. Tulsa's crash was nothing at all like the rest of the country. In fact, the Tulsa market lost very little value. Zillow right now is showing the market pretty level.

That's exactly my point. Our house had not lost value. It still hasn't. Zillow is showing the value of that house right now as $30,000 over our selling price (which does seem a bit high to me). But we had the misfortune to need to sell our house during a period of time when there was nothing in the news except for the housing bubble and the lousy economy and people were in a panic. The lousy economy was certainly there in Tulsa, but the housing bubble wasn't. So it isn't that our house was suddenly worth less - it's that no one was buying at the time unless they were getting a bargain.

No, we weren't in anything approaching Maple Ridge. Solidly lower middle class neighborhood (near the fairgrounds).

This really has nothing to do with the FPP anymore. I was just trying to make the point that the middle of the country didn't see the ridiculous inflation of home prices and insane mortgage deals happening on the ends, but they still got screwed up by the aftermath.
posted by Dojie at 5:05 PM on May 12, 2010

So if you saw the bubble collapse coming, why didn't you rake in cake by short selling building suppliers? The answer is because you didn't have the means to short-sell the building suppliers, or because you believe in standard financial advice: you can't time the market. In both cases, your argument is undermined.

As for me, I really didn't have the means, but man I wish I did. I was living in the SF Bay Area in the early 2000s, and it was obvious when prices are going up 20% a year that there is going to be a moment when it cannot go any higher, when no manner of finagling would manage the payments higher against a shrinking median income, and that will be when it starts to go lower and probably won't stop for years. The Nasdaq crashed while the bubble was growing, but it didn't get way out of hand for another few years. I was early, but never in my life have I wished so much for the money to invest on an upcoming trend, because it was so obvious if you were looking around and thinking about it at all. Now I have the means to do that to some extent, although those moments of clarity don't come very often when you're way ahead of the market, but I couldn't short the CDS junk, which is where a few people really cashed in.
posted by krinklyfig at 2:56 PM on May 13, 2010 [1 favorite]

haven't used those terms at all.

You've referenced the concepts...but I was more taking notice of your unhelpful comment toward Dojie than anything else. You specifically state that price = value, then dodge away from it by saying that access to certain types of financing can cause price to be higher than value. By the same token, can't a lack of access to normal financing (as when banks reduced all lending in the wake of the meltdown) cause price to be lower than value?

The problem with the price = value theorem is that it forces those who hold it to deny the existence of obvious events like bubbles and crashes...unless of course, they aren't concerned with logical consistency.

The problem of relating price to value has been a frustrating one since the dawn of economic theory, but saying price = value, no matter how attractive its simplicity may make it, isn't a satisfactory one.
posted by Jimmy Havok at 1:19 PM on May 14, 2010

By the same token, can't a lack of access to normal financing (as when banks reduced all lending in the wake of the meltdown) cause price to be lower than value?

It could. It hasn't, but it could. Housing prices don't move quickly like prices of stocks and other things. So while it is possible for a lack of access to normal financing to cause on-paper price to be lowere than actual value, that cannot happen immediately following a bubble, because the prices cannot and do not drop that fast.

The problem of relating price to value has been a frustrating one since the dawn of economic theory, but saying price = value, no matter how attractive its simplicity may make it, isn't a satisfactory one.

I agree (as indicated in my above comments).
posted by The World Famous at 2:22 PM on May 14, 2010

« Older Too Much Horror Fiction: "Covering horror lit... | Salo has been discussed before... Newer »

This thread has been archived and is closed to new comments

Walk away May 9, 2010 5:48 PM Subscribe

Walk away
May 9, 2010 5:48 PM Subscribe