Professor Advises Underwater Homeowners To Walk Away From Mortgages

[iheartscience]

I just read this article in the LA Times and thought it was interesting. Below is a snippet:

"White contends that far more of the estimated 15 million U.S. homeowners who are underwater on their mortgages should stiff their lenders and take a hike.

Doing so, he suggests, could save some of them hundreds of thousands of dollars that they "have no reasonable prospect of recouping" in the years ahead. Plus the penalties are nowhere near as painful or long-lasting as they might assume, he says.

"Homeowners should be walking away in droves," White said. "But they aren''t. And it''s not because the financial costs of foreclosure outweigh the benefits."

Sure, credit scores get whacked when you walk away, he acknowledges. But as long as you stay current with other creditors, "one can have a good credit rating again -- meaning above 660 -- within two years after a foreclosure."

Better yet, homeowners can default "strategically": Buy all the major items they''ll need for the next couple of years -- a new car, even a new house -- just before they pull the plug on their current mortgage lender.

"Most individuals should be able to plan in advance for a few years of limited credit," White said, with minimal disruptions to their lifestyles."

What are your thoughts? I can see both sides, myself!

 

[Regular Guy]

Generally, this makes me think of the problems of saying "Fire" in a crowded theatre. The public welfare trumps free speech laws.

 

[Lady_Disdain]

Better yet, homeowners can default ''strategically'': Buy all the major items they''ll need for the next couple of years -- a new car, even a new house -- just before they pull the plug on their current mortgage lender.

To me, this statement verges on fraud: deliberately misrepresenting the borrower''s situation. Besides, since a lot of loans allow rates to be reajusted if credit scores change significantly, it may not even be successful.

 

[Fly Girl]

If you can afford the mortgage, it shouldn''t matter if the house is underwater. You still need a place to live.

We purchased a vacation home in 2005 and we can afford the payments. I haven''t even looked to see if it is underwater. Don''t care, and don''t want to know. I''m planning on keeping the place for a long time.

 

[purrfectpear]

The only thing about the professor''s article that I disagree with is, he states "Homeowners should be walking away in droves," White said. "But they aren''t..."

They are in non-recourse states. It''s only been since May when I did my foreclosure and my FICO is already 660. Not one credit card changed any of my rates. Not that it would matter, I pay in full each month anyway.

It makes economic sense.

Of course it matters if your home is underwater for years. Every penny you spend is money down the toilet until the home is worth what you owe. Only then does your payment make even the tiniest dent in the equity. All those years you are underwater, you might as well be renting...and if you CAN rent for less, then the money is a complete and total economic waste. For many that will add up to several hundred thousand dollars in sunk unrecoverable costs.

You may have some intangible ideas of home owning value, but if they don''t pass the dollars and cents test, they are emotional, not economic.

 

[kenny]

Stocking up on a new car and other stuff before stiffing your lender is not ethical.

How disgusting.

 

[iheartscience]

But one could argue that a bank refusing to allow a short sale (even though both the bank and the homeowner would walk away better off than with a foreclosure) is also unethical.

 

[kenny]

edit.

On second thought, forget it.

 

[neatfreak]

Personally I think it''s the laws that need to be changed. There need to be lookbacks (like there are for medicare and other programs) and there needs to be further recourse than simply repossessing the house. It''s bull**** that people **who can afford it** are allowed to walk away from mortgages essentially unscathed.

 

[neatfreak]

Date: 11/29/2009 2:08:36 PM
Author: thing2of2
But one could argue that a bank refusing to allow a short sale (even though both the bank and the homeowner would walk away better off than with a foreclosure) is also unethical.

But that's not true. Most of the time the bank is better off letting it go into foreclosure because many of these homes have mortgage insurance. If they allow a SS, they don't collect on the insurance. THAT is why most banks say no to SS's-because they will be better off letting it foreclose.

Not to mention the fact that if everyone is simply bailed out (and I am talking the multi million dollar homes here not the middle class person who owns a single modest home) then they don't learn their lesson and we'll be back in the same place in a number of years.

 

[swingirl]

When you buy a car it doesn''t go up in value. What makes people think that when they buy a house they should have a guarantee from the bank that it will go up in value otherwise they default?

It''s everyone''s own choice what to buy, how much to put down, what type of mortgage to get and whether or not they can afford the ups and downs of the economy. Who ever said an investment wasn''t risky? I don''t remember there ever being any guarantees. Sometimes investments go sour. But everyone is hurt by loan defaults, the ones who took the risk and the ones who didn''t.

 

[iheartscience]

Date: 11/29/2009 2:48:48 PM
Author: neatfreak

Date: 11/29/2009 2:08:36 PM

Author: thing2of2

But one could argue that a bank refusing to allow a short sale (even though both the bank and the homeowner would walk away better off than with a foreclosure) is also unethical.

But that's not true. Most of the time the bank is better off letting it go into foreclosure because many of these homes have mortgage insurance. If they allow a SS, they don't collect on the insurance. THAT is why most banks say no to SS's-because they will be better off letting it foreclose.

Not to mention the fact that if everyone is simply bailed out (and I am talking the multi million dollar homes here not the middle class person who owns a single modest home) then they don't learn their lesson and we'll be back in the same place in a number of years.

Banks would rather allow a house to go into foreclosure instead of approving a short sale because they want the asset in black for as long as possible. I read a great article about this a while ago...wish I remembered where it was. A foreclosure costs banks tens of thousands of dollars in legal fees, so a short sale will often save the bank money.

 

[steph72276]

Date: 11/29/2009 3:02:03 PM
Author: swingirl
When you buy a car it doesn''t go up in value. What makes people think that when they buy a house they should have a guarantee from the bank that it will go up in value otherwise they default?


It''s everyone''s own choice what to buy, how much to put down, what type of mortgage to get and whether or not they can afford the ups and downs of the economy. Who ever said an investment wasn''t risky? I don''t remember there ever being any guarantees. Sometimes investments go sour. But everyone is hurt by loan defaults, the ones who took the risk and the ones who didn''t.

well said

 

[neatfreak]

Date: 11/29/2009 3:42:47 PM
Author: thing2of2

Date: 11/29/2009 2:48:48 PM

Author: neatfreak

Date: 11/29/2009 2:08:36 PM


Author: thing2of2


But one could argue that a bank refusing to allow a short sale (even though both the bank and the homeowner would walk away better off than with a foreclosure) is also unethical.

But that's not true. Most of the time the bank is better off letting it go into foreclosure because many of these homes have mortgage insurance. If they allow a SS, they don't collect on the insurance. THAT is why most banks say no to SS's-because they will be better off letting it foreclose.


Not to mention the fact that if everyone is simply bailed out (and I am talking the multi million dollar homes here not the middle class person who owns a single modest home) then they don't learn their lesson and we'll be back in the same place in a number of years.

Banks would rather allow a house to go into foreclosure instead of approving a short sale because they want the asset in black for as long as possible. I read a great article about this a while ago...wish I remembered where it was. A foreclosure costs banks tens of thousands of dollars in legal fees, so a short sale will often save the bank money.

There's a lot more to it than that though. A major reason like I said is that if the person going into foreclosure/short sale has mortgage insurance (as most people who are finding themselves wildly upside down do) then they are better off letting it go into foreclosure.

It may cost banks tens of thousands in legal fees if they foreclose-but at the same time a short sale is usually losing the banks more than $10-30k. It's more often $100+ and in places like where I am (SF Bay Area) it's often $200-300k that the bank would lose by allowing a short sale (yes prices have dropped that much and I am talking about average small homes here). Seems like a no brainer to me if I were the bank.

Obviously it's complicated but trust me-it's not just about keeping themselves appearing in the black. And they are most certainly not always better off letting a short sale go forth. Of course there are certain situations where the bank would be better off with a short sale-but in those few cases the bank usually will approve a SS.

 

[VRBeauty]

Date: 11/29/2009 3:02:03 PM
Author: swingirl
When you buy a car it doesn''t go up in value. What makes people think that when they buy a house they should have a guarantee from the bank that it will go up in value otherwise they default?


It''s everyone''s own choice what to buy, how much to put down, what type of mortgage to get and whether or not they can afford the ups and downs of the economy. Who ever said an investment wasn''t risky? I don''t remember there ever being any guarantees. Sometimes investments go sour. But everyone is hurt by loan defaults, the ones who took the risk and the ones who didn''t.

I have heard of cases of lender misrepresentation or fraud... walking away in those cases is a different matter. But to willfully walk away from a a loan -- and break a contract -- because suddenly there are better options out there strikes me as being unethical, at best.

 

[iheartscience]

Date: 11/29/2009 5:04:06 PM
Author: neatfreak

Date: 11/29/2009 3:42:47 PM

Author: thing2of2

Date: 11/29/2009 2:48:48 PM

Author: neatfreak

Date: 11/29/2009 2:08:36 PM

Author: thing2of2

But one could argue that a bank refusing to allow a short sale (even though both the bank and the homeowner would walk away better off than with a foreclosure) is also unethical.

But that''s not true. Most of the time the bank is better off letting it go into foreclosure because many of these homes have mortgage insurance. If they allow a SS, they don''t collect on the insurance. THAT is why most banks say no to SS''s-because they will be better off letting it foreclose.

Not to mention the fact that if everyone is simply bailed out (and I am talking the multi million dollar homes here not the middle class person who owns a single modest home) then they don''t learn their lesson and we''ll be back in the same place in a number of years.

Banks would rather allow a house to go into foreclosure instead of approving a short sale because they want the asset in black for as long as possible. I read a great article about this a while ago...wish I remembered where it was. A foreclosure costs banks tens of thousands of dollars in legal fees, so a short sale will often save the bank money.

There''s a lot more to it than that though. A major reason like I said is that if the person going into foreclosure/short sale has mortgage insurance (as most people who are finding themselves wildly upside down do) then they are better off letting it go into foreclosure.

It may cost banks tens of thousands in legal fees if they foreclose-but at the same time a short sale is usually losing the banks more than $10-30k. It''s more often $100+ and in places like where I am (SF Bay Area) it''s often $200-300k that the bank would lose by allowing a short sale (yes prices have dropped that much and I am talking about average small homes here). Seems like a no brainer to me if I were the bank.

Obviously it''s complicated but trust me-it''s not just about keeping themselves appearing in the black. And they are most certainly not always better off letting a short sale go forth. Of course there are certain situations where the bank would be better off with a short sale-but in those few cases the bank usually will approve a SS.

I definitely know it''s more complicated than that. I''m certainly not an expert on them, but I did a fair amount of research on short sales because my current house''s contract was contingent on the seller being able to purchase a short sale home. (It''s a long and complicated story, but the seller of the short sale house came into some inheritance money and was able to get her payments current, so the seller of my house ended up buying that house as a regular sale after all.)

Anyway, one of the articles I read on short sales said that a decent amount of short sales would save a bank money vs. a foreclosure. I''m sure that''s highly dependent on area-for example, my area hasn''t been hit that hard and houses that are priced well are selling quickly. The suburbs have been hit harder, but it''s still not insane like in CA or FL. Overall people in my area tend to be more conservative with their money than places like CA and FL so there weren''t as many risky buyers.

I''m not saying all of the delinquent homeowners should be bailed out (even though all the delinquent banks were!), but it seems clear that banks are very unwilling to work with homeowners on short sales, payment adjustments, etc. And not all of these homeowners gambled big-some of them just lost their job because of the economy. Again, I''m no expert, but it doesn''t seem like foreclosures are good for anyone besides the banks. Is a foreclosure better for the economy than a short sale or payment adjustment? I don''t know the answer, but it doesn''t seem like it.

 

[Tacori E-ring]

We just bought a foreclosure (from the courthouse) where the homeowner lived there for 16 months free. It will be almost another month before we have possession and the sheriff goes to remove her from the property. Bankruptcy is when banks REALLY lose money. Short sales actually can save them money over foreclosures. There are lots of factors that go into having a house go to the courthouse or worse (for them) the mls than settled privately through a short sale.

Being immoral and being illegal are two different matters. For many people walking away IS their best option.

 

[iheartscience]

Date: 11/29/2009 7:57:14 PM
Author: Tacori E-ring
We just bought a foreclosure (from the courthouse) where the homeowner lived there for 16 months free. It will be almost another month before we have possession and the sheriff goes to remove her from the property. Bankruptcy is when banks REALLY lose money. Short sales actually can save them money over foreclosures. There are lots of factors that go into having a house go to the courthouse or worse (for them) the mls than settled privately through a short sale.

Being immoral and being illegal are two different matters. For many people walking away IS their best option.

We looked at one foreclosure and the owner lived there for free for about a year, too. He absolutely TRASHED the place because he was angry about being foreclosed on (plus he was on drugs). It was crazy-plaster torn off the walls, writing on the walls he didn''t tear up, broken windows, cabinet doors torn off, etc. He was a successful local business owner until he started using crack and lost pretty much everything.

Before he trashed it, the house was beautiful and in a highly desirable historic neighborhood. It had been featured in the newspaper because it was so gorgeous. We didn''t even put an offer in because there was just so much damage we didn''t want to deal with it. My realtor ended up buying it himself and has had to put about $70k into the house to get it back into livable shape.

I can guarantee the house would have sold for a lot more if they had done a short sale instead of having the owner live there for a year and wreck the place! Obviously that''s not the case for most houses, but my realtor said occasionally in foreclosures the owners will wreck the place or even just do things like take all the appliances.

 

[Dancing Fire]

Date: 11/29/2009 2:47:53 PM
Author: neatfreak
Personally I think it''s the laws that need to be changed. There need to be lookbacks (like there are for medicare and other programs) and there needs to be further recourse than simply repossessing the house. It''s bull**** that people **who can afford it** are allowed to walk away from mortgages essentially unscathed.

YEP!!!

 

[iheartscience]

Date: 11/29/2009 10:20:17 PM
Author: Dancing Fire

Date: 11/29/2009 2:47:53 PM

Author: neatfreak

Personally I think it''s the laws that need to be changed. There need to be lookbacks (like there are for medicare and other programs) and there needs to be further recourse than simply repossessing the house. It''s bull**** that people **who can afford it** are allowed to walk away from mortgages essentially unscathed.

YEP!!!

I agree that if they can afford it, they shouldn''t be able to walk away unscathed. I''m thinking more about the people who can''t afford it because of unscrupulous lending, job loss, illness, etc. I would imagine most foreclosures are with people who just can''t afford it, but I have no data to back that up.

 

[Tacori E-ring]

Date: 11/29/2009 10:13:55 PM
Author: thing2of2

Date: 11/29/2009 7:57:14 PM

Author: Tacori E-ring

We just bought a foreclosure (from the courthouse) where the homeowner lived there for 16 months free. It will be almost another month before we have possession and the sheriff goes to remove her from the property. Bankruptcy is when banks REALLY lose money. Short sales actually can save them money over foreclosures. There are lots of factors that go into having a house go to the courthouse or worse (for them) the mls than settled privately through a short sale.


Being immoral and being illegal are two different matters. For many people walking away IS their best option.

We looked at one foreclosure and the owner lived there for free for about a year, too. He absolutely TRASHED the place because he was angry about being foreclosed on (plus he was on drugs). It was crazy-plaster torn off the walls, writing on the walls he didn''t tear up, broken windows, cabinet doors torn off, etc. He was a successful local business owner until he started using crack and lost pretty much everything.


Before he trashed it, the house was beautiful and in a highly desirable historic neighborhood. It had been featured in the newspaper because it was so gorgeous. We didn''t even put an offer in because there was just so much damage we didn''t want to deal with it. My realtor ended up buying it himself and has had to put about $70k into the house to get it back into livable shape.


I can guarantee the house would have sold for a lot more if they had done a short sale instead of having the owner live there for a year and wreck the place! Obviously that''s not the case for most houses, but my realtor said occasionally in foreclosures the owners will wreck the place or even just do things like take all the appliances.

I know they used to offer a program (maybe they still do) called "cash for keys" and the bank gives the former homeowners $500 if they leave the house in good shape. In our experience most homeowners DO trash the house. They are angry, scared, confused. Some even refuse to leave w/o getting the courts involved. Talk about denial. We bought one that is in PERFECT condition. We were shocked the stainless steel appliances were even left. Even so if you buy it for the right price it is still worth it. Opening bids start much lower than the first mortgage. Second mortgages get NOTHING.

 

[miraclesrule]

I wouldn't buy a foreclosed house. I don't know why...maybe it's the impact of that great book that was made into a mediocre movie. Fog..something....help me out here peeps.

Anyway, I know a lot of people who have walked away from their mortgages. I'm not going to judge. I think the banks were as greedy as hell and that the property values were ridiculous. People who prospered during the haydays, are flipping foreclosures again and making a windfall.

It's a shell game. If you have the guts to play...go for it. Personallly, I have a low risk tolerance and I like to play it safe when it comes to the roof over my head. I don't want some kicked out crazy fool coming back to his home while I am in it.

 

[iluvcarats]

Does anyone know who pays for the back taxes when a house goes into foreclosure? Is the new owner responsible for the back taxes? When a bank assumes a house, are they responsible for the unpaid and future taxes?

 

[Tacori E-ring]

Date: 11/29/2009 11:14:32 PM
Author: iluvcarats
Does anyone know who pays for the back taxes when a house goes into foreclosure? Is the new owner responsible for the back taxes? When a bank assumes a house, are they responsible for the unpaid and future taxes?

If you buy a foreclosure through a trustee (courthouse) the new owner pays the back taxes or city liens. If you buy a foreclosure through the bank (mls) the bank pays.

 

[iluvcarats]

Date: 11/29/2009 11:22:16 PM
Author: Tacori E-ring

Date: 11/29/2009 11:14:32 PM

Author: iluvcarats

Does anyone know who pays for the back taxes when a house goes into foreclosure? Is the new owner responsible for the back taxes? When a bank assumes a house, are they responsible for the unpaid and future taxes?

If you buy a foreclosure through a trustee (courthouse) the new owner pays the back taxes or city liens. If you buy a foreclosure through the bank (mls) the bank pays.

Thanks Tacori!

 

[Tacori E-ring]

Date: 11/29/2009 11:23:32 PM
Author: iluvcarats

Date: 11/29/2009 11:22:16 PM

Author: Tacori E-ring

Date: 11/29/2009 11:14:32 PM


Author: iluvcarats


Does anyone know who pays for the back taxes when a house goes into foreclosure? Is the new owner responsible for the back taxes? When a bank assumes a house, are they responsible for the unpaid and future taxes?

If you buy a foreclosure through a trustee (courthouse) the new owner pays the back taxes or city liens. If you buy a foreclosure through the bank (mls) the bank pays.

Thanks Tacori!

Also an interesting fact, most of the banked own foreclosures on the mls go to the mls because no one bid on them at the courthouse. Banks really lose out once the house hits the mls.

 

[ndpwood]

I read that article too and was shocked to read it. He does have a point that the bank is not worried about being ethical, they just make sound choices based on numbers. He suggests that underwater homeowners do the same.

I live in an area (Scottsdale, AZ) where most people are underwater. We''re not, because we put a large downpayment into the house. It is very sad though. I just couldn''t walk away from my home and impact my neighbors with another short sale or foreclosure. It''s a crappy thing to do to the neighbors.

Granted, we lost a couple hundred thousand, not a million. If the number lost were in the 7 digits, I may be singing a different tune. My husband and I are looking to upsize houses in the next couple of years and feel certain that homes in the $1mil+ range will definitely come down dramatically still. There are too many people who have lost over a million dollars on their homes. For them, it likely makes no sense to stay. That''s a lot of money for a town where most wealth has been built on real estate and development

 

[ndpwood]

One more thought . . . It is really hard to buy a home here - foreclosure, short sale, or just regular sale. We have had 2 offers on houses where the homeowners were so far underwater that they couldn''t take our bid or else they would have to write a check. They are most certainly destined for a short sale. We are just waiting and twiddling our thumbs until the prices reset.

It is sad when there are buyers out there with money to spend but really can''t. We''re trying to stimulate the economy But no luck!

 

[miraclesrule]

In California, you don''t have the pay the capital gains tax that is owed when you short sell. The feds passed a bill that basically forgave the tax debt and then most of states followed with their own. I am sure that California''s is being extended.

It''s a huge tax debt that most people can''t afford. If they could, they would have stayed in their homes.

 

[crown1]

Date: 11/29/2009 11:06:57 PM
Author: Tacori E-ring

Date: 11/29/2009 10:13:55 PM

Author: thing2of2

Date: 11/29/2009 7:57:14 PM


Author: Tacori E-ring


We just bought a foreclosure (from the courthouse) where the homeowner lived there for 16 months free. It will be almost another month before we have possession and the sheriff goes to remove her from the property. Bankruptcy is when banks REALLY lose money. Short sales actually can save them money over foreclosures. There are lots of factors that go into having a house go to the courthouse or worse (for them) the mls than settled privately through a short sale.



Being immoral and being illegal are two different matters. For many people walking away IS their best option.

We looked at one foreclosure and the owner lived there for free for about a year, too. He absolutely TRASHED the place because he was angry about being foreclosed on (plus he was on drugs). It was crazy-plaster torn off the walls, writing on the walls he didn''t tear up, broken windows, cabinet doors torn off, etc. He was a successful local business owner until he started using crack and lost pretty much everything.



Before he trashed it, the house was beautiful and in a highly desirable historic neighborhood. It had been featured in the newspaper because it was so gorgeous. We didn''t even put an offer in because there was just so much damage we didn''t want to deal with it. My realtor ended up buying it himself and has had to put about $70k into the house to get it back into livable shape.



I can guarantee the house would have sold for a lot more if they had done a short sale instead of having the owner live there for a year and wreck the place! Obviously that''s not the case for most houses, but my realtor said occasionally in foreclosures the owners will wreck the place or even just do things like take all the appliances.

I know they used to offer a program (maybe they still do) called ''cash for keys'' and the bank gives the former homeowners $500 if they leave the house in good shape. In our experience most homeowners DO trash the house. They are angry, scared, confused. Some even refuse to leave w/o getting the courts involved. Talk about denial. We bought one that is in PERFECT condition. We were shocked the stainless steel appliances were even left. Even so if you buy it for the right price it is still worth it. Opening bids start much lower than the first mortgage. Second mortgages get NOTHING.

too bad that it is shocking when people do the right thing. we are not entitled to have everything we want. when you agreed to the purchase terms then you need to stick by them. it is sad that people have things happen that they can not control, like loosing a job. when they overindulge and expect someone else to pay for their mistake it is revolting. i am for keeping up my end of the bargain unless it becomes impossible. why should someone else pay for me. i am for banks and people doing the right thing.