Walkaway or Stay?

IrvineRenter_IHB

IrvineRenter_IHB

New member
<a href="http://globaleconomicanalysis.blogspot.com/2009/08/bright-side-of-falling-home-prices.html">I saw a letter from "Morally Conflicted in Arizona" on Mish's blog.</a>

<blockquote>

Mish,



I'm an avid reader of your blog.



I'm sure you get a lot of messages like this, so I'll try to be brief as possible.



I know you've heard the story before: I purchased a house in 2005. It was a new build that was completed in May 2006, and I have been living in it since.



The house is in Scottsdale, AZ (a non-recourse state). I purchased it for $740K with minimal money down ($40K). The house is now worth maybe $450K...maybe.



I have been able to afford the payments up to this point, but recently my income has been reduced due to the current economic situation, and now I think there is a chance that I may even lose my job.



I will not ask you for specific advice regarding my situation, but in my humble opinion, we are well past the point at which it would make "financial sense" for me to walk away...but I feel morally conflicted...yet every time I make the payment, I fear I am losing money that I may need for necessities - perhaps sooner than later...BUT maybe if I could "hang on" long enough I could eventually sell the house to break even and/or perhaps my income will increase again.



So, I will keep my question very simple: In your opinion, disregarding whether or not I can afford the house, how long will it take for home values to get back up to their 2005 levels?



My guess is that you are going to have bad news for me. Thank you for your time.



"Morally Conflicted in Arizona"</blockquote>


What you advise this person?



<a href="http://globaleconomicanalysis.blogspot.com/2009/08/bright-side-of-falling-home-prices.html">Mish's answer is here.</a>
 
[quote author="IrvineRenter" date=1250682024]<a href="http://globaleconomicanalysis.blogspot.com/2009/08/bright-side-of-falling-home-prices.html">I saw a letter from "Morally Conflicted in Arizona" on Mish's blog.</a>

<blockquote>

Mish,



I'm an avid reader of your blog.



I'm sure you get a lot of messages like this, so I'll try to be brief as possible.



I know you've heard the story before: I purchased a house in 2005. It was a new build that was completed in May 2006, and I have been living in it since.



The house is in Scottsdale, AZ (a non-recourse state). I purchased it for $740K with minimal money down ($40K). The house is now worth maybe $450K...maybe.



I have been able to afford the payments up to this point, but recently my income has been reduced due to the current economic situation, and now I think there is a chance that I may even lose my job.



I will not ask you for specific advice regarding my situation, but in my humble opinion, we are well past the point at which it would make "financial sense" for me to walk away...but I feel morally conflicted...yet every time I make the payment, I fear I am losing money that I may need for necessities - perhaps sooner than later...BUT maybe if I could "hang on" long enough I could eventually sell the house to break even and/or perhaps my income will increase again.



So, I will keep my question very simple: In your opinion, disregarding whether or not I can afford the house, how long will it take for home values to get back up to their 2005 levels?



My guess is that you are going to have bad news for me. Thank you for your time.



"Morally Conflicted in Arizona"</blockquote>


What you advise this person?



<a href="http://globaleconomicanalysis.blogspot.com/2009/08/bright-side-of-falling-home-prices.html">Mish's answer is here.</a></blockquote>
Honestly, I would tell that person to walk away. Companies treat their employments like commodities and have no loyalty and it's just business for banks to lend money. That it should be a straightforward decision for a homeowner on whether they keep paying for a home or toss the keys back to the bank. In my eyes, it's not much of an ethical decision...it's more of a financial decision. I vote to walk.
 
I would walk away in a heartbeat. It is miserable to live under financial duress, and that is a hole that they wont be getting out of in a long time. If he bites the bullet right now, in 7 years he is good to go. If he stays, in 7 years, the value of his home still wont be what he bought for and he would have been losing cash flow every month for seven years. At least. To me this has always been a business decision, as Mish stated. Im sure there will be the selective moralist talking about how they signed up for something and they should see it through because its the right thing to do. There are no right or wrong things in life since every ones value system is different - just what makes and doesnt make sense. And to keep paying a 700K mortgage when its worth 450K, does not make sense, it may be the "morally" correct thing to do, but it does not make sense.
 
A friend of my wife, in San Diego is experiencing something similar, they bought in 2005, they are struggling, they dont make anywhere near as much as in the real estate hey day (both her and her husband had real estate related jobs) i tell her to tell her friend to just stop making payments, live rent free for 12 - 15 months (or more) and use that money to start over.
 
[quote author="qwerty" date=1250683190]A friend of my wife, in San Diego is experiencing something similar, they bought in 2005, they are struggling, they dont make anywhere near as much as in the real estate hey day (both her and her husband had real estate related jobs) i tell her to tell her friend to just stop making payments, live rent free for 12 - 15 months (or more) and use that money to start over.</blockquote>
Yup, that's the decision that one of my friends have made. Wife lost her job and they would have to dip into savings to make the monthly nut. They made the decision to stop paying the mortgages (80% first and 20% second from BofA in 2005 for an Irvine home) back in Oct. 2008. To-date, no NOD has been filed and BofA hasn't called or written them a letter in the past 3 months....it's almost like BofA forgot about them. haha Needless to say, they ask me how long this can go on....I tell them I have no idea but they could send up living in their home for 2 years rent free (at least they are putting money away each month).
 
[quote author="usctrojanman29" date=1250683502]Yup, that's the decision that one of my friends have made. Wife lost her job and they would have to dip into savings to make the monthly nut. They made the decision to stop paying the mortgages (80% first and 20% second from BofA in 2005 for an Irvine home) back in Oct. 2008. To-date, no NOD has been filed and BofA hasn't called or written them a letter in the past 3 months....it's almost like BofA forgot about them. haha Needless to say, they ask me how long this can go on....I tell them I have no idea but they could send up living in their home for 2 years rent free (at least they are putting money away each month).</blockquote>


You keep bringing this couple up as an example of living rent free. Would you mind PM'ing me the address and the owner's last name? And of course, I will respect their privacy. The only reason I say this is there are a lot of people out there in denial of true situation. Case in point: tmare pointed out the dude who was putting in new landscaping two weeks after the bank had foreclosed on him. And... just like I said, the sheriff was there two weeks later to boot them out, and they were taking the landscaping with them. I just think they are telling you what they wish were true, because when they get to that point all they have is hope.
 
Maguire walked away from a billion in bad loans recently and I didn't see any moral outrage. In fact, their stock went up over 15% the next day. I don't see why individual homeowners should be held to a higher standard.
 
[quote author="graphrix" date=1250689663][quote author="usctrojanman29" date=1250683502]Yup, that's the decision that one of my friends have made. Wife lost her job and they would have to dip into savings to make the monthly nut. They made the decision to stop paying the mortgages (80% first and 20% second from BofA in 2005 for an Irvine home) back in Oct. 2008. To-date, no NOD has been filed and BofA hasn't called or written them a letter in the past 3 months....it's almost like BofA forgot about them. haha Needless to say, they ask me how long this can go on....I tell them I have no idea but they could send up living in their home for 2 years rent free (at least they are putting money away each month).</blockquote>


You keep bringing this couple up as an example of living rent free. Would you mind PM'ing me the address and the owner's last name? And of course, I will respect their privacy. The only reason I say this is there are a lot of people out there in denial of true situation. Case in point: tmare pointed out the dude who was putting in new landscaping two weeks after the bank had foreclosed on him. And... just like I said, the sheriff was there two weeks later to boot them out, and they were taking the landscaping with them. I just think they are telling you what they wish were true, because when they get to that point all they have is hope.</blockquote>
If not for the husband one of the few life long friends that I've had, I'd certainly PM you the info but I would like to keep it between them and I unless they feel like sharing more info. My use of them as an example was to back up your findings concerning the fact that there is a lot more pain out there that even FR isn't even capturing because banks are lagging (either on purpose or not on purpose). I do check their address every now and again FR and it confirms what they tell me. If figure if their credit is gonna get dinged, why even go through a short sale when they can get more months of free rent by sitting tight. I would be shocked if an NOD isn't filed by October by the lender. The interesting thing is that the HOA is sending threatening letters that they are ready to file a lien and begin proceeding with a foreclosure. Can an HOA foreclose on a property when there's a mortgage that's greater than market value out there???
 
From a moral standpoint, I would say it all depends upon the contract that you signed, recourse or non. The bank and the borrower made an agreement. If the bank agreed to take the property with no recourse, then that is the agreement both the borrower and the bank live by.
 
I think I agree with everybody here, due to his job situation. He should stop making payments, take the two-years-free-rent deal, rent for awhile after the sheriff finally shows up, then buy a new home in a few years after his credit has recovered.



Now, there's a different situation I have a bit of a problem with-when somebody that can easily afford their payments and has a very stable job does the same thing. People with stable finances don't walk away on car loans when their value drops below what is owed (for example, the moment they drive it off the lot); why should houses be any different? I personally think the hit to one's credit report for a foreclosure is too low. If one goes into foreclosure, one proves that they are not a "trustworthy" buyer-either due to not having stable enough finances, or because they are willing to renig on the loan if it is their financial interests to do so. If I am somebody who gives out credit, why would I want to give a loan to such a person?
 
[quote author="usctrojanman29" date=1250693022]Can an HOA foreclose on a property when there's a mortgage that's greater than market value out there???</blockquote>


Oh yes they can. But especially with how many people have no equity, they're more likely to just sue and use small claims court to go after the delinquent amount.



In 2006, CA adopted some new regulations, and added in



Under the new law, before an HOA can foreclose -- either judicially or non-judicially -- for delinquent assessments, one of two thresholds must be met



* The assessment debt must be $1,800 or more (2004's vetoed legislation and the original SB 137 called for $2,500), exclusive of assessment charges; <strong>or</strong>



* The debt -- at any level -- must be more than 12 months delinquent.



Also dredged up this:

http://www.hoalawblog.com/ToForecloseOrNot.pdf



"In California, an association cannot both actually foreclose and then seek to obtain a personal judgment against an owner. This is what is called the ?single action rule.? Associations only get one chance to collect the money. An association can proceed with the foreclosure process to compel the owner to pay, but cannot proceed with the actual foreclosure sale and then determine there is no equity and decide to pursue the owner for money (and not the property). We recommend that the association proceed non-judicially to the point of sale and then make the decision, as in our experience, many owners will pay rather than lose their home."



Hope that helps.
 
At least they should pay the monthly HOA fees, why they don't even pay that? they are enjoying free services that their neighbors are paying, people like that pisses me off.



The HOA should make public in their website delinquent homes that are some months behind.
 
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