America's Debtor Prisons

It’s the most wonderful time of the year

(Most wonderful time)

With the kids jingle-belling

And everyone telling you

Be of good cheer

It’s the most wonderful time of the year

(Wonderful time)

It’s the hap-happiest season of all (wonderful time)

With those holiday greetings

And great happy meetings

When friends come to call

It’s the hap-happiest season of all

There’ll be parties for hosting

Marshmallows for roasting

And caroling out in the snow (out in the snow)

There’ll be scary ghost stories

And tales of the glories

Of Christmases long, long ago

It’s the Most Wonderful Time of the Year – Andy Williams

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Debtor’s Prison 1 Debtor’s Prison 2

Asking Price: $630,000IrvineRenter

Income Requirement: $157,500

Downpayment Needed: $126,000

Purchase Price: $436,500

Purchase Date: 12/13/2002

Address: 219 Terra Cotta, Irvine, CA 92603

First Mortgage $629,600

Second Mortgage $157,400

Total Debt $787,000

Beds: 3

Baths: 2.5

Sq. Ft.: 1,510

$/Sq. Ft.: $417

Lot Size: -

Type: Condominium

Style: Modern, Other

Year Built: 2003

Stories: Two Levels

View(s): City Lights, Hills, Mountain

Area: Quail Hill

County: Orange

MLS#: S515205

Status: Active

On Redfin: 4 days

From Redfin, “Vaulted Ceiling In Living Room, Private Corner Lot With Open View Of Outdoor Sports Center. Spectacular City Light View From Master Bedroom Balcony & Other Area. Beautifully Upgraded In Spacious Private Courtyard. Wood Floor On Fist Level, Dining Room Open To Kitchen, Convenient 2nd Floor Laundry Room. Plantation Shutters, Granite Counters, Stainless Steel Appliances.”

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{adsense-ir}

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So how is it that someone can own a house for 5 years, sell it for $200,000 more than they paid, and still end up leaving the bank with a huge loss? Welcome to the Great Housing Bubble mania. Today’s seller refinanced this property in July of 2005 for $787,000 taking out a whopping $350,500 cash. Now that the day of reckoning is at hand, if they get their asking price and pay a 6% commission, the shortfall will be $194,800. This is a recourse loan as it is a refi. Do you think they have $194,800 in assets for the bank to go after?

Debtor’s Prison 4Should this seller be sent to debtor’s prison? I would like to think so, but in reality, they are escaping debtor’s prison — their house.

What is a debtor’s prison? A prison is any place you cannot leave until you have served your sentence, and these debtors will not be able to leave until they can pay off their mortgage. Most will not be able to do so until market values go back up. Hopefully, it is a gilded cage, but it is still a cage.

Houses are America’s new debtors prisons. By the end of 2008, anyone who purchased between 2004 and 2007 will be underwater. Let’s say for a moment that the government comes up with some substantive bailout program where homeowners can stay in their house and continue making payments of 50% or more of their gross income. House prices will still fall, albeit at a somewhat slower rate if there are fewer foreclosures. Everyone who is underwater and making crushing home payments will be stuck in their homes until values climb back above their purchase price. Mozilla JailSince there are a great many people in this circumstance, and since each of these people is in at a different price point, each one will have a different term in debtor’s prison, but when their sentence is up, most will opt to sell to get out from under the crushing payments. Each of these people selling their home keeps prices from rising. This is called overhead supply. It is also why the market will not see meaningful appreciation without capitulatory selling. A bailout will make for a slightly higher bottom and a much slower recovery.

Anyone who purchased in the late 80s or early 90s knows the feeling of being imprisoned in their house. This is not a new phenomenon. This time around the sentence will be much longer, and the debt service will be much larger.

Home, sweet home? We will see…

Debtor’s Prison 3

My question to you today is this: Who is better off, the homedebtor rotting in their debtor’s prison, or the family thrown to the curb in a foreclosure?

139 thoughts on “America's Debtor Prisons”

  1. I believe that the proliferation of credit card debt over the past 15 years has helped lead us down this path to consumer debtors prison. The difference between using plastic versus your home as the ATM is the key. They can take away your plastic and you at least have a place to live.

    I think it is really sad that big business (e.g. Countrywide and all their conspirators) have enabled the weak minded to dig themselves such a big hole. Many of us who follow this blog are not only educated, but wise with our money and are able to distinguish wants from needs. Many others in society, unfortunately, are not.

    So the question today is really good – should they take the ‘bailout’ which keeps them locked in their home or just walk away with a black mark on their credit record? As we have read in this blog and news articles, many people will not even have a choice as they do not qualify for the bailout. For those who qualify, I think for many it will come down to their character – will they honor their commitments regardless how misguided they were?
    —–

  2. Question for IrvineRenter. The writeup says: “This is a recourse loan as it is a refi.” From this I make an assumption–

    Original mortgages are only backed by the property itself in the event of default, but refinance mortgages are backed by the property and any other assets/income of the borrower.

    Is this correct?

    Thanks for your great blog.

    Bill Shoe.

  3. Whenever I think about this issue, I keep hearing Steve Miller’s song “Take the Money and Run.” The people who got the best possible outcome are those that did a cash-out refi at the peak and just let the property go back to the bank. They got to spend the money, and they get out of their debtor’s prison. Of course, like the characters in the Steve Miller song, “They’re still running today…” because that recourse debt with the refi will follow them for years or to bankruptcy.

  4. Yes, that is correct. The people who used 100% financing and never refinanced have no further financial obligation to the bank after a short sale or foreclosure. Their losses are limited to their downpayment (in this example, zero,) the tax burden on the loss (assuming the government doesn’t waive it,) and the decline in their FICO score.

  5. I have a great idea.

    The ancient Chinese secret to escaping the home-debtors prison:

    Pay off your house. Pay more than the monthly minimum.

    Can’t make the payment? Screw you and the bank. Mail in the keys. Take your bankruptcy lump. Mortgage defaults are going to be so common on peoples records in the next few years that lenders are likely to not even care (except to use it as an excuse to charge you more interest than the rest of us – that’s just too bad for you; don’t use credit cards then).

    Start slashing prices on homes. The sooner we hit the bottom, the better it is for EVERYONE.

  6. “Who is better off, the homedebtor rotting in their debtor’s prison, or the family thrown to the curb in a foreclosure?”

    I would rather just get foreclosed on and get it over with. Then maybe move to Vegas, clean hotel rooms and live a simple life.

    BTW, pretty good article in NY Times this morning –

    ——————————————————–
    And leaders of a housing advocacy group in California, meeting with Mr. Greenspan in 2004, warned that deception was increasing and unscrupulous practices were spreading.

    ‘He never gave us a good reason, but he didn’t want to do it,’ Mr. Gnaizda said last week. ‘He just wasn’t interested.’

    An examination of regulatory decisions shows that the Federal Reserve and other agencies waited until it was too late before trying to tame the industry’s excesses. Both the Fed and the Bush administration placed a higher priority on promoting “financial innovation” and what President Bush has called the “ownership society.”

    Mr. Greenspan, in an interview, vigorously defended his actions, saying the Fed was poorly equipped to investigate deceptive lending and that it was not to blame for the housing bubble and bust.

    http://tinyurl.com/2yy9vy

    ——————————

    Financial innovation? Here is financial innovation for you: Throw out all lending products for homes except 15 or 30 yr fixed rate mortgages. There, I fixed the problem, and I dont even have an advanced degree.

  7. That is true for CA and 5 other states. THe rest of the country are recourse states on purchases as well as refi.

  8. I think if they’re smart, they’ll drop it now. go into FC and BK. wait 3 years & buy at the bottom like everyone else who was responsible enouogh not to buy during the bubble. sure, they’ll pay a higher rate, but once their FICOs continue to improve they’ll be able to refi down the road & save all the money they would have lost in equity if they had stayed put. Plus, they’ll be able to save money for that 20% DP.

  9. Isn’t it worse NOT to show pics of the home, even if it may be not as nice as others for sale?

    With this home, I just keep imagining the worst.

    like white appliances instead of stainless steel.

    :D

  10. I wonder if he is attempting to obfuscate or if he really believes the nonsense he is spouting? He is smart, so I lean toward intentional deception.

  11. I don’t think this home debtor’s prison sentence is a nationwide thing. It is almost certainly regional. While home prices have fallen nationwide, and things are slow in almost every market, most of the country didn’t experience a bubble and therefore really doesn’t have very far to fall.

    To wit, I own a house in Central North Carolina. I bought this house in Summer 2006 because it actually saved me money on rent. I will say that again, my mortgage payment (even before taxes) is LESS than the rent on an equivalent house in the neighborhood. Yes, Virginia, there are still regions of the nation where this is so. Soon it will be so in most every region.

    And there is the rub. I think the true pain will be felt in regions where this is not currently so (e.g. California, Florida, Arizona, New York, Boston, etc.). The rest of the country will take a few lumps then get back on the inflation train, while so many poor people will be slaves to their SoCal stucco boxes for the foreseeable future.

  12. Why does everyone keep assuming that people will have to put down 20%? Yes, the more expensive properties, those over Freddie/Fannie limits may have to go that route, but conforming & FHA/VA won’t. & since they raise the conforming limit every year, I doubt too much that 3-4 years from now that limit will be less than $550,000 or so.

    Are all properties in Irvine over that?

  13. NC’s bubble just ended this year. You don’t have too many more FL people moving up there since they need to sell their house first.

    Maybe buying in 2006 was the right decision for you (it sounds like it was), but that doesn’t mean NC isn’t in for some real pain itself.

  14. So we are enjoying our unencumbered 92606 home last night when a familiar real estate agent stops by to deliver his traditional tin of cookies for the holidays. Yes, it has been a bad year and he expects an even worse year next year. In our neighborhood he had 8 listings and none of them sold. What homes WERE going for $750k were now getting very low ball offers of $500k. The perspective buyers were planning on flipping the properties next year in the spring.

    4 of the property owners decided to lease out their homes and try to sell again in two years. I found this strategy an interesting twist to the current housing situation.

    This particular RE guy actually reads this blog, too, btw!

  15. Diana,

    I fail to see how there is a bubble if you can get real estate for below its equivalent rental value? How could it possibly retreat more than a few percent barring a local macroeconomic shock? Buying houses here to rent them out is easy money, but the margin is low…. if the houses decline by more than a few percent though, investors will flock in for easy gains, supporting the prices from the bottom.

    Look at the Greensboro, Winston-Salem area. They lost tens of thousands of good-paying textile jobs over the last 20 years, but home prices still followed inflation more-or-less.

    BTW, a lot of NC buyers around here are first time buyers, who left NY, FL, or CA because they couldn’t afford a home without taking a suicide loan.

  16. Yep. And one of the sadder things here is that but for their greed, they could’ve easily “taken the money and ran” totally free and clear. All they needed to do is sell instead of refi and then go rent instead.

    But no, their greed (hoping to take advantage of the next climb) killed them. There’s a reason for the Bible calling it the root of all evil.

  17. I’m sorry, but what flavor kool-aid has he been drinking?

    “In my judgment, however, the impact on demand for homes financed with ARMs was not major.

    Demand in those days was driven by the expectation of rising prices — the dynamic that fuels most asset-price bubbles. If low adjustable-rate financing had not been available, most of the demand would have been financed with fixed rate, long-term mortgages.”

    Seriously, how does he think flippers and unqualified buyers were going to afford the payments on 30 year mortgages? As we continue to discuss here and evaluate data that shows otherwise, it is clear to all of us that the ARM’s WERE a major factor.

  18. It’s amazing how many people are sticking their heads in the sand, blindly thinking that it is all going to magically get better in 2 years if they can just “hold out”.

    I refer to this crowd as “the believers”. There is no logical reason to “believe” that house prices are going to rebound and the band will play on and the minimum wage will be 100.00 an hour so we can continue the house price pyramid scheme.

    We have a special group of believers here in Phoenix who are holding on to their lemons in anticipation of the upcoming Super Bowl. These debtors think that they can rent out their houses for thousands of magical dollars to out-of-town visitors coming for the game. I’m wondering how many of these will be up for sale the week after.

  19. AFAIK it’s not clear at all that 100% financing is non-recourse, because such deals are commonly structured as two mortgages, first and second, and case law is unclear on whether the second mortgage constitutes a “purchase money” loan, which is how the statute distinguishes between recourse and non-recourse.

    It’s possible if not likely that the second mortgage (the $157400 in this example) is also a recourse loan on top of the refi.

  20. “BTW, a lot of NC buyers around here are first time buyers, who left NY, FL, or CA because they couldn’t afford a home without taking a suicide loan.”

    exactly.

  21. “Mortgage defaults are going to be so common…” Good point. I also think this is the case. They will be very common; so common that lenders in three years will be a little surprised when the pull your credit, see you’ve had a mortgage, yet don’t have a foreclosure.

    Will Congress meddle with the consumer credit rating agencies and require less damage to credit scores from foreclosures?

  22. “less damage to credit scores from foreclosures”

    no bc those scores are tracked & calculated privately. it has nothing to do with any public agency.

    & since conforming loans do not care what your mid FICO score is to get a mortgage, the FICO score doesn’t matter too much . (although a higher FICO will make any PMI that you have to pay less expensive.

  23. Renting homes out is not easy money. If that were true then none of us would work. We would just rent homes to each other. In a normal market, the landlord should be able to generate a positive cashflow as their reward for the added financial risk that they assume along with the risk of being screwed by the tenant. To think that a lot of these people are just renting in order to lessen the negative cash flow 50% is indicative of some pretty poor planning.

    Personally, I would never buy a home with the intention of “renting it out” as it is totally not worth my time to deal with tenant complaints, maintaining premises, etc. I could earn a lot more money in my profession with a lot less stress.

    There is a lot more to it than just handing over keys and collecting checks.

    No such thing as “easy money”.

  24. he’s trying to mitigate his own involvement. he said in 2003/2004? that ARMs were a great advantage for most people & that more homebuyers should be using ARMs rather than the 30 yr fixed.

    it’s not kool-aid; it’s justification.

  25. Hmmm… if the majority of NC buyers are first time buyers (many from FL), that means they don’t have a home to sell, so they don’t have an anchor back where they came from…. I am quite confused as to the point you were trying to make, Diana.

  26. nope, my point was that those same people flooded your market thinking “this home is way too cheap! I’d better buy now!”

    but NC & SC historical GRM and current GRM are way out of balance. as well as the median income to median home price ratios.

  27. At the height of the bubble, you could not obtain three bedrooms for under the $417,000 limit, and there were not many desirable 2 bedrooms under that price either.

  28. I know someone who just consulted an attorney on this matter, and in California, the second mortgage is used to purchase the home is a non-recourse loan.

  29. “Anyone who purchased in the late 80s or early 90s knows the feeling of being imprisoned in their house.”

    My husband and I bought a condo in a brand new development in Anaheim Hills in 1993. 2 bed/2 bath 1100 sf for $152,000. We divorced in 1997 when prices were at bottom so we waited it out 1 year and ended up selling for $147,000. Not a huge loss but a loss nonetheless. I can relate to that feeling of being imprisoned and I feel for the people who are going through now it at much higher stakes. They should get out their harmonicas now…they have a long prison term ahead of them.

  30. When the people who are trying to hold on for a year or two finally sell, we will be at the bottom. People like this are an example of overhead supply. This is what keeps appreciation in check after a long decline. If these people give up and sell in a panic (it’s coming) that is called capitulatory selling. This clears out the overhead supply and permits market prices to rise again.

    It is an interesting dilemma, if they hold on, and others do as well, to wait for appreciation, the appreciation will never come. If however, they sell, and others sell as well, they create the conditions for appreciation to occur.

  31. Since the GSE loan limit is supposed to be tied to the price of homes, any increase in the limit in the near future is another form of bailout–but this would be a bailout more for the lenders, who can then sell (what are currently) jumbo loans to Freddie/Fannie and get them off their books. Angelo is pushing hard for an immediate bump (originally, he proposed $850k; he’s moderated to $625k). Anything Angelo proposes should be assumed to be for the benefit of Countrywide and not anyone else.

    Unless there is significant inflation in the next 3-4 years, I doubt very much that the GSE limit will move up to $550k, unless the lenders’ lobbyists prevail.

  32. Our gov’t has already shown that it is far more likely to prevent banks than homeowners or future homeowners.

  33. thank goodness you bought looking for a home & not an investment.

    IMO, that’s why people now will do everything they can to hold onto their home+investment. too many people made tons of money when selling so the rest think they’re entitled to that same scenario as well. they will only take a loss, when that loss gets pushed onto the bank. otherwise, they’ll keep holding out.

  34. These people are the worst kind of stupid. They actually think they can get away with this. They will be prosecuted for fraud on thier new home.

    http://online.wsj.com/article/SB119785633408932917.html?mod=googlenews_wsj

    The case of Karenn and Steve Oropeza from down the street shows how Inland Empire buyers complicated their lives by overextending themselves.

    ‘The New Orange County’

    The Oropezas arrived at Calle Canon Road in 2004. Corona appealed to them because of its quality of life and regional cachet. “It was labeled as the new Orange County,” Mrs. Oropeza says. Public records show they paid $557,000 for a four-bedroom house and took out a $500,000 mortgage. Her husband is an area manager for an auto-parts retailer and she is a purchasing manager for a firm that sells dietary supplements.

    As property values skyrocketed, they refinanced three times, most recently in late 2006, for $835,000, Mr. Oropeza says.

    The couple say they used some of the money they pulled out of the house for home improvement, such as a backyard waterfall. But Mr. Oropeza says the bulk was used to pay off credit-card arrears. “We were in a vicious cycle of refinancing our home to get out of debt,” he says. “We banked on selling the house, but that’s where we failed.”

    The couple listed the house several times, even before the final refinancing, which raised their monthly payments to about $6,300. Earlier this year, they were asking $839,000 for the house. But it just sat. Elsie Cambone, the Coldwell Banker agent who had the listing, says prospective buyers were put off by the vacant home next door.

    Meanwhile, Mr. Oropeza expected to be transferred to Texas, so the couple began house hunting there in late 2006. In June, they bought a 3,600-square-foot home for $283,000 in the Houston suburb of Katy, Mrs. Oropeza says. “It was easy. We had good credit. The deal was done in seven days.”

    In the run-up to their move, she says, the couple lived off credit cards to “make sure we had cash for the house payments” in Corona. They packed up in June, and then took their 9-year-old son and 2-year-old daughter on a long-planned Caribbean vacation. They returned to Calle Canon Road, “got in our cars and drove to Texas,” Mrs. Oropeza says.

    Neighbors Ms. Lefranc and Mr. Saffold are dismayed over the Oropezas’ departure and note that shortly before leaving, the couple bought a new Lexus. “I think they took money out of their house and split,” Ms. Lefranc says.

    Mrs. Oropeza says that she and her husband recently bought a Lexus and a Chevrolet Suburban with no money down. She denies that the family intended to abandon the house. The choice was straightforward, she says: “It was easier to keep the house in Texas than the one in California.”

    Countdown to Foreclosure

    The couple stopped making their Corona mortgage payments in June, triggering a notice of default 90 days later and starting the countdown to foreclosure. The family is now living in Texas. But Mr. Oropeza says he no longer expects a transfer, so every other week, sometimes more often, he says he flies west to make his usual rounds of retail locations in the Inland Empire. Mrs. Oropeza says she travels to Orange County every three weeks for her job.

    “We’re sad because there goes our credit, and because people think we are a bunch of flakes who walked away from the house and tried to make money,” Mrs. Oropeza says. The property’s for-sale listing has expired. “We have zero expectation that we can sell this house,” she says. After the government-brokered mortgage plan was announced, Mr. Oropeza says he called the toll-free helpline and left a message, though he doubts he will qualify to get his Corona house back.

  35. I like the description including the “wood floor on the Fist Level”.

    Maybe that’s where you go when you need someone to beat the tar out of you for being avaricious and a financial bonehead to boot.

    I find myself wondering (too) why the title font is interesting to these realtors and agents? Did someone hand out a bogus study showing it sells 2 more houses a year?

  36. Yes, selling now actually creates a higher bottom. Waiting, and renting out, makes a lower bottom. Every additional rental is another chip on the foundation undermining Irvine’s citadel of high rents. As rents soften, demand will decrease further and equivalent rent falls further away.

  37. I hope you all see through the increasing limit proposals. This is an attempt by investors in jumbos to make our government the bagholder. If GSEs are allowed to insure these loans, it will do nothing to prop up the market, but it will make all of us liable for some very large insurance payouts.

    The government insured speculators in the 1980s through savings and loans. This is why we had a bubble in commercial real estate in the 80s and why we had a massive government bailout.

  38. Does anyone think that this is not fair? They apparently had $350K in cash and probably bought 2 BMW’s, some jet ski’s, trips to Europe, etc…

    In the meantime, the rest of us are saving our money and trying to make ends meet.

    Now, these folks appear like the victims and the government needs to help them.

    Then at the end of the day, they shortsale, have some potential tax consequences, and have a bad credit report for a couple of years.

    Hmm… What do you guys think or am I wrong in my understanding of the repercussions to people like the seller of this property?

  39. Prision is supposed to serve 3 functions: 1) deter otherwise law abiding citizens from commiting crimes 2) punish the guilty 3) rehabilitate the lawbreakers so they don’t commit crimes again.

    A house may be a temporary trap but it is not a prision, you certainly don’t have to worry every time you bend over in your house.

    I don’t think debtor’s prisions would work, prision time doesn’t seem to work at all for drunk drivers, they just do their time and go back to their old ways.

    I think what we need is public flogging and humiliation like they did in the Puritian days but the liberals will never go for that again.

    That said, I think scoundrals like Mr Mozilla should be in prision for a long time, if this were China, Mr Mozilla would have been quietly killed a long time ago.

  40. Your credit score itself is pretty meaningless even today. It is just a phoney abstract number that is rigged in favor of banks to justify sticking you with an interest rate that is different from the next guy.

    Granted, it has its place. Obviously, EXTREMELY irresponsible people will have very low “scores”, but the vast majority of us responsible people are pretty close.

    My “score” has actually gone down because I always pay off my balance each month and close the credit lines when the 0% teasers expire. The banks hate that and try to discourage that bad consumer behavior by dinging you.

    If your credit history shows that you pay your credit cards, pay your utilities, etc, but have a mortgage default – big deal. You’ll still be able to get a credit card, etc; they will just use your circumstances against you to charge more interest.

    I would much rather be stuck with a mortgage default on my record than endure sleepless nights worrying about making my monthly payment to my mortgage master.

  41. By the time the housing market rebounds, white appliances may be the hip thing to have. The owners should hang on to their precious gem for a few more years.

  42. They seem to think that people would much rather rent a house rather than stay in a hotel. I can’t say that I quite understand the rational behind that as if I were looking to blow a few grand – I would probably opt for a nice hotel.

    Nevertheless! It is not stopping people from trying and engaging in magical thoughts.

  43. Hey come on, don’t be so harsh. They had credit card bills to pay!

    And notice how they cleverly qualified the carribean vacation as “long planned” as though to make it look like they didn’t go on a spending spree with home equity credit? Hah.

  44. I just want to make a clarification. Fixed rate loans will not themselves prevent a real estate bubble, but they will moderate it.

    Bubbles will probably happen no matter what restrictions there are. But its really a matter of how bad the bubble becomes.

    This last real estate “up” cycle started in the late 90s. That is perfectly normal and to be expected. And I do think a bubble did take place after 9/11 and lower interest rates.

    But, the real problem and huge bubble started in 2003 when wacky-jacky lending was used more extensifly to qualify people who would not have qualified using the old standards. This also caused prices to inflate even further.

    If 30 yr fixed full doc with verifications by the lender was the only game in town, then this would have been just a normal “up” cycle + minor bubble for real estate.

    An “up” cyle for real estate just serves to bring prices back in line with trend.

  45. Many people have asked me about the new Fed bailout policy for those trapped by subprime loans, and why the hedge funds and banks were willing to go along with it.

    Here is the analogy that I used:

    “Imagine a drug dealer pushing his product on his growing clientele…. only to find that the dosage and toxicity of his product was killing off his clients. At one point, the dealer would realize that he had to reformulate his drugs to a lower dosage and toxicity too keep his clients lifelong addicts without actually killing them off prematurely. This formulation change would be followed by a press release… telling everyone how wonderful he is for making the change for the “good” of his clients, even though the welfare of his clients was actually furthest from his mind.” This is basically what is happening now.

    Of course, another way to look at this is with the old saying that I mentioned around 7 months ago:

    “Borrow a dollar and the bank owns you… borrow a million dollars and you own the bank.”

    Clearly, the subprime borrowers own the bank at this point, since the fate of the banks is now clearly in their collective hands.

    Food for thought.

  46. The fact of the matter seems to be that if you are a crook or if you are a responsible borrower, you are both welcome in America. None of you has to endure prison time or public disdain. It all depends on thick you can let your skin grow. Besides it looks like quite a financial advantage to be a crook in America provided you udon’t drop the ball on the consequences and manage those like Mrs. Oorupuza and her family did. JUST DON’T grow a conscience, will ya?!

  47. There is a lot of disgust over the people who bought the lexus after a forclosure, or the people who did the big cash out refis and frittered away the money. The Lexus example above shows that bailout or not, walking away or not, these people will go on making bad financial decisions. You might think that after the foreclosure, they would reconsider their lifestyle, but they don’t.

    To understand why the spendthrifts benefit the financially responsible, try this article:

    http://www.efficientfrontier.com/ef/103/hell4.htm

    It essentially says that in a country that is aging rapidly (most of the western world), how much you save relative to your peers is what matters. The people who do not save make it easier for the people who do save to afford retirement. These Lexus types will be the ones working at 70 or 75, because they have no choice. By working longer, they increase the number of available workers, reduce inflation, and make it easier to afford retirement if you did save.

    So, for my money, they can walk away, or they can stick with it. Let them ‘buy’ their Lexus. Live it up! They are making things easier for me in the long run.

  48. Of course its not fair but good ‘ol Uncle Sam has just decided that these equity cannibals should be rewarded for splurging on hooters and scooters. With one exception, every single U.S. Senator voted in favor of the FHA reform bill that elimnates forgiven debt income on all short sales until something like 2010.

  49. Diana,

    They do not increase the conforming limit every year…it has been 417k since 2005 and they just voted to keep it at 417k again for 2008.

    FHA and VA loans are not enough ammo to save people. Conforming approvals can only be generated at 90% LTV for SUPERIOR credit. This is regardless if it’s a purchase or refi. If you have spotty credit (between 620 to 680) You are at 80-85% max with PMI. If you are below 620 forget about it. You may be capped @ 70% LTV

  50. If there was an American debtor’s prison, I am sure it would be decorated pretty nicely. Every cell would have granite counter tops and marble tiled floors.

  51. The mortgage must be defined as a “purchase money loan.” Even if you just refinanced to lower your rates and did not take out cash, your loans are now no longer purchase money loans. You are no longer protected by the homestead law.

    Oops!

  52. Diana,

    I am curious as to where you are getting your info? Fannie and Freddie most certainly go by the middle of the three FICO scores. Both companies look at the borrower’s total financial outlook, LTV, assets, job history, self-employed vs wage earner, and FICO score.

    My desktop underwriter denies loans every day because of low FICO scores.

  53. “Conforming approvals can only be generated at 90% LTV for SUPERIOR credit. This is regardless if it’s a purchase or refi. If you have spotty credit (between 620 to 680) You are at 80-85% max with PMI. If you are below 620 forget about it. You may be capped @ 70% LTV”

    That is not true.

    Confomring can still be had @ 100% & up to 65% DTI.

    Conforming loans do not care about FICO scores.

  54. Ah yes. Justify your mistakes. The sign of a real mature person. And I had such faith in Greenspan. I sure was misguided.

  55. What are you talking about? You cannot do 100% conforming approvals. There may be an investor other than fannie or freddie that purchases 100% loans, but they do not. Even during the height of the purchase boom, they neve purchased these loans.

    What do you mean they don’t require credit scores? I addressed this comment later on in this thread.

  56. “Corona appealed to them because of its quality of life and regional cachet.”

    LOL! Which real estate agent fed them that line of bull?

  57. There was no law-breaking by the home owner here. Yes there was rampant fraud by appraisers, brokers and lenders during the boom, and many people can be blamed, but lets be rational. This home owner didn’t rob a bank and steal the 350K at gun point. The home owner made out, the broker made a fat commission, and the lender’s stock went up. Now the music is over and the bag holders are who ever has shares in the first and second mortgage. There’s no justification to have such hatred targeted towards the home owner.

  58. Fannie Mae has a program called “my community mortgage” which allows first time homebuyers to purchase at 100% BUT. Your income need be less than the area median income. This is not a typical approval, it is a special HUD regulated program

    should these people be buying homes anyways?

  59. Thanks Alan, I needed a good laugh today!

    “A house may be a temporary trap but it is not a prision, you certainly don’t have to worry every time you bend over in your house.”

  60. Hmm.. eons ago we opened a HELOC. The limit went up to 80% LTV. We never reached it.

    How in the world could anyone get a HELOC to 100% LTV? I feel like I missed the boat somewhere in there. I could have transfered the title to my wife, taken out ungodly amounts of cash. Walked on it, rented a place and next year I would be able to buy a house with cash.

    Damn…. I really blew this one.

    I’m trapped in a nice house, quartz countertops, stainless steel gourmand appliances, a low rate 30 year fixed, comfortable payments and plenty of equity even if the market drops 45% or more….

  61. These guys are stone cold winners. They cashed out huge, and should now “sell” the place to the bank. Just quit making the payments and stash the cash in a London bank to wait it out. Live rent (and HOA / taxes / Mello Roos / maintenence / insurance) free for six to nine months.

    Hell, they could even buy the place back for the $629,000 on the first using $125,000 of the cash out refi. Then they’d have the same house back, owe $500,000 on it and have $225,000 sitting in a Euro mutual fund. This screams WINNER WINNER WINNER all over it (well, except for the stupid lender).

  62. Any idea where we can find this data Diana? It would be great reference material for comparison purposes.

  63. who are “these people” exactly? my parent’s made less than the median their whole lives, & they still deserve to own a home as much as anyone else responsible with their credit.

  64. Everyone thought he was so brilliant for not letting the markets seize up after the S & L crisis, but I think he’ll actually be remembered as the worst Fed chairman we’ll ever have.

  65. “I’m trapped in a nice house, quartz countertops, stainless steel gourmand appliances, a low rate 30 year fixed, comfortable payments and plenty of equity even if the market drops 45% or more….”

    Now THAT’S what I call the American dream!

  66. The Fed has only proposed changes to the rules for mortgage lenders today.

    Or are you talking about the plan from Bush? In that case, the bailout is so extreme. the requirements are too strict to qualify many people at all.

  67. By absolute chance, we opened up a HELOC at the absolute pinnacle of the market — June 2006. Add to that the fact that the appraiser was very generous with his comps. I dare say, our HELOC today is at about 140% LTV! Of course, we haven’t touched it…

  68. The “old saying” is an Americanization of Keynes’ line:

    “If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has.”

    Which was added to by The Economist magazine in the early 80s:

    “If you owe your bank a billion pounds everybody has a problem.”

  69. I would imagine that people that are so stupid that they borrowed more money than they could pay back at rates they could not afford are probably too stupid to fill out the government paperwork required to qualify for the program……..

  70. Priced_Out_IT_Guy –

    The homeowners borrowed money that they never planned on paying back.

    Just like everyone else who wanted something for nothing; they pulled out all the cash and pissed it away on Caribbean vacations and credit card bills (i.e s*** they don’t need).

    Now they are whining because they don’t want to have to pay it all back and even had to nerve to call the 800 number for bail out assistance.

    They may not have done enough to be arrested and put in jail; but that’s only because we don’t have any statutes outlawing stupidity.

  71. Do these people actually get to keep their house in Texas?

    Wow, lucky them if they do:

    1. Buy a house in CA
    2. Use a HELOC to buy a house in Texas
    3. Foreclose on CA house and make the get-away to Texas
    (oh yeah buy a lexus and a suburban with your HELOC to make the get-away)

    They should have pre-paid for their kids college tuition while they were at it…. maybe they did !

  72. Is it an adjustable rate?

    Is it still opened?

    You might want to tap it all out for a week and see if they freak out!

  73. Mr Mozillo conspired to break the banking system by running a corrupt corporation that specialized in using inflated aprasials to procure loans to people whom they knew couldn’t afford the payments, taking rediculous fees off those transactions and then selling these loans as grade A investment material to unsuspecting buyers, thus relieving themselves of any liability for the losses occuring when the turkeys stopped paying on the notes and making 100’s of millions in the process.

    (read Enron… smartest people in the room for comparison. Countrywide is the Enron of the mortgage industry)

    Other than that, I suppose he’s a great guy

  74. When I bought my Irvine home in the spring of 2000, I worked my a$$ of to pay down the mortgage. Allot of the time I felt like I was in debtor’s prison. I wasn’t easy. So why should these people have the opportunity to bail out like that. Thats not right. If your stupid with your money, it’s your fault.

  75. You know, I think that credit card companies and the rest would really turn us into slaves if they could.

    When my son was in the army, he bought a cheap car. He HATED the army and couldn’t wait to get out. He went to a car dealership and got roped into driving an expensive (by my standards, not by TonyE’s) truck off the lot. He called us, told us what he had done and I went off like a volcano. One of the things I said to him was, do you want to be a slave? Do you want to stay in the army forever? Didn’t you say you wanted to go to college?

    He took the truck back, got out of the army and got almost straight As. He actually listens to what his parents say, bless his heart. Now he’s working for a year in his field and applying to grad school.

    Seeing how the average person acts, I can see lots of people selling themselves into debt slavery, if it were allowed.

  76. Nope. Not a shrink.

    I heard that term used in an article I read somewhere and thought it was so great that I stole it for my own purposes!

    :)

  77. What kind of flipping? The funny stuff seen on TV where they tear shit up and put new shiny shit in? Or just buy and hold and sell?

  78. Yeah, they refi to pay off cc debt and then run it up again I bet. Stupid fooks. So sure they took the money and ran. And you know what? The banks lent to them!

  79. It’s the whole how much are my monthly payments gonna be bullshit. Some people just don’t look at the bigger picture and see how much they are going to pay over the life of the loan. I think of this everytime I drive by a rent-to-own business. It’s for the people who suck balls at math.

  80. Charles Dickens has excellent portrayals of actual debtors prisons. As Mr. Micawber used to say in David Copperfield, “I have every confidence that something will turn up.”

  81. I think it’s called “Pimp your cell”.

    or maybe that’s “Pimp your cellmate.”

    I tend to flip the channel pretty quickly.

  82. Oh, but if you have knowledge that the individuals you are selling the loans (stated income, gardners claiming to own landscape companies) to do not have the resourses to pay, then sell the payment stream (SIV) as a AAA quality, then you are commiting fraud. You are selling a turkey (the loneee) as a dressed up bird!

  83. “Anyone who purchased in the late 80s or early 90s knows the feeling of being imprisoned in their house.”

    I bought in early ’90 after an early dip in prices and won’t forget the feeling in ’92. Being down 15% hurts. Fortunately I didn’t have to sell and by ’98 was finally above water. 8 years of pain was long enough but this time will be worse, for those who are in prison.

  84. For $82 a Day, Booking a Cell in a 5-Star Jail

    Many of the self-pay jails operate like secret velvet-roped nightclubs of the corrections world. You have to be in the know to even apply for entry, and even if the court approves your sentence there, jail administrators can operate like bouncers, rejecting anyone they wish.

    “I am aware that this is considered to be a five-star Hilton,” said Nicole Brockett, 22, who was recently booked into one of the jails, here in Orange County about 30 miles southeast of Los Angeles, and paid $82 a day to complete a 21-day sentence for a drunken driving conviction.

  85. Look at the other side. This will help deflate the bubble faster. Sell by 2010 and you get a break. Try to hold out past that and you’re screwed. More people will put their houses up.

  86. “Comment by Mr Vincent
    2007-12-18 10:44:28
    “Corona appealed to them because of its quality of life and regional cachet.”

    LOL! Which real estate agent fed them that line of bull?

    I bet it was Holly Nguyen (Realturd).

    ROFL!!!!

  87. What if I actually want to live in my prison for the next couple of decades? And if I am paying down the principle on my 30 year fixed at a 15 year rate? And if $90/sqft were a reasonable price for a quality 2004 construction? And if I had reached 45% equity of the 2004 purchase price?

    I’m sorry, but bubble-mania is not a conservative trait. Simple math abilities, and Economic logic should keep people out of trouble. But there’s always a percentage that get caught in these bubbles. For those who chose to show some responsibility, and forgo the Lexus and Caribbean trip in order to pay down their reasonable mortgage, these happenings are quite a spectacle. But I believe that Real Estate does have a fundamental value that does not go down over the long term. Having a nice place to spend most of my time is more important than making a million in a short time, and blowing it all on cars and hookers.

  88. As one commenter on Doctor Housing Bubble’s blog (not me) remarked, there is a method to this couple’s madness.

    Mainly, Texas has homesteading laws that protect your principal dwelling and one auto per person from creditors in the event of bankruptcy. Texas has some of the most liberal and corrupt bankruptcy laws in the nation. Back in the Dust Bowl days of the 30s, it was commonplace for a bankrupt Oklahoma farmer to scrawl the initials GTT, or ‘gone to Texas’ as he vacated his bankrupt homestead and departed for the land of perpetual debt forgiveness just to the south.

    So don’t think this couple’s happy job transfer was an accident or that they didn’t plan to shirk their debt in CA, as well as their car loans and other obligations. I’m sure that every move they made was completely calculated with the thought in mind that they would extract the max free money possible from the house in CA, knowing that they could take it to Texas and set themselves up in a safe, untouchable situation while the creditors and neighbors in their old Inland Empire neighborhood took the hit for their fraud.

    Don’t think for a minute this couple didn’t intend to commit fraud.

    They will default on the debt on the CA house, and probably the car loans, too, but they will get to keep their new suburban Houston home- a very good deal for the money at $283,00 for 3,600 sq ft!! They will have their nice new cars and and one hell of a nice house, and cash to spare.

    The ease with which they managed this is the ruin of our country.

  89. I should have posted my comment at the bottom.

    I repeat….. anyone who thinks the Inland Empire couple who HELOCed their house and then bought a house in Texas did this out of stupidity, is naive, as another poster on another blog pointed out.

    This couple committed deliberate fraud, and it’s too bad they can’t be prosecuted.

    They took a massive amount of cash out of the house in CA , AND bought 2 extremely nice new vehicles, then bought a very nice 3,600 ft house in suburban Houston for $238,000K, a gift compared to Los Angeles or Chicago prices for something similar.

    Don’t you think the job transfer to Houston is very fortituous for them, as is the ability to pull a massive amount of cash off the house via a no-down mortgage and HELOC?

    Homestead law in Texas protects their home there and one vehicle per person should they bankrupt out of the $800K-plus debt on the Inland Empire house, which of course they will.

    You can be pretty sure they were aware of all this when they HELOCed their CA house and bought the house in TX.

    Don’t think for a New York Nanosecond that they were naive or stupid in all this. It looks to me like calculated fraud, and they will get away with it.

  90. You think Diana has any real data?

    Diana, I dont have anything against you personally but you seem to constantly BS on the comments. What makes NC have a bubble when one can buy cheaper than renting? Even if the GRMs were lower 5 years ago, wouldn’t it be possible that it was mispriced 5 years ago and now is at a more correct price for the given market? Setting aside the above comments, you also have not backed up your statements regarding FICOs and conforming loans.

  91. Totally agree with the “monthly payments” statement. This March our 2nd car will be paid off. 2003 model with only 45,000 miles. I will be driving this or years to come and have no “monthly payment”. Cha ching!

  92. Besides the Fannie My Community, there’s also the DreamMaker Opportunity, the Freddie 100%, The Flexible 100%, the FHA 97% (but allows rolling closing costs into loan), & several other local programs that 1st time homebuyers can qualify for to get 100% financing.

    & I would also be interested in who “these people” are?

  93. “Wood Floor On Fist Level”
    Hmm, a whole level dedicated to a special sexual practice. Those homeowners must be real perverts.

    Or is this a description of a heightened wooden floor, maybe for acoustical or storage purposes? Then “fist level” might be a synonym for a height of four to five feet, the level at which boxers hold their fists. Damn, those realtor descriptions are hard to understand for us outsiders…
    :D

  94. I like the description including the “wood floor on the Fist Level”.

    I thought this sounded like a zen kung-fu flick.

  95. Just bc you disagree with me doesn’t make it BS. I don’t live in NC, so it will take me a few days off work to come up with the links, but I’ll post them as soon as I can get it done.

    I did, check it.

  96. “Mr Mozillo conspired to break the banking system “ Umm-m, is there any evidence Orangzillo conspired to break the banking system? Wouldn’t it be more realistic and reasonable to assume he was trying to make money? But conspiring to break the banking system? That initial statement decreases from the credibility and validity of the rest of your argument, which makes alot of sense.
    Did Orangzillo knowing make bad loans? It seems obvious to us in hindsight, but unless there is written evidence documenting his direction of such behavior. If he was smart, and I don’t think anyone is accusing the guy of being stupid, he never documented anything which he knew to be illegal. He may not have even given verbal direction and instead just let it happen once he saw which way the wind was blowing.

  97. The NY AG is actively investing Countrywide and other lenders. I predict we will see inditements, but not for a year or two until the investigations are over and the true nature of the credit freeze blows over the economy.

    By diverting people into teaser loans instead of properly amortized loans those people could afford to maximze the Countrywide’s fee’s then reselling those loans as gold unsuspecting investors when Countrywide had prior knowledge that the lendee’s couldn’t afford the fully amortized payment constitues fraud. The Company senior management pushed their brokers into selling these loans at the expense of lower, affordable loans to maximize profit, just like Ken Lay and Co at Enron; hence Mozillo is legally liable for the actions of his brokers.

  98. Excellent observation. One thing I’ve learned with the media — you have to read between the lines. Here we have as clean cut a case of premeditated fraud and the media is using this couple as a sob story. Are they that gullible? Do they think we are? Thanks for cross-posting. I knew Texas had pro-homeowner BK laws, but you’ve laid it out in detail.

  99. Note that while their jobs “transferred” them to Texas, they seem to be commuting back to California quite a bit for work. Guess it wasn’t so much as transfer as the article might imply…

  100. If it was a calculated fraud, why would they have agreed to be in a newspaper article? They could have just said no to the reporter.

  101. Possibly because this type of skankiness and immorality is so prevalent in the U.S. population, that people who do this stuff think it’s actually OK.

    Or at least not too bad.

    And, hey, everybody does it. Don’t they?

    It’s amazing what people brag about. And it’s even more amazing that they have no concept that what they did is really and truly wrong

  102. As I note in another comment to another post, this has all of the signs of acts taken with the intent to defraud creditors. If they file bankrupcty and if (this is the bigger problem) at least one of their creditors challenges their discharge, it’s fairly likely that they will be denied their discharge. So, they’d be on the hook for all of their debts, including all of the airfare they are charging to their credit cards, and potentially be subject to indictment for bankruptcy fraud (altho this is quite unlikely).

  103. People like this make me sick. Thanks society, for encouraging this type of behavior and aggrandizing these idiots.

  104. Just as only “special” people are allowed to own homes, only special people are allowed to manipulate a situation to generate cash, and to promiscuously enjoy the benefits that cash can provide.

    I congratulate them for carrying off this fraud successfully. It shows that they have the math skills, the capacity to plan, the nerve, and the knowledge of how the system works to execute the scheme effectively. This assumes that it was deliberate. Alternatively, they may just have gotten lucky.

    Either way, good for them.

    Far too often the manipulation of the system to skirt laws and regulations to take advantage of the suckers (“those people” who don’t deserve to own houses) by predatory brokers, complicit appraisers, and weasel mortgage lenders, lets everyone in the smart people club rake off a nice chunk of change while pushing off any losses to the last putz in line, and smirking happily about what fools the hapless home buyers are who “shoulda known better”.

    Caveat Venditor Motherf****ers! Maybe you aren’t that smart after all.

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