Everyone walking away from their homes is also hoping to walk away from their debts. Will our system let them slide? Should it?
Asking Price: $850,000
Address: 5 Hawk Irvine, CA 92618
Could you whisper in my ear
The things you wanna feel
I’ll give you anything
To feel it comin’
Do you wake up on your own
And wonder where you are
You live with all your faults
Chorus:
I wanna wake up where you are
I won’t say anything at all
So why don’t you slide
Yeah we’re gonna let it, slide
Slide — Goo Goo Dolls
Back in February of this year, I wrote a post titled The Financial Implications of Short-Sales and Foreclosures. It links to a post written by an attorney on what happens to those who cannot or will not sustain their mortgage payments. To paraphrase the attorney, when people are in these circumstances, they break down into one of four groups:
- Those who still owe the bank much money;
- Those who have a big income tax bill with no cash to pay it;
- Those who owe the bank much money and have a big tax bill
- Those who owe the bank nothing and who do not have a tax bill.
Everyone wants to be the last case. Many end up as the third case.
Very few research the implications in advance. Since most people do not have any other options, it really does not matter because it does nothing to change their decision.
Even fewer take any initiative to do the right thing. Legally, it is the duty of the debtor and taxpayer to determine if they have any liability and pay it. Realistically, everyone will “keep their head down” and hope they do not get any letters from the bank or the IRS. No letter, no liability. The amount of tax cheating is enormous.
Most of the properties I profile would be the third case from above that owe the bank and the IRS because they were recourse loan refinances, and many were not primary residences. How many people do you think are going to pay either the bank or the IRS? Not many, IMO.
I know one person who walked away from a 100% financing deal on an investment property in Corona. His tax advisor told him not to pay taxes on the shortfall because he listed it as him primary residence on the loan application. That is one hard-working lie. He used it to qualify for an interest rate he did not deserve (owner-occupied housing gets a better rate), and he is using the same lie to dodge a tax bill. He isn’t the only one.
The lenders are finally wising up to the changing situation. Since most people believe they can walk away from their debts in a short sale, lenders are sneaking language into short sale agreements where the borrower is liable to repay the shortfall. Collection of these debts will be a booming business in the coming years.
So what do we do about this problem as a society? If we hold all these debtors liable to the banks and to the IRS, we keep them in a financial hole for a very long time, or we force them into bankruptcy. The societal effect will be diminished economic growth because so much disposable income will be diverted from consumer spending to debt service. However, if we just let these people slide, the moral hazard will be huge. If people see no consequences come from this behavior, they will repeat it. The societal effect will be endless Ponzi Schemes and periodic economic near-depressions as the financing collapses.
No matter what we do, the winners and losers will be determined by caprice. Those who owe either the lender or the IRS and get away without paying will be unjustly rewarded. Those who do the right thing will be punished. There will be no pattern of reward or punishment for behavior good or bad. It is a dysfunctional system, and nobody knows how to fix it.
What is your solution? Let ’em slide? Crush ’em with debt?
Asking Price: $850,000
Income Requirement: $212,500
Downpayment Needed: $170,000
Purchase Price: $404,000
Purchase Date: 12/14/1999
Address: 5 Hawk Irvine, CA 92618
Beds: | 4 |
Baths: | 3 |
Sq. Ft.: | 2,780 |
$/Sq. Ft.: | $306 |
Lot Size: | 3,320
Sq. Ft. |
Property Type: | Single Family Residence |
Style: | Other |
Stories: | 2 |
Year Built: | 1998 |
Community: | Oak Creek |
County: | Orange |
MLS#: | S580691 |
Source: | SoCalMLS |
Status: | Active |
On Redfin: | 4 days |
waiting for. Where else are you going to find a home in IRVINE that is
in a gated community, that has 4 bedrooms, 2.5 bathrooms, 2,700 sq ft
with a 2 car attached garage, on a Cul-D-Sac for this price. RIGHT
HERE!!! This great Ashford Place home will not be on the market long so
HURRY and get one of the best deal in Orange County.
Multiple exclamation points, ALL CAPS, HURRY — all standard realtorspeak is present.
- This property was purchased on 12/14/1999 for $404,000. The owners used a $322,850 first mortgage, a $80,700 second mortgage, and a $450 downpayment.
- On 7/3/2001 they refinanced the second mortgage for $170,000.
- On 9/14/2004 they opened a $280,000 HELOC.
- Total property debt is $772,580 assuming they maxed out the HELOC.
- Total mortgage equity withdrawal is $369,030 including their $450 downpayment.
If this property sells for its current asking price, the lender will recoup all of their money and make $26,420 after a 6% commission. I don’t think anyone believes that is going to happen. Check out the listing price history:
Date | Event | Price |
---|---|---|
Jul 06, 2009 | Price Changed | $850,000 |
Jul 06, 2009 | Listed | $580,000 |
Mar 20, 2009 | Sold | $640,000 |
Dec 14, 1999 | Sold | $404,000 |
They listed this property for $580,000, then changed their mind and listed it for $850,000. Perhaps this was a transposition error, or perhaps it was a Freudian Slip where the lender put down what the property is really worth…