As lenders delay the foreclosure process, many delinquent borrowers are settling in to their new way of life — a life where they don't have any housing expenses.
Irvine Home Address … 14902 ELM Ave Irvine, CA 92606
Resale Home Price …… $769,000
Darling you gotta let me know
Should I stay or should I go?
If you say that you are mine
I'll be here 'til the end of time
So you got to let me know
Should I stay or should I go?
Always tease tease tease
The Clash — Should I Stay or Should I Go?
When the Clash wrote their smash hit about a relationship on the rocks, they had no idea they would be speaking to the fortunes of millions of homeowners in the aftermath of the housing bubble. The question posed by this song, "Should I Stay or Should I Go?" is on every struggling homeowner's mind. If they go there will be trouble, but if they stay it could be double. With the fate of so many borrowers now in the hands of their lenders, most just want to know, "Should I Stay or Should I Go?"
By Sue McAllister and Eve Mitchell
Posted: 07/25/2010 12:01:00 AM PDT
Updated: 07/25/2010 07:18:28 AM PDT
Tens of thousands of Bay Area homeowners are trapped in a bizarre real estate limbo, living in houses but no longer paying for them, waiting and wondering if someone will help them — or throw them out.
Yes. It's called squatting. Of course, this doesn't meet the technical definition of squatting which is possession of real estate without the owner's permission. In this instance, the squatters are technically still the owners of property, so there is nothing illegal going on, but these owners are generally hopelessly underwater and failing to make their mortgage payments. They are in possession of real estate that can be called to auction at the discretion of their lender at any time. Ultimately, they will lose their homes.
Some are victims of their own economic circumstances, unable to afford their mortgage and expecting to lose their homes if they can't get a break from their bank. Others are opportunists, choosing not to spend on a house worth less than they owe. Instead, they can live rent-free until their lender makes a move.
The limbo phenomenon is a radical departure from previous real estate crashes, when there were far fewer troubled loans and banks moved speedily on those who fell behind on payments. Now many lenders simply can't keep up, and others appear reluctant to flood a weakened market with foreclosed homes.
As I have stated on many occasions, I am shocked by the banks policy toward delinquent homeowners. There is no real reason for the squatting. Lenders would be far better served by forcing the deadbeats out and taking the property back in foreclosure. If they didn't want to flood the market with foreclosed homes, they could simply rent them out and at least get some income from the property. As it stands, they obtain no return on their invested capital. It sits there along with a squatter who is happy to enjoy the free ride.
The argument that squatters care for the property is silly. Why would a sqatter care for a property better than a renter? Because it used to be theirs? Or does the denial and the years of false hopes prompt squatters to care for the lender's property?
It all adds up to lingering instability for the Bay Area housing market, as lenders slowly work through the backlog while homeowners endure uncertainty that could last months or even years.
At this point, the only thing that is uncertain is when the foreclosure will occur. I think the fantasies of widespread principal foregiveness have long since faded. The false hope of imminent price recovery is all they have left.
"It's bad all the way around, for the neighbor, the community, the city, state, nation," said Chris George, founder and CEO of CMG Mortgage, based in San Ramon. "It's a continued indication that there are a lot of people in trouble, particularly with their job situations."
Some homeowners say ignoring the mortgage is the only option they have.
"I stopped paying payments about 12 months ago," said Jeff Dunkin, who has twice sought to modify the loan on his San Jose condo near Branham High School, and twice been denied. The 25-year-old construction worker has been employed only sporadically since early 2009, and the unemployment checks he's collected are less than half what he used to make.
How could he expect to get a loan modification to keep a property he can no longer afford. It would be a great deal if he could get a loan modification to make it affordable under his greatly reduced income. If that worked, you would see working couples have one spouse quit their job just to get the reduced payment, then go back to work and enjoy the lower cost of housing. If people can't afford the house they occupy, they need to get out. Home ownership on borrowed money comes with a responsibility, and if borrowers are not up to the task, they need to move on.
He knows some people may think living mortgage-free sounds like a cushy deal. But that's not how it feels to him.
"It's a lot of anxiety, a lot of stress," Dunkin said.
'On the edge'
Dunkin has plenty of company. An estimated 40,283 homeowners across a seven-county region spanning the South Bay, East Bay and the San Francisco metro area were at least three months behind on their mortgages but not yet in foreclosure as of April, according to CoreLogic, which tracks mortgage performance data. That's about 4.5 percent of total mortgages in those areas, and a drastic increase from 0.25 percent in January 2007. In the San Jose metro area in January 2007, only 513 loans were more than 90 days late but not in foreclosure. In April of this year there were 11,558. In the East Bay, the total grew from 1,435 in early 2007 to 23,155 in April.
"We have all these people who are really kind of on the edge," said Kevin Stein, associate director of the California Reinvestment Coalition, which fights for homeowners seeking loan modifications. "They're anxious because they know they're behind, and they know all these foreclosures are happening, and they know they could be next."
Let's be real; these people are doomed. They are over-extended, and they can't afford their properties. Without mortgage equity withdrawal to make up for a shortage of disposable income, these people are the waking dead. It is only a matter of time before they give up and become another statistic.
Dunkin, for example, bought his two-bedroom condo in September 2007 for $355,000. His fiancee and a roommate helped him pay the mortgage. But in early 2009 the relationship with his fiancee crumbled, and construction business in the valley plunged. As he scrimped to keep up with his $2,486 monthly mortgage payments, he let his homeowner association dues lapse, and the association sued him for the overdue amount. He spent months paying it, but let his mortgage slide.
Dunkin has yet to receive a notice of default, but he did receive letters this spring from his lender about the possibility of a short sale — selling the condo for less than he owes.
"I have not responded to that," he said. For now, he's sitting tight, saving money so he can rent a place after foreclosure, which he considers nearly inevitable.
Saving the payment money is the smartest thing he could do. Even smarter would be to respond to the lender and pretend to cooperate in order to string the process out and save even more money.
Nationwide "roughly 3.5 million loans are in this limbo land, and are not proceeding through very quickly. It could take years," said Sam Khater, an economist with CoreLogic, which tracks mortgage performance. "I have a feeling it's going to follow the path of unemployment and have a long tail."
Part of the reason homeowners wind up staying in their homes so long lies with the lending industry, Stein said. Many companies are overloaded with people who are behind in payments, and financial institutions are hesitant to process thousands of foreclosures at once, because dumping all those properties on the market would lower prices even more.
Khater said many lenders are moving slowly because they hope the government will eventually step up to help cover their losses. They also may be hoping an economic recovery will allow many borrowers to catch up with their payments, but "they're going to be waiting a while," he said.
Why shouldn't lenders expect more bailouts? We have already done everything possible to prevent them from feeling the pain of their incredibly stupid lending decisions and shift the losses to the US taxpayer. This expectation of a bailout is the most irritating feature of this whole debacle.
Too slow, critics say
Critics of loan modification programs say the housing market would be better served if foreclosures moved more quickly, and that any resulting drop in home prices is necessary to reset housing values to their pre-bubble levels. Allowing delinquent homeowners to remain in their homes for months or years means many of the owners will stop maintaining their properties, which hurts their neighborhoods, and their own delinquency may even encourage neighbors to default, prolonging the housing market's pain, some say.
The unnamed critics are right on every count. Prices need to get reset to pre-bubble levels so we can get back to a modestly appreciating market rather than endure several more years of slowly grinding declines (yes, I know some of the deluded believe we are at the bottom, but we aren't.) Long-term delinquency does cause neighborhoods to deteriorate, and it does foster more accelerated defaults as neighbors see the rewards obtained by those who stop paying their mortgages.
But Kenneth Rosen, chair of the Fisher Center for Real Estate and Urban Economics at UC Berkeley, said banks and the government "are being quite rational" in stretching out the foreclosure process to avoid displacing homeowners and depressing prices. He estimated that fewer than 15 percent of Bay Area mortgage-holders who are 90 days overdue will get foreclosed on. "Most people will catch up if they can get a job" or a loan modification, he said. In the San Jose metro area, about 1.9 percent of mortgages were in foreclosure in May, or about 4,900 loans, CoreLogic said. In the East Bay, the rate was 2.5 percent, or about 10,090 loans. Bay Area median home prices, though rebounding from lows reached last year, are down 38 percent from their peak in July 2007.
Mr. Rosen is as wrong as wrong can be. How did he come about his estimate that fewer than 15% of those who are 90-days late will get foreclosed on? Rectal extraction? Cure rates are currently running less than 10% which means that 90% of those borrowers who get 90 days behind end up in foreclosure. Mr. Rosen is either completely misinformed as to what is really happening in the world, or he is engaging in the most foolish kind of wishful thinking. I suspect he is a homeowner who sees what he wants to see.
To wish away the problem by saying "Most people will catch up if they can get a job or a loan modification" is simply wrong. Nobody can afford to catch up because they have so many other debts that curing the loan is impossible. These debtors don't have huge cash reserves, or they wouldn't have fallen behind in the first place.
Foreclosure is certainly taking longer than it used to.
According to figures from ForeclosureRadar, for the California homes that were foreclosed on in June, it took an average of 234 days from the "notice of default" to the time the property was foreclosed. That's nearly eight months on average — meaning some homeowners stay in their homes much longer. In January 2007, the average time to foreclose was a little more than four months. New state laws have built more time into the foreclosure process, adding a requirement that lenders try to contact borrowers in person before they are allowed to file a notice of default, for example. Between legislated timelines, delays because lenders are swamped with loan modification cases, and possible strategic delays on the part of banks, many homeowners can stay put, payment-free, for months on end.
Jobs aren't enough
There's another unfamiliar wrinkle in delinquency trends now, said Hans Johnson, who studies housing at the Public Policy Institute of California. Any time unemployment rises, mortgage delinquency does too, he said, just as it has in the past few years. But this time around "even people who are employed are debating whether to keep paying the mortgage because they're so far underwater," he said.
Just because people go back to work doesn't mean they will be able to afford to make the payments on their mortgages. Many delinquent borrowers are employed and simply borrowed too much. Employment is prerequisite to making steady mortgage payments, but it doesn't make it certain.
New research from consulting firm Oliver Wyman found among borrowers nationwide who defaulted in the first half of 2009 and remained in default at the end of last year, 19 percent could have afforded to keep paying. In June, mortgage financing company Fannie Mae said it would punish such strategic defaulters by prohibiting them from getting a Fannie-backed loan for seven years after their foreclosure, instead of the typical five.
Pinole resident Charles Rinne, 63, is no longer employed, but the retired postal worker says he could keep paying the $1,300-a-month mortgage on his two-bedroom condominium. Instead, in February, he stopped.
He considers defaulting a way to live more affordably after years of racking up debt.
Rinne purchased his condo for $26,500 in 1973 and over the years refinanced it several times. He said he ran up credit card debt and had some dental surgery that was not fully covered by insurance.
That is the most pethetic explanation of HELOC abuse so far. He must have some seriously pimped-out grills.
"All of a sudden late last year I just could not pay all the bills down to zero," he said. So he plans to file for bankruptcy, which will delay foreclosure proceedings.
What he meant to say was "suddenly, I was cut off from Ponzi borrowing and couldn't go any further in debt."
"That will allow me to save as much money as possible so I have the money to move," he said.
There's no survey data on the demographics of nonpaying homeowners. But with unemployment and recession affecting all socioeconomic levels, the nonpaying phenomenon spans poor neighborhoods and rich ones, from tiny condos to multimillion-dollar houses, said Jon Maddux, CEO of YouWalkAway.com. The company provides legal and financial advice to homeowners who've stopped paying.
Maddux said defaulting is one way owners have of "lashing back" at lenders when they've been frustrated by a lack of response or denial of their loan modification. He rejects the notion that borrowers have an ethical obligation to keep paying, saying mortgages are contracts that specifically include language about what happens if the borrower stops paying.
"We've made it so sacred to pay your mortgage, when it shouldn't be that way. People shouldn't make their families suffer to pay a mortgage that has an exit strategy in the contract," he said, referring to foreclosure.
I have written on strategic default many times. Jon Maddox is right.
S.J. man fights back
San Jose homeowner and Santa Clara Valley Transportation Authority bus driver Darrell Thomas stopped paying his mortgage in late 2008 after he lost overtime pay and while he was seeking a loan modification.
Do you smell bullshit here? Did he lose overtime pay, or did he lie on his mortgage application and needed a justification after the fact?
He was offered a trial modification in April last year, but as he was about to start making the new payments, he learned he'd been foreclosed on. With help from an attorney, he successfully sued to get back his triplex, where he lives and has tenants.
But he's still pursuing legal action against his lender, Wells Fargo, because he feels he was improperly denied a loan modification under the Home Affordable Modification Program. In May he began making mortgage payments for the first time in almost a year and a half, as part of an agreement with Wells Fargo to ensure the bank would not foreclose on him during litigation.
What a loser. He probably lied on his loan application, and now he is trying to claim some kind of damages because he didn't get a loan modification on a loan he should never have received in the first place. I hope Wells Fargo wins and throws him out on his ass.
While some might find relief in walking away from their homes after prolonged struggle, "I don't look at it that way," said Thomas, 46. "That's home. I'm established, that's where my family's at, and it's hard to start over."
With unemployment still high in the Bay Area and home price stability not yet assured, San Jose condo owner Jeff Dunkin puts his own situation — in default, working infrequently and bracing to move out of his first home — in perspective. "I'm just one person in a sea of problems," he said.
His foreclosure will be part of what should have been a tsunami. Instead it will become part of a slowing rising tide that will take a bit longer to reach the coast, but it is still on its way.
Greenpoint Mortgage holds the bag
Once a Ponzi scheme starts to unravel, the last participants are the ones who lose the most. The buyer of today's featured property started with a very large cash down payment, but she was fortunate to extract all her equity through a Greenpoint Mortgage loan and leave them holding the bag.
- On 6/10/2005 this property was purchased for $749,000. The owner used a $495,000 first mortgage and a $254,000 down payment.
- On 11/10/2005 she refinanced with a $499,000 first mortgage.
- On 1/27/2006 she obtained a $190,000 HELOC.
- On 3/28/2007 she refinanced the first mortgage for $688,000, and obtained a HELOC for $86,000.
- Total property debt was $774,000.
- Total mortgage equity withdrawal is $279,000 including her down payment.
- Total squatting time was almost 2 years.
Recording Date: 04/23/2009
Document Type: Notice of Sale
Recording Date: 10/23/2008
Document Type: Notice of Default
This property was picked up by Paladio Properties at auction on 6/10/2005 for $625,000. If they get this near peak price, they will make a substantial profit. If you notice, each of the Palladio Properties flips I have featured have been renovated with pergraniteel. These guys are the best operators I have seen in our market. However, with the softening market, I expect to see price reductions before this goes into escrow.
If you would like to learn how you can get involved with trustee sales, please contact me at firstname.lastname@example.org.
Irvine Home Address … 14902 ELM Ave Irvine, CA 92606
Resale Home Price … $769,000
Home Purchase Price … $749,000
Home Purchase Date …. 6/10/2005
Net Gain (Loss) ………. $(26,140)
Percent Change ………. -3.5%
Annual Appreciation … 0.5%
Cost of Ownership
$769,000 ………. Asking Price
$153,800 ………. 20% Down Conventional
4.57% …………… Mortgage Interest Rate
$615,200 ………. 30-Year Mortgage
$151,526 ………. Income Requirement
$3,143 ………. Monthly Mortgage Payment
$666 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$64 ………. Homeowners Insurance
$43 ………. Homeowners Association Fees
$3,916 ………. Monthly Cash Outlays
-$752 ………. Tax Savings (% of Interest and Property Tax)
-$800 ………. Equity Hidden in Payment
$262 ………. Lost Income to Down Payment (net of taxes)
$96 ………. Maintenance and Replacement Reserves
$2,723 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$7,690 ………. Furnishing and Move In @1%
$7,690 ………. Closing Costs @1%
$6,152 ………… Interest Points @1% of Loan
$153,800 ………. Down Payment
$175,332 ………. Total Cash Costs
$41,700 ………… Emergency Cash Reserves
$217,032 ………. Total Savings Needed
Baths: 3 baths
Home size: 2,600 sq ft
($296 / sq ft)
Lot Size: 5,000 sq ft
Year Built: 1972
Days on Market: 50
Listing Updated: 40394
MLS Number: S621843
Property Type: Single Family, Residential
College Park Remodeled Home. Wood flooring, Crown Moldings & Recessed lighting throughout. Granite Countertop. 3 Bedrooms plus spacious bonus room. Mater bedroom with Deck. New Air-conditioner & New Stainless Steel Appliances installed. New interior paint. New light fixtures.Walking distance to school & Association Pool.
Mater bedroom? I won't go there….
From a reader, Steve Averill:
Video Game Designer for the World,
Botox Maker, Stacker of Integrated Circuits,
Player with Real Estate and the Nation’s Mortgage Broker,
Calm, quaint, quiet, City of the Perfect Plan:
They tell me you are dull and I believe them, for I have seen your streamlined streets and homogenous homes luring Los Angelenos.
And they tell me you are polite and I answer: Yes, it is true I have seen the car yield to the bicycle.
And they tell me you are quiet and my reply is: I once heard a hummingbird while sitting in a Starbucks.
And having answered so I turn once more to those who sneer at this my city and I give them back the sneer and say to them:
Come and show me another city so safe, so educated, built for children, groomed for adults determined to bounce back and thrive once more…