In a signifant change in lending standards, underwriters are now counting rental income toward income qualification. Since Las Vegas properties are all cashflow positive, it means you only need a down payment and a 700 FICO score to buy an income property.
As I mentioned in the opening, underwriters are now counting rental income toward income qualification. Since Las Vegas properties are all cashflow positive, it means you only need a down payment and a 700 FICO score to buy an income property.
Previously, lenders required the borrower to have enough income to support the property as an empty stucco box. Now that they are counting the rental income toward qualification, the income requirement is essentially removed.
It just got a lot easier to buy income property.
Adding value
I am in escrow to sell the second income property to a local cashflow investor. Having gone through the process twice now, I have identified ways to make the decision easier by adding value to the property package.
Below is an example of the new property packages I prepare for each cashflow property. It includes the following:
Four page executive summary
Estimated HUD showing all closing costs plus the down payment required to close the deal.
A copy of the signed lease.
The management contract.
An inspection report showing the physical details and condition of the property.
My goal is to eliminate any surprises and provide the most accurate representation of the product. I prepare each property as if I were going to buy it myself because I do buy some of them. We don't cut corners on the renovations. We want to deliver a quality product which performs as we state with the fewest number of management headaches. My properties may not be the lowest priced on the MLS, but they are all high-quality rental homes prepared to deliver years of solid financial performance.
Many loan owners are hoping the government or the bank will fix their problem by forgiving the principal on their debt. Banks are not charities, so they are not in the business of giving away money. The government is too broke and running a deficit in order to come to the rescue.
JON WITTENBERG and Bill Sawyer have never met. One lives in Walnut Creek, Calif., the other in Wilsonville, Ore. But if they did, the conversation might be littered with exclamations like, “That’s exactly what happened to me!”
Their stories start with a mid-decade home purchase and turn sharply as they simply walk away from those homes and the mortgages that accompany them. What was supposed to happen next was that their financial lives would crash and burn for years.
Or so the dire warnings went. In reality, both men said, walking away turned out to be the best financial decision they made.
It is essential for the banks to maintain the illusion that dire consequences await those who strategically default. As the moral arguments fall flat, fear becomes the only weapon they have left.
As people talk to the survivors of strategic default and realize the consequences are greatly exaggerated, the fear will slowly dissipate, and more and more loan owners will strategically default and move on with their lives.
In 2005, Mr. Wittenberg, 42, was working in the pharmaceutical industry in Boulder, Colo., when his employer told him he would be relocated to Southern California. It was two years to the day since he had bought a house, and he had no trouble selling it.
When he got to Agoura Hills, north of Los Angeles, Mr. Wittenberg said, he could not believe the pressure to buy another home. “Everybody was making tons of money,” he said. “My company had a relocation expert who said, ‘I’m going to have to insist that you buy property.’ My only hesitation was it seemed like prices were inflated. Little one-bedroom condos were half a million dollars.”
I wonder if the people who were giving out advice like that during the bubble have experienced any consequences for their advice? I imagine a few disgruntled buyers have wanted to look these people up and inflict a little pain in return.
Mr. Wittenberg bought a two-story, 1,300-square-foot condominium for $450,000 in April 2006, putting 20 percent down on a 30-year fixed mortgage with Wells Fargo. And the bank promptly offered him a line of credit, he said: “They were handing mortgages out like candy, and I was able to borrow from the house on Day 1 of signing the loan.” A Wells Fargo mortgage spokeswoman, Vickee Adams, confirmed last week that Mr. Wittenberg had been a customer but said that because of confidentiality laws, the bank could not release any additional information.
A year and a half after getting his mortgage, he was laid off, along with 3,300 co-workers. But he found a new job almost immediately, with a renewable-energy company. It meant yet another relocation, to San Francisco. So he turned the condo into a rental and headed north.
The need to relocate comes up far more often than buyers realize. One reason Shevy and I emphasize rental parity is to allow the rental plan B to work. People who pay less than rental parity can move to take other work without an enormous hole in their balance sheet. Those who don't heed our advice and have to move end up with an ongoing loser with no relief in sight.
But Mr. Wittenberg found himself agreeing to lower and lower rents, eventually resulting in a monthly shortfall of $1,200 between the rental income and his mortgage payment. By 2009, comparable homes in the area were selling for $210,000, and he still owed more than $300,000. He tried for a year and a half to get the bank to modify his loan, he said, to no avail. So with the help of YouWalkAway.com, he decided to stop paying. YouWalkAway.com is a company that sprang up in 2007 to help homeowners through the foreclosure process, specifically what is called a strategic default. In that instance, even if you can afford to make mortgage payments, you stop paying to force the bank into foreclosing.
The company charges clients an enrollment fee of $199 to $395, and monthly membership fees ranging from $29.95 to $99.95, depending on which assistance plan a homeowner chooses. Then it essentially coaches clients through the process of walking away from their mortgages, helps them figure out which threatening letters to pay attention to and which to ignore and provides access to lawyers versed in each state’s property laws.
As YouWalkAway.com points out in its materials, there is usually no paperwork or response required from homeowners: they should track what documents the bank sends, but other than that, the process is fairly simple. “We looked at how much my home was under water, how much I’d lost thus far and how much I would continue to lose until I started to break even,” he said. “And that could be 20 years away. It was a no-brainer.”
Anyone who is underwater and paying more than a comparable rental would likely benefit from strategic default. It largely depends on how far underwater and how much the rental savings would be. Underwater mortgages still have option value. Even though the property has no equity today, if a small increase in values would create equity, many owners may opt to hang on. Hope and delusion will prompt these owners to tell themselves everything will be okay soon.
YouWalkAway.com’s chief executive, Jon Maddux, said that was how it should be — a no-brainer — for hundreds of thousands of people who were underwater on their mortgages.
“I think as more and more people know someone that’s done it, they know that, O.K., these people have moved on, they kind of pushed the reset button, and they’re starting over,” he said.
Jon is exactly right. Right now fear is the only thing holding most people back. Once they realize these fears are unfounded, many will opt to walk away.
For many Americans, a mortgage is about more than money. It’s a contract that should not be broken, a debt that should under almost all circumstances be paid. In this context, walking away has been framed as an ethical or moral issue.
But many economists, and legal professionals, say it’s not and is simply a matter of contract law. “If your home is a financial asset, and it’s financially rational to walk away, that’s what you do,” said Nicolas Retsinas of the Joint Center for Housing Studies at Harvard.
Mr. Maddux of YouWalkAway.com said his site had helped more than 7,000 homeowners walk away and that, for most of them, a change in their all-important credit score was the biggest downside.
all-important? A credit score is not important to people who don't use credit. It's only those who are addicted to consumer credit who fuss over their credit scores.
Among the company’s clients, the average score drops 100 points, he said. Fair Isaac, which provides the industry-standard FICO credit score, released a study this year showing similar results.
But if someone’s original score is on the high end, say a 780, that person will take a bigger hit (150 points on average) in a foreclosure or short sale than someone who has a lower score of 680 or 720 to begin with.
The bigger surprise, according to YouWalkAway.com, is that many clients are finding their scores begin to recover within the first few months of a foreclosure’s becoming final. Mr. Wittenberg said he knew the decision to walk away could spell doom for his score, which was in the low-to-mid 700s, and he didn’t know what other financial complications might arise.
Banks would love to punish strategic defaulters, but in reality, this group is creditworthy and economically savvy. They are a low risk for future credit, and creditors will acknowledge that fact by extending them credit again as soon as the mess is cleaned up.
“Am I going to have to pay this back? What are these banks capable of doing to me? Buying a house again? Out of the question,” he said. “So here I am, upper middle class, I have two degrees, and I’m stuck. Just because I wanted to end the hemorrhaging.”
The impact so far? There hasn’t been any. At least for him.
Mr. Wittenberg lives in his girlfriend’s house in Walnut Creek, so he didn’t have to worry about a landlord checking his credit. He has a job he enjoys. And he said he was done with debt forever. He doesn’t have any credit cards. His car is paid off. “I live in a cash world, and I want to keep it that way,” he said.
Hallelujah! This man has escaped the bondage of debt, and he is not looking back. Kudos to him.
He hasn’t checked his FICO score and doesn’t want or intend to. He shredded every last piece of paperwork from his mortgage and foreclosure.
That’s not to say he has not paid a price, though. He lost his entire down payment and drained a significant portion of his savings account to make up for the monthly rental shortfall.
Mr. Wittenberg said he never planned to walk away from his debts and if the bank had lowered his interest rate by a percentage point or two, he could have continued to rent it out.
In the end, his financial stability, both short term and long term — it would take up to 20 years to break even on the home — trumped any ethical or moral questions he had about honoring his contract with the bank.
What saddens Mr. Wittenberg, he said, is the loss of a home. “I did a lot of work on it, did it all myself, and it was nice,” he said. “But it’s O.K. I’ve moved on.”
I admire how this man has abandoned his attachments along with his debt.
He did note that the lack of permanence in the job market made owning a home for any length of time more difficult.
“It’s not like our parents, where they worked at the same place for 40 years,” he said. “So when you own a house, it’s a huge burden. It’s almost like renting is peace of mind.”
It's not “almost like renting is peace of mind.” Renting is peace of mind when prices are falling and the job market is uncertain.
SIX hundred miles north, in the rural community of Wilsonville, Ore., Bill Sawyer, 50, sat at a desk just off the kitchen in his apartment in a multiunit complex near the I-5 freeway, about 17 miles south of Portland.
Mr. Sawyer, who works as an operations and policy analyst for a state government agency, said a couple of years ago, his credit score was in the low 700s. That’s about average on the Fair Isaac scale, which tops out at 850.
He knows his score has gone down, because he stopped paying the mortgage on his former residence, a small town house in nearby West Linn, more than a year ago. But he has no idea how much. He bought the town house in 2000 for $138,000, with a loan from the Federal Housing Administration and a small down payment. Mr. Sawyer was a single father to Vanessa, who was 12 at the time, and Daniel, who was 11.
Over the next few years, the town house’s appraised value grew to $256,000. The mortgage holder, Wells Fargo, approved two cash-out refinancings, and Mr. Sawyer said he used that money to pay down other debts.
He was living like many Ponzis of the housing bubble era. He racked up credit card debts living beyond his means, then he went to the housing ATM to pay them off. The foolishness of this style of financial management was not immediately apparent, so many others adopted this way of life. Few of those people are still living in the same houses.
“They just crunched the numbers like a car salesman might, and, you know, you sign the dotted line,” he said.
Then in 2007, his son, then 18, was killed, along with a friend, in a head-on collision with a truck.
Aside from the emotional and psychological devastation, the accident sent Mr. Sawyer into a financial tailspin. Insurance coverage was minimal, he said, and he was billed by the towing company and the volunteer fire department that responded to the accident.
“There were financial hardships as a result of funeral expenses and so forth,” he said in a low voice. “That started a chain reaction. A maxed-out credit card and line of credit. When you have a limited income, and you make minimum payments, well, that debt just keeps going.”
His story is very sad, but that doesn't change the fact he was living beyond his means. Having a personal tragedy does not mean lenders or taxpayers must give free money to the aggrieved. The man was living as a Ponzi, and the tragedy made matters worse.
Within a year, the housing market collapsed. Similar town houses started selling for $180,000, and with the equity he had taken out over the years, he owed more on the mortgage than his home was worth. He said he spent months trying to negotiate with the bank for a loan modification. When he was unsuccessful, he abandoned the property in March of this year, with the help of YouWalkAway.
Mr. Sawyer had not wanted to check what that had done to his credit scores, but he did. “Oh, boy,” he said, with a small, uncomfortable chuckle, as he waited for numbers to pop up on his laptop’s screen.
“Oh gosh. Never has it been that low. TransUnion 535. Equifax 520. Pretty much start over from the bottom of the barrel now.”
It’s not the bottom of the barrel, but it’s close, and it was made worse by a bankruptcy filing over the summer. The resulting damage to his credit history is what Mr. Sawyer worried about most.
The man is now totally free of debt, yet he is worried about his credit score. He should be celebrating his financial freedom and making plans for the future — a future without Ponzi borrowing and unsustainable living.
He has what he thinks is a stable job, he said, and he made sure to secure his current apartment before leaving his other property, in case a low score scared away potential landlords. But if something happened with his job, and he had to move, he said his decision to walk away could make everything more difficult.
A future landlord could decide not to rent to him. Insurance companies could decide to raise his rates.
One thing Mr. Sawyer and Mr. Wittenberg do not have to worry about is banks coming after them for the mortgage debt they left behind. California and Oregon are nonrecourse states, which means that lenders cannot take homeowners to court to get that money back. Many other states — including New York, New Jersey and Connecticut, as well as Nevada, a foreclosure hub — do allow recourse. In those cases, walking away can exact a much higher price.
For now, Mr. Sawyer said he felt relief. “We were happy in that home,” he said. “But I didn’t see any other way to resolve this matter without pretty much putting money down the drain for years to come.”
And the financial recovery appears to have started already. Mr. Sawyer was approved last month for a credit card through Capital One. It has a $300 limit and a 22 percent interest rate, but he said he planned to use it and pay it off each month. “I’m going to live within my means and kind of start from scratch,” he said.
Devin Maverick Robins contributed reporting.
The debt-aholic left rehab and went to the bar for another drink. I don't consider that a recovery, I think that is a big mistake.
The bottom line is that most people who strategically default feel a great sense of relief later. The soul-draining debts are gone, and they are free to start over and rebuild a better life.
750 Days on the market
The owner of today's featured property paid $345,000 on 11/19/2003. The purchase price may not be correct as the first mortgage was $344,674. On 11/22/2005 he obtained a $150,000 HELOC which he didn't fully use. On 6/26/2007 he refinanced with a $472,500 Option ARM first mortgage with a 1.72% teaser rate. This investment didn't turn out as planned.
The owner put this property for sale nearly 3 years ago. After 750 days on the market, it's still for sale.
Beautiful 2003 built condo in the Quail Hill neighborhood. Just minutes from Verizon Wireless and the Spectrum. Spacious 2 bedroom home with attached garage. Do not miss out on this great condo and value.
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Proprietary IHB commentary and analysis
Resale Home Price …… $360,000
House Purchase Price … $345,000
House Purchase Date …. 11/19/2003
Net Gain (Loss) ………. ($6,600)
Percent Change ………. -1.9%
Annual Appreciation … 0.5%
Cost of Home Ownership
————————————————-
$360,000 ………. Asking Price
$12,600 ………. 3.5% Down FHA Financing
4.06% …………… Mortgage Interest Rate
$347,400 ………. 30-Year Mortgage
$111,423 ………. Income Requirement
$1671 ………. Monthly Mortgage Payment
$312 ………. Property Tax (@1.04%)
$133 ………. Special Taxes and Levies (Mello Roos)
$75 ………. Homeowners Insurance (@ 0.25%)
$400 ………. Private Mortgage Insurance
$288 ………. Homeowners Association Fees
============================================
$2878 ………. Monthly Cash Outlays
-$260 ………. Tax Savings (% of Interest and Property Tax)
-$495 ………. Equity Hidden in Payment (Amortization)
$18 ………. Lost Income to Down Payment (net of taxes)
Some people who should know better got caught up in the financial mania. Today's story is very instructive. I admire the author for his bravery in admitting his idiocy.
We all do stupid things. I know I have. It's what people learn from their mistakes that counts.
Today's featured article is written by a financial planner in Las Vegas who believed and acted upon every false belief of the housing bubble. He didn't just make a few stupid decisions, he made them all. Rather than being an object of ridicule, I admire his courage to stand up and tell his story.
Since I began writing for the IHB, my focus has always been on educating people on the mistakes of the housing bubble. If the foolish decisions people made are not seen for the folly they were, the mistakes will be repeated. In that regard, I find Carl Richards' story compelling. He appears to have learned from his mistakes, and now he is working to educate others on what not to do. Perhaps he may become a good finanical planner after all. His advice is undoubtedly better today than it was five years ago.
… I’m a financial adviser. I get paid to help people make smart financial choices, and I speak and write about personal finance issues for this publication and others. My first book comes out in January, “The Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money” (Portfolio, a Penguin imprint).The thing that few people know, though, is that I learned a lot of this from experience. I made a bunch of mistakes, the very same ones that I now go around warning people to avoid.
So this is the story of how I lost my home, the profound ethical questions that arose along the way, and what my wife and I learned from the mistakes that led us to that point. It made me better at what I do, but it wasn’t much fun getting there.
… That was May 2003. Housing prices were already crazy, so we rented. But our neighborhood had zero character and lots of cookie-cutter houses. Within a few weeks, we were looking for a place to buy.I felt we could afford around $350,000. We called a real estate agent named Mitch, who had signs on all the bus stops: Talk to Mitch! He picked us up in a gold Jaguar, and suddenly we were looking at houses that listed at $500,000 or more.
It felt a little crazy to be shopping for houses that cost half a million dollars, but my income was growing rapidly. Everywhere I looked, people were being rewarded for buying as much house as they could possibly afford, and then some. There was this excitement in the air, almost like static. I started to think that if I didn’t buy a house right then, I would never be able to afford one.
Fallacy #1: Buy now or be priced out forever. How many people succumb to that fallacy?
At moments during our house hunt, I felt in my gut that something wasn’t right. We’d go to open houses for $400,000 homes and see lines of couples in their late 20s — younger than we were — waiting to get inside. I kept wondering where all the money was coming from. How did all these people make so much?
But prices just kept rising, and when people kept buying, that made it seem safer. I knew from my work as a financial adviser that following the crowd could be costly. But like everyone else, I felt safer in a crowd.
Fallacy #2: There is safety in the Herd. Following the herd is almost always a financial disaster.
We didn’t find anything we liked with Mitch, but one day in September 2003 Cori spotted a for-sale-by-owner sign in a really nice neighborhood. We ended up buying the house and paid the asking price of $575,000. (When we tried to negotiate on price, the owners were amused; it just wasn’t that kind of market.)
We borrowed 100 percent of the purchase price. In fact, I was told I could borrow even more if I wanted. I had perfect credit and a solid income that was growing. But even so, when the lender approved us at 100 percent, it was more than I had expected. I remember thinking something like “Wow. I guess if they’re willing to lend it to us it must be O.K.”
Fallacy #3: Using 100% financing is safe.
I should have known better. No matter how well things are going, borrowing 100 percent of the purchase price of a home is not a good idea. I shouldn’t have relied on someone else to make that calculation, let alone the guy who was making money putting me in the loan. I was a financial adviser, and I never sat down to figure out what it would take to make this work. I just wanted to believe him. And it was so easy to believe he had been right, at least at first. We loved living there. The children went to an awesome public school, and we made some great friends. I could ride my bike to Red Rocks, the wilderness area outside of town. And for a time, the real estate market erased any doubt I may have had. It just kept going up.
One evening in 2006 comes to mind. My sister-in-law was thinking of moving to Las Vegas, and a real estate agent told me about an open house for a new Toll Brothers community. This wasn’t a come-by-for-cookies type of open house; it was held at a Las Vegas hotel ballroom. I arrived to find a line that led down a flight of stairs and out of the front door. Before I got to the front of the line, they stopped admitting people. Then people rushed the door, like it was a rock concert.
The market’s continued strength meant we could borrow even more. It was easy. In late 2004, a year after buying the house, we refinanced our mortgage with World Savings Bank, which later ended up in the hands of Wells Fargo, using one of the pick-a-payment loans that let you choose your own payment each month.
We picked the lowest possible payment, the one that added to our balance each month instead of subtracting from it. And we added a line of credit with Wells Fargo.
Fallacy #4: Option ARMs are a safe form of financing.
Around that time, I left Merrill Lynch to become an independent financial adviser, so it was easy enough to convince ourselves that we were borrowing to pay for the start-up costs.
Fallacy #5: Rising house prices can finance a new business or a spendthrift lifestyle.
There was some truth to that, but we were also borrowing against the house to finance our lifestyle. The line between business expenses and personal ones is sometimes hard to draw when you run your own business, and during those heady times it seemed even harder. But in hindsight it is clear that we were spending more than we should have on things like recreational gear and family trips for ourselves and our four children.
It was extravagant, but it seemed modest compared to what some of our neighbors were doing. Our house was the smallest model in the neighborhood (though at 3,500 square feet it was hardly tiny), and we drove a Chevy and a VW. Cori and I and some of our friends had a lot of conversations comparing our spending habits to those around us. How can so-and-so afford a boat? How are people buying new trucks and four-wheelers and 5,000-square-foot homes? Do they know something we don’t know?
At times, it seemed as if maybe they did. I knew a builder of custom homes who urged me to buy one of his houses for close to $2 million. I told him there were at least a million reasons why I couldn’t do that. He looked at me like I just didn’t get it. He assured me the house was appraised for $200,000 more than the asking price, and that after I lived there I could take out a line of credit to live on while the house went up even further.
The crazy thing is, he was right. The place eventually sold for more than $3 million. When I heard that, I felt a little silly that we hadn’t taken that risk.
Fallacy #6: The high end is immune to price declines from credit problems.
As for our spending, we told each other that we’d catch up later, as my income and the value of our home continued to rise. As late as February 2006, a comparable home in our neighborhood sold for $998,000. We made the classic mistake of projecting recent trends — even extreme ones — into the future.
But slowly — and then increasingly — we began to have a different kind of conversation, “When are we going to stop and just get on top of this?” The solution was always making more money, not cutting back. The fact is, it’s much easier to set a goal of making more money in the future than it is to buckle down and cut back today.
Fallacy #7: You can earn your way out of insolvency. Unless your Nicolas Cage making $20M a picture, once you go insolvent, bankruptcy is likely the only way out.
We never really worried that things would go to pieces the way they ultimately did. But then came the collapse in the stock market. I had clients calling in tears and breaking down in my office. People who had never worried about their portfolios were calling me from their vacations. It was like talking people in off a ledge virtually every day, maybe three times a day, for maybe 90 days in a row.
The range of potential outcomes had gotten so broad in people’s minds that it now included the end of the world. What they wanted and needed more than anything was reassurance that things would be O.K. and that they should stick with the investment plans we had created together. Providing that reassurance had been my job for 10 years or more, but this was the first time that I really wondered if my advice was right.
It was my job to assist them, but I found it incredibly stressful. It didn’t help that we were in increasingly dire straits ourselves. My income fell about 20 percent because my take-home pay depended on the amount of money I managed. At the same time, our cost for health insurance and property taxes kept increasing, and the payment on our mortgage reset higher as well.
By then, housing prices in Las Vegas were falling quickly, and the bank had cut off our home equity line of credit. We quickly got rid of a car and stopped taking trips. I moved into a smaller workspace and cut back on my administrative and marketing costs. Even so, we found ourselves using credit cards as emergency stopgaps.
Fallacy #8: You can borrow your way to prosperity.
Then, the sickness set in. The pain would start in my stomach, and then I’d spend six hours vomiting. It happened once, then three months later it happened again, then one month later it happened yet again. Eventually, it was happening every couple of weeks. The doctors couldn’t find a physical cause.
I know that problem. I've never found myself throwing up from stress, but I have had all-day headaches and days I could not eat. Stress will tear you apart.
Right around that time, it became clear that we might need to get back to Utah, where 90 percent of my (still nervous) clients lived. We spent the summer of 2009 living in my in-laws’ basement in Salt Lake City, while I tried to stabilize my financial planning business. By that fall, I was convinced we had to move back permanently to save the business. But that meant we faced the question of what to do about the house.
By then, we owed over $200,000 more than our original loan balance. …
At first, I dismissed the idea of a short sale. Late that summer, I sat down with a really close friend in Las Vegas, someone I looked up to. He cut to the heart of the matter right away: Why, he wanted to know, were we still making the payments?
Because I have a moral obligation, I said. You pay your debts.
He proceeded to explain that I didn’t have a moral obligation to the bank. I had a moral obligation to my family. I had a contractual obligation to the bank, along with a clear moral obligation to be honest in my dealings. What he was asking was this: Which is more important? Your contractual obligation to the bank or your obligation to your family to preserve your ability to make a living?
I had never thought of it that way. But it made sense. I summed it up to myself like this: I have a contractual obligation to the bank (as well as a moral obligation not to skirt the consequences of breaking it: losing my house and wrecking my credit score). But my moral obligation to my family trumps the contractual obligation to the bank.
I have made the same argument many times. I still believe it to be true.
Cori and I thought about this for months, but we finally decided to let the house go and stop making payments so we could pursue a mortgage modification or a short sale. The fact was, we didn’t have a choice. We simply couldn’t afford it.
I remained troubled by the ethical implications of what I was doing, but I soon started seeing some of my friend’s arguments echoed in the work of Brent T. White, a law professor at the University of Arizona. He and others were arguing that homeowners should act more like companies — taking into account legal and economic reasons for stopping a regular payment rather than “perceived moral obligations.”
That was reassuring in the dead of night while I sat in front of the computer trying to make sense of the world financial markets and my own personal situation. I remember being relieved at discovering a way to frame my decision.
But we didn’t know what would happen in the harsh light of day, and we were scared to death. Would we be kicked out of our house? What would the neighbors think? What would the children think? We worried about the stress on our relationship and even the survival of our marriage. I felt like a complete failure.
I am always amazed when I hear people who are motivated about what they believe the neighbors will think. It reminds me of an old adage: At 20, you worry about what everyone thinks. At 40, you don't care what anyone thinks. At 60, you realize nobody was ever thinking about you. They were all too busy worrying about what you were thinking.
… We were pretty low when we packed up to leave. We hadn’t told anyone about the short sale — not family and only one or two friends. But we sensed that people knew anyway.
We borrowed a truck from a friend who owns a wood mill to move our belongings. Back in Utah, we found a house to rent— much to my relief and after months of being terrified that we’d never be able to find a landlord willing to take a chance on us. I had to tell the owner what had happened. He looked at our personal references and let us lease the house anyway.
People worry they won't be able to rent a house or borrow money after a financial collapse. Most people grossly overestimate the negative consequences of strategic default.
We love where we live now. Still, there are consequences. We lost our home. It’s not clear when we’ll be in a position to become homeowners again.
But the worst thing was my sense of complete failure and powerlessness when I realized that things were out of control and that it was my fault. These days, there is still a sense of genuine regret that I screwed up and hurt myself and other people. I still worry about what others think of my behavior, which is one reason I haven’t shared this story with many people until recently.
… Still, the questions linger. As I ponder all this — and I think about it a lot — it occurs to me that we are a nation of risk-takers. Some of us were overoptimistic; some were ignorant; some were deluded; some were greedy; some just had bad timing. We erred to different degrees. Our experiences varied; each story is different. Now you know mine. The experience has changed just about everything about how I do financial planning and the advice I give in public. For one thing, I am less quick to judge other people’s financial behavior. I’m also more inclined to take into account personal factors that determine how people behave around money.
Just because you make some mistakes about money doesn't mean you shouldn't use that wisdom to notice the mistakes other people make. Mistakes are still mistakes. If you can make judgments and discrenments about what behaviors are wise and which ones are foolish, you don't grow.
I have a friend who is going through a tough time financially. He has a high income, but is burdened by debt from a few real estate deals that went south. He continues to take fairly expensive ski trips. That would seem irresponsible in his situation, and maybe they are.
But I now realize that it is not that simple. Maybe those trips are keeping the guy alive, or saving his marriage or keeping him sane enough to work.
Bullshit. Spendthrift behavior is not going to allow anyone to reach their financial goals. It isn't a matter of judging someone good or evil to notice whether or not their behavior is serving them well or not. I watched a guy at a craps table lose most of his paycheck while his wife was standing there berating him and complaining about having no money to buy diapers for their baby. I don't think that man was well served by his behavior, and I didn't think him evil, but he was clearly pretty stupid. Is that judging, or observing?
As for Cori and me, things are much better now. Moving back to Utah clearly was the right choice. The business is doing well, and we’ve managed to pay down most of our debt. It would be easy to say that we’ve learned our lesson, that we’ll never screw up again.
But it’s not that simple. At times I’m absolutely clear about what makes sense. Then ordinary life choices arise, and things can get cloudy. Should our children play sports that cost money? What kind of family vacation is O.K.? How much is enough?
We’re still working on that last one. But we are asking the question, repeatedly. And the temptation to overspend, to go for it, to tell ourselves that things will work out in the long run, is tempered by a feeling that something big is at stake. …
I question whether or not this guy has figured it out yet. Perhaps this will help:
Turtle Rock 3/2 under $400/SF, under $3,000 monthly cost of ownership
Given how inflated prices still are in Turtle Rock, it's unusual to find a property trading at or below rental parity. Today's featured property is one of them.
WOW!! Priced Reduced to sell NOW!! Great price for this lovely neighborhood!!!Beautiful 'Standard Pacific' Home located on a private cul de sac * * Gated entry w/ Pavers * * Tastefully upgraded Home * * Foyer has Porcelian Tile Flooring * Separate Formal Dining Room * * Formal Living Room w/ Gorgeous Custom Tile Fireplace and Mantel * * Kitchen offers Granite Countertops W/ Tumbled Marble Backsplash & extended spacious counters, Nickel hardware & Stainless Steel Appliances * Recessed Lighting * All Baths have Granite countertops and Customs Mirrors * Master has dual Vanity sinks, large tile shower, walk in closest * Backyard Brick Patio and raised Brick planters * Lemon and Lime trees *
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Proprietary IHB commentary and analysis
Resale Home Price …… $789,000
House Purchase Price … $452,000
House Purchase Date …. 5/16/2001
Net Gain (Loss) ………. $289,660
Percent Change ………. 64.1%
Annual Appreciation … 5.3%
Cost of Home Ownership
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$789,000 ………. Asking Price
$157,800 ………. 20% Down Conventional
4.06% …………… Mortgage Interest Rate
$631,200 ………. 30-Year Mortgage
$162,909 ………. Income Requirement
$3,035 ………. Monthly Mortgage Payment
$684 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$164 ………. Homeowners Insurance (@ 0.25%)
$0 ………. Private Mortgage Insurance
$325 ………. Homeowners Association Fees
============================================
$4,208 ………. Monthly Cash Outlays
-$705 ………. Tax Savings (% of Interest and Property Tax)
-$900 ………. Equity Hidden in Payment (Amortization)
$224 ………. Lost Income to Down Payment (net of taxes)
When faced with an insolvent and bankrupt banking sector, Iceland chose to let them fail. Now while we are struggling, Iceland is recovering. We should have let our banks fail too.
I believe we should have let our too-big-to-fail banks go bankrupt. Many have contended this would have created a global catastrophe of some sort, but I rather doubt it. In reality, a bunch of bondholders and shareholders would have lost a great deal of money, but life would have gone on. The government could have recapitalized the banking system and sold the stock for a profit when the economy recovered. In the end, we bailed out a group of people who should have lost money, and crippled our economy.
Would the recession of 2008 have been worse if we let our banks fail? Sure. It would have been very painful, but it also would have been over. It's better to take a band aid off quickly and get the pain over with quickly than endure the slow bleed we are now. I'm not the only one who believes this to be true.
Three years after Iceland's banks collapsed and the country teetered on the brink, its economy is recovering, proof that governments should let failing lenders go bust and protect taxpayers, analysts say.
The North Atlantic island saw its three biggest banks go belly-up in the October 2008 as its overstretched financial sector collapsed under the weight of the global crisis sparked by the crash of US investment giant Lehman Brothers.
The banks became insolvent within a matter of weeks and Reykjavik was forced to let them fail and seek a $2.25 billion bailout from the International Monetary Fund.
After three years of harsh austerity measures, the country's economy is now showing signs of health despite the current global financial and economic crisis that has Greece verging on default and other eurozone states under pressure.
“The lesson that could be learned from Iceland's way of handling its crisis is that it is important to shield taxpayers and government finances from bearing the cost of a financial crisis to the extent possible,” Islandsbanki analyst Jon Bjarki Bentsson told AFP.
Iceland refused to have taxpayers absorb the private losses. They endured a brief period of severe economic contraction, but now its over. The taxpayers don't have a lingering debt, and the economy is recovering more robustly than countries which chose to bail out their banks.
“Even if our way of dealing with the crisis was not by choice but due to the inability of the government to support the banks back in 2008 due to their size relative to the economy, this has turned out relatively well for us,” Bentsson said.
Iceland's banking sector had assets worth 11 times the country's total gross domestic product (GDP) at their peak.
Iceland bailing out the banks was never an option because the problem was too big. It turned out to be a blessing for them. Rather than be saddled with a generation of debt, the Icelandic taxpayers have a clean slate. What do we have? How many trillions of dollars will this cost us?
Nobel Prize-winning US economist Paul Krugman echoed Bentsson.
“Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net,” he wrote in a recent commentary in the New York Times.
“Where everyone else was fixated on trying to placate international investors, Iceland imposed temporary controls on the movement of capital to give itself room to maneuver,” he said.
That's an accurate description of what happened. Iceland bailed out Main Street while allowing their Wall Street to go belly up, and they are better off for it.
During a visit to Reykjavik last week, Krugman also said Iceland has the krona to thank for its recovery, warning against the notion that adopting the euro can protect against economic imbalances.
The problem Greece, Italy, Spain and Portugal are having is caused by their being the in Euro. If they still had their own currencies, they would print their way out of debt and inflate away the problem. The resulting decrease in the value of their currency would boost their exports and rebalance their economy. It's what we will ultimately do to correct the problem too. Notice nobody is talking about austerity here in the US.
“Iceland's economic rebound shows the advantages of being outside the euro. This notion that by joining the euro you would be safe would come as news to the Spaniards,” he said, referring to one of the key eurozone states struggling to put its public finances in order.
Iceland's example cannot be directly compared to the dramatic problems currently seen in Greece or Italy, however.
“The big difference between Greece, Italy, etc at the moment and Iceland back in 2008 is that the latter was a banking crisis caused by the collapse of an oversized banking sector while the former is the result of a sovereign debt crisis that has spilled over into the European banking sector,” Bentsson said.
“In Iceland, the government was actually in a sound position debt-wise before the crisis.”
We were running a large deficit due to Bush's policies, so our government wasn't as healthy as it was when Clinton left office, but we could have chosen to allow the banks to fail and recapitalized the system. We didn't have a soverign debt problem until we decided to absorb the banking sector losses and run up a massive debt (thank you Obama).
Iceland's former prime minister Geir Haarde, in power during the 2008 meltdown and currently facing trial over his handling of the crisis, has insisted his government did the right thing early on by letting the banks fail and making creditors carry the losses.
“We saved the country from going bankrupt,” Haarde, 68, told AFP in an interview in July.
Haarde was absolutely correct. I wish Bush would have had the courage to be a Republican back in 2008 and let the free market work. Instead, Bush chose to socialize the losses. Karl Marx would have been proud.
“That is evident if you look at our situation now and you compare it to Ireland or not to mention Greece,” he said, adding that the two debt-wracked EU countries “made mistakes that we did not make … We did not guarantee the external debts of the banking system.“
Like Ireland and Latvia, also rescued by international bailout packages and now in recovery, Iceland implemented strict austerity measures and is now reaping the fruits of its efforts.
So much so that its central bank on Wednesday raised its key interest rate by a quarter point to 4.75 percent, in sharp contrast to most other developed countries which have slashed their borrowing costs amid the current crises.
Iceland devalued its currency, rebalanced its flow of funds, and now they can raise interest rates to stabilize its currency and continue with their economic recovery.
It said economic growth in the first half of 2011 was 2.5 percent and was forecast to be just over 3.0 percent for the year as a whole.
David Stefansson, a research analyst at Arion Bank, told AFP Iceland hiked its rates because it “is in a different place in the economic (cycle) than other countries.
“The central bank thinks that other central banks in similar circumstances can afford to keep interest rates low, and even lower them, because expected inflation abroad is in general quite (a bit) lower,” he said.
Iceland has hit bottom and is recovering because they made a different decision than we did in 2008. We should have let the banks fail, nationalized them, recapitalized the system and endured the pain. We would be much better off now if we had.
Five years and 50% off
Back in 2007 I predicted Irvine house prices would falter by 39%. Some would fall more and some would fall less. Today's featured property is one that fell more.
The loan owners of today's featured property paid $326,000 using a $309,700 first mortgage and a $15,300 down payment. They refinanced on 2/22/2007 for $320,000 and got all but $6,000 of their down payment back.
Standard sale . Tranquality awaits you at this charming turn-key home with patio overlooking a peacful stream and lush grounds. Minute to Irvinespectrum. one bedroom condo located close to Irvine vally collage. This condo has loundry inside and installed shelves in living room.
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Proprietary IHB commentary and analysis
Resale Home Price …… $169,000
House Purchase Price … $326,000
House Purchase Date …. 1/12/2006
Net Gain (Loss) ………. ($167,140)
Percent Change ………. -51.3%
Annual Appreciation … -10.8%
Cost of Home Ownership
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$169,000 ………. Asking Price
$5,915 ………. 3.5% Down FHA Financing
4.06% …………… Mortgage Interest Rate
$163,085 ………. 30-Year Mortgage
$55,102 ………. Income Requirement
$784 ………. Monthly Mortgage Payment
$146 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$35 ………. Homeowners Insurance (@ 0.25%)
$188 ………. Private Mortgage Insurance
$270 ………. Homeowners Association Fees
============================================
$1423 ………. Monthly Cash Outlays
-$70 ………. Tax Savings (% of Interest and Property Tax)
-$232 ………. Equity Hidden in Payment (Amortization)
$8 ………. Lost Income to Down Payment (net of taxes)
Shevy Akason and Larry Roberts will host a short sale and REO workshop at 6:30 PM Wednesday, November 16, 2011, at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618).
I have no agenda to spin the data. Let's see what is really going on. I want to be accurate. People can make their own decisions and draw their own conclusions from accurate data. If approached without the built-in bias of a realtor, data analysis can be revealing rather than deceiving.
I will still have a dog in this hunt. I do run a business that makes money from real estate transactions. I am subject to the same biases as any other human being. I sell real estate, but I am not a realtor. The truth needs no salesman. I will present data as accurately as I can. If reality motivates you to buy or rent, the IHB can help you. I have no desire to manipulate data in order to make a quick buck. This is a part-time hobby for me, not my livelihood.
I now have accurate data which is updated each month. I have been presenting this data at our monthly IHB presentations. Now, I have created the first IHB monthly newsletter which presents this data in a format anyone can download and read at their leisure.
This is a work in progress, but I am pleased with what we have so far. Take a look for yourself and tell me what you think in the comments. Constructive criticism will be greatly appreciated. Any questions about the data or its presentation will help me improve future newsletters.
National Association of Realtors Chief Economist Lawrence Yun forecast Friday that U.S. home prices will go up from 2% in 2012, part of a gradual improvement that will continue through 2014.
In addition, Yun told reporters at the NAR annual conference in Anaheim that he now pegs the probability of a new recession at 10% to 15% — down from his estimate six months ago of a 30% probability of renewed recession.
Although he believes the U.S. economy would “be teetering on a recession” if the Euro debt crisis expands, he said he doubts that will happen and predicted that the crisis will be contained in Italy.
“The market has been tough, but there are some developing positive signs,” Yun told a mid-day news conference at the Anaheim Convention Center. “As a result, there will be a recovery occurring next year, and it will continue in 2013 and 2014. It is not a great robust expansion. … But it is a moderate recovery.”
Yun also forecast that rents will rise for the next five years.
Specifically, Yun said:
U.S. home prices will rise 2% to 3% next year, 3% in 2013 and 4% in 2014.
Existing home sales will increase 4% to 5% in 2012. This year’s sales are projected to be up 1% to 4.96 million housing units.
Rent will increase 3% in 2012 and 3.5% in 2013 and 2014.
There you have it. House prices will rise next year. Therefore, we are at the bottom. It would be laughable if were printed in the Onion. But Yun actually pretends to have credibility, and some potential buyers actually believe him.
Yun noted that people buy a home today will see some price appreciation in future years. But the recovery will be too slow for people who bought homes at the peak of the market bubble and may not see prices back to what they paid for 10 years or more.
“It will be quite a long time for people who bought right at the peak to gain recovery,” he said.
Yun noted that distressed properties – foreclosed homes and underwater homes – now make up a third of all housing transactions in the U.S. That will remain unchanged next year, and will be only slightly better in 2013, he said.
“Distressed property sales will be with us for the next two years. The question is, will the buyers be there to sop up sales?” he said.
Also speaking Friday was Richard Peach, senior vice president at the Federal Reserve Board of New York, who was less optimistic about prospects for housing.
Citing a host of economic data from income ratios and savings rates to bond yield spreads, Peach concluded that the U.S. economy continues to operate well below its potential. He said also that the bulk of foreclosures and mortgage defaults lie ahead.
“I’m not as sanguine about the future prospects of home prices,” Peach said.
So where would you rather get your real estate market information, the IHB or the NAr?
Short-Sale and REO Workshop
Shevy Akason and Larry Roberts will host a short sale and REO workshop at 6:30 PM Wednesday, November 16, 2011, at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618).
Peak buyer got two years of squatting
The former owner of today's featured REO paid $835,000 on 3/13/2006. They used a $636,000 first mortgage, a $64,000 HELOC, and a $135,000 down payment. The down payment money is now gone. They did manage to obtain two years of squatting before the auction.
Beautiful, spacious and bright property within a gated community! House offers vaulted ceilings, new carpet, 3 bedrooms, and 2.5 baths! The master suite has walk in closet and jacuzzi tub. Enjoy granite kitchen counters with a breakfast bar, and a cozy fireplace in the living room! This property has so much to offer- must see! Highly desired Evergreen complex with pools, parks, clubhouse, tennis court and tot lot. Popular schools nearby.
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Proprietary IHB commentary and analysis
Resale Home Price …… $615,000
House Purchase Price … $835,000
House Purchase Date …. 3/13/2006
Net Gain (Loss) ………. ($256,900)
Percent Change ………. -30.8%
Annual Appreciation … -5.3%
Cost of Home Ownership
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$615,000 ………. Asking Price
$123,000 ………. 20% Down Conventional
4.06% …………… Mortgage Interest Rate
$492,000 ………. 30-Year Mortgage
$133,757 ………. Income Requirement
$2,366 ………. Monthly Mortgage Payment
$533 ………. Property Tax (@1.04%)
$133 ………. Special Taxes and Levies (Mello Roos)
$128 ………. Homeowners Insurance (@ 0.25%)
$0 ………. Private Mortgage Insurance
$295 ………. Homeowners Association Fees
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$3,455 ………. Monthly Cash Outlays
-$385 ………. Tax Savings (% of Interest and Property Tax)
-$701 ………. Equity Hidden in Payment (Amortization)
$175 ………. Lost Income to Down Payment (net of taxes)
Iceland bailing out the banks was never an option because the problem was too big. It turned out to be a blessing for them. Rather than be saddled with a generation of debt, the Icelandic taxpayers have a clean slate. What do we have? How many trillions of dollars will this cost us?
The former owner of today's featured REO paid $835,000 on 3/13/2006. They used a $636,000 first mortgage, a $64,000 HELOC, and a $135,000 down payment. The down payment money is now gone. They did manage to obtain two years of squatting before the auction.