Distressed Homeowners Ponder Whether to Stay or Go

[question everything]

NOVEMBER 24, 2009

Distressed Homeowners Ponder Whether to Stay or Go

By JAMES R. HAGERTY
WSJ

SCOTTSDALE, Ariz. -- Brian Gindlesperger says he has never been late on a mortgage payment and considers paying off his loan "the right thing to do." But as the value of his home continues to fall, he is starting to wonder whether paying his debt is the smartest thing to do. Four years ago, Mr. Gindlesperger, a police officer, and his wife Kelly, a real-estate agent, paid $650,000 for a four-bedroom house in this wealthy Phoenix suburb. They believed they were getting a bargain price for the area and made a 20% down payment, using a 30-year fixed-rate mortgage to pay the balance. To help pay for their eldest daughter's college costs, home improvements and a wedding, they took out a second mortgage against their home. Now they owe about $647,000 on the two mortgages.


But home prices on average have dropped about 48% in the Phoenix area since peaking in mid-2006, according to the First American CoreLogic index. Mr. Gindlesperger figures his home now probably is worth only $375,000 to $425,000, even though it comes with a four-car garage, a pool and a 1.2-acre lot. Zillow.com, a Web site that makes home-value estimates based largely on recent sales of nearby properties, pegs their house at $374,000. Families like the Gindlespergers are among millions of Americans who are "underwater" on their mortgages, owing more than the current value of their homes, and they face a dilemma: Keep making payments and hope for the best -- or walk away, give up their home and accept the seven-year blemish of a foreclosure on their credit record.

No one is forcing the Gindlespergers out of their home, but sometimes they have to dip into savings to make their mortgage payments. Like others who are underwater, they lack a cushion of equity that would protect them if illness or a job loss slashed their income. That makes them more vulnerable to foreclosure because they couldn't count on selling their home for enough money to satisfy their lenders. Only a huge rebound in home prices -- something that appears unlikely in the near term -- would give the Gindlespergers a shot at having equity in their house again.

Some of their neighbors have walked away from mortgages they saw as losing bets. That is tempting because the Gindlespergers could rent another house for much less than they now pay each month for their mortgages, property taxes, insurance and maintenance costs. On the other hand, they don't want to move. "It's our home. We have horses. We have dogs," says Mr. Gindlesperger. The Gindlespergers still aim to hang onto their house and wait for a stronger economy to boost its value.

But they can't wait for better days indefinitely, Mr. Gindlesperger says. "I've got a trigger point." If the family savings fall below a certain point, they would have to consider all options, including an attempt to sell the home for less than the loan-balance due and get the lenders to agree to forgive the rest of the debt -- a transaction known as a short sale. "We've always been responsible homeowners," he says. "We're sitting here draining our assets to keep current" on the mortgage. But, at some point, he adds, "you have to limit your exposure to being a victim in this."


Printed in The Wall Street Journal, page A4

http://online.wsj.com/article/SB125902556993561567.html (subscription)

=====

I wonder whether, on other occasions, he dislikes "big government" I really cannot feel sorry for him. If anyone should be helped, it is the ones who purchased homes according to their means and now lost their jobs and health care. Or who are faced with huge medical expenses.

[TwilightGardener]

1. You make a bad investment, then tough crap. You bought into the bubble--pay up.

That's what I'm doing--I probably paid a little too much for my house, too, because it was a seller's market when we moved here. But them's the breaks.

[FBaggins]

2. There should be no "pondering" for him

If he purchased a new car three years ago, it isn't worth what he paid for it... or likely even what he owes on it (if he borrowed to purchase it). Should he walk away?

Entirely missing from this man's calculation is simple character. How about "I promised to pay 'x' every month for thirty years and I'm obligated to do so if I possibly can" ???

If he lost his job or had a major illness thats one thing. That hasn't happened... he HAS a choice and is wondering whether he should be a man of his word... or take the money and run.

It's sad that he even has to "ponder".

[question everything]

3. This is really one of the sad "side effects" of this recession

It used to be that people, as you say, felt obligated to stand by their word, their signature, their - dare I say it? - character. It used to be that people were embarrassed by having to declare bankruptcy.

Now it is a matter of course, perhaps even a badge of honor, on how people can "play" the system.

If he can work with the lender - this is one thing. I have to wonder how a police officer and a realtor could have even qualified for such a purchase, so let the banks "ponder" whether to take losses and to let the owners keep the home. But leave the government and tax payers out of the equation.

[JuniperLea]

5. Why should someone feel obligated to pay a loan...

That is upside down due to the corruption of others? This particular guy maxed out his mortgage with re-fi's, and that wasn't smart, but there are millions of people who are watching their new neighbors buy homes exactly like theirs for half price. Through no fault of their own, they are paying twice the going rate for their home. Not fair, not even right.

One might say that people shouldn't use their homes as an investment... the only problem with that argument is that for the past 35 years, the real estate industry has pushed real estate for precisely that reason. How is it right to all of a sudden, without warning, put on the brakes and say, "No, your home is no longer an investment. Deal."

[FBaggins]

7. Is that the "two wrongs make a right" or

the "cops are looking the other way" defense?

Corruption somewhere in the system is not an excuse to "get some of that" for yourself.

The fact that something isn't your fault is not an excuse to back out of your commitments.

Through no fault of their own, they are paying twice the going rate for their home. Not fair, not even right.

It isn't an issue of "fair" or right and wrong. You don't have a right to the lowest possible price for something. Some stores will make a guarantee, but that's not because you have a right to it. If you buy something for $10 today and find them giving it away for $2 six months from now... there is no issue of "fairness". You agreed to pay that price at the time - that's as "fair" as it gets.

Homes generally ARE "ivnestments"... but there's no guarantee that your investments will always pay off.

Note also that it appears their main source of income was the wife's real estate sales... which likely provided LOTS more income when they purchased the home than it does now. If you consider the whole thing to be the results of corruption in home sales... then they were a part of it (or at least in a position to know it).

[JuniperLea]

10. Really bad straw man...

$600k to $300k isn't exactly the same as a coat from Nordstrom.

[FBaggins]

12. Actually... it's EXACTLY the same thing.

Not at all a strawman... just trying to simplify it for you. I can try harder if you need it?

How about "when you promise to do something... you should do it" ???

It doesn't matter whether it's a million dollar item or a gumball.

[BR_Parkway]

18. Actually that 'investment' would pay off - at the end of the 30 years

you'd have a place paid for to live in - but that part always gets left out of the equation. It's funny, we never had these huge bubbles until people let common sense go and decided that they all deserved to get wealthy for doing nothing (homes and stock market)

[FBaggins]

20. Not by the standards of some of the posters here

You are of course correct that the person would get what they paid for... but too many of the posters here seem to think that if it isn't worth a certain amount then it didn't pay off.

By your standard what is there for them to be upset about? They're still in the home they wanted paying the mortgage payment that they agreed to. Nobody jacked their payment up or rezoned so that they're next to a highway isntead of a forest. The only real change is that if someone else wanted to buy their home from them... they wouldn't pay as much of the current owners did.

[question everything]

9. The old reply: and if someone told you to jump off the roof?

So what if the industries told you to treat your home as an investment, to use it as an ATM? Don't you have a brain to think for yourself?

You know how much you can afford and with how much debt you feel comfortable or how much risk you can tolerate. No one else can do this for you.

Even when you fly, chances are the person sitting next to you paid half as much for the ticket.

And even if the house next to you was sold for the same amount as yours - you don't know the financial situation of the owner, whether he is one paycheck away, one medical bill away from walking away, which will affect the value of your home.

You invest in the stock market and your investment tanks - whose fault is it? Unless you can prove that your broker misled you. Or it just a global melt down and we all lose our investments, as secure and as safe we thought they were.

When we purchased our first home, my father in law recited the "golden rule": a home should cost no more than twice the annual salary and we pretty much followed that rule with five homes that we have had so far. The only exception was California in the early 90s and then we started looking at interest rates - at the monthly payment and for how long. But even then, I remember our realtor told us that the price of the house could drop for several years which I think it did, and then bounced back.

At the height of the bubble, I remember reading about a realtor in California who stated that if your house is paid free and clear, that you do not manage your investments well...

Last year I posted here a story about two buyers, each purchasing a home at ten times their annual income and, of course, losing them. One was a librarian in New York earning $40K purchasing a $400K Duplex but never managed to rent the second unit. She blamed her realtor. Another, a real estate professional in Florida, making $1 million - in the good days - and purchasing a $10 million mansion.

[JuniperLea]

11. Again... really bad analogies, very poor straw man...

The banks and wall street were bailed out... yet there were no guarantees. And a $600k home to a $300k home isn't anything close to airfare. It's going to take 20+ years for those homes to double in price and for the owners to break even. For most people this is the largest investment in their portfolio.

I'm not talking about people making lame investments, I'm talking about people who are suffering through no fault of their own.

So much for liberal progressive...

[FBaggins]

13. When did "no fault of their own" become a defense for unethical behavior?

When did THAT become part of liberalism?

Also - How do you know it's no fault of their own?

How do you know that the people who WILL take that loss are more at fault than the guy who is electing to stick it to them?

[barb162]

33. If you buy a a suit for 500 and wear it once, do you not pay off your credit

card bill for that month since the suit is worth a lot less after you've worn it?

[FBaggins]

6. No need for much "daring" to say it.

It IS an issue of character.

In lending, whether you learned the four, five (or soetimes even six) "C's of credit", one of them was always "character". This does not question whether someone can afford to pay... or whether the collateral is sufficient to support the loan. It's a simple measure: Given the ability to pay the loan back, will he?

I've known people who declared bankruptcy and had their debts forgiven by the court... yet when they got back on their feet they went back and paid off their debts anyway. "I said I would... and so I will unless I'm dead"

[barb162]

32. I tend to look at it like you do.

That car example. You buy a suit or shoes or a lot of things and as soon as you wear them once....

[Uben]

4. damn, I need to become a cop!

A police officer can afford a $650K house? How much does he make in Phoenix? Our local cops barely make enough to pay rents. I know because I rent to them!

[FBaggins]

8. It's probably the wife.

Keep in mind that a few years ago they were making really impressive sums of money.

Anyone who has been in the RE business for enough years (whether realtor/atty/lender/etc) could have told them that you need to set aside some savings in the "hot" years because they don't last forever.

So their real problem has little to do with the value of their home. They're eating into their savings because realtors aren't making anywhere close to what they once did (and have to work much harder to boot!)

[Robb]

14. I'm missing the ethics issue here, I guess.

You buy a house with borrowed money. You agree to pay the money back over time.

You sign a contract, wherein there's all kinds of language that explains what happens if you don't. Such as the lender taking the house.

You don't pay it back, those things you agreed to have happen, happen.

...What's the ethical dilemma? If the bank takes a bath on the agreement, the bank failed to adequately protect itself in the contract.

What am I missing? :shrug:

[pa28]

15. I wish people would analyze these situations like any business decision.

This couple has choice. They can take positive action and arrange to share loss and penalties with the bank or they can passively allow themselves to become indentured servants to that same bank which in all probability will be laughing up their sleeves at them anyway. It sounds like they are pragmatic people who are leaning toward the right decision.

As for the moral issues surrounding this I also wish people would realize financial institutions have identified the desire to honorably settle debts and have acted to exploit it in a very cynical way.

From "The recovery plan from hell"

I learned the reality a few years ago in London, talking to a commercial bank strategist there. “We’ve had an intellectual breakthrough,” he said. “It’s changed our credit philosophy.”

“What is it?” I asked, imagining that he was about to come out with yet a new junk mathematics formula?

“The poor are honest,” he said, accompanying his words with his jaw dropping open as if to say, “Who could have guessed?”

The meaning was clear enough. The poor pay their debts as a matter of honor, even at great personal expense. Unlike Donald Trump, the poor are less likely to walk away from their homes when market prices sink below the mortgage level. In today’s neoliberal Chicago School language, the poor behave “uneconomically.” That is, they make choices that do not make economic sense, but rather reflect a group morality. This sociological gullibility is what made them rich pickings for predatory lenders such as Countrywide, Wachovia and Citibank."

http://www.informationclearinghouse.info/article21969.htm

[FBaggins]

16. If that's the choice, then they already made it

They actively "allow(ed) themselves to become indentured servants to that same bank" when they signed the mortgage. This isn't (at least not as reported) a case of some kind of ARM where the payments rose out of proportion to anything they could have anticipated... they knew exactly what they were getting (and one of them is a realtor who no doubt understood their options). they went in with eyes open and it didn't work out.

financial institutions have identified the desire to honorably settle debts and have acted to exploit it in a very cynical way.

Lol! Yeah... they made a loan to someone who they thought would repay it. When did THAT become a problem? The loans we have a problem with are the ones that the banks "knew or should have known" could NOT be repaid. There's no evidence of that here.

[pa28]

21. I like this particular example.

The people in this story mirror the situation of many others around the country so it's a good template for discussion.

If I were in this situation I'd probably feel the same way these people sound. Frightened by the effect of a massive debt on my financial future whose nature has changed since it's inception. They now have a quarter of million dollars in debt that is completely non-accretive to them and representing no asset of any kind other than the possibility the house grow in value very quickly.

These people made an error and stretched themselves to the breaking point. To keep their integrity they could deplete their savings, struggle to pay on a shrinking income for 20 years and still end up losing the house if they should suffer lost income. I really hope nobody would accuse them of being dishonorable people for approaching the bank with a current appraisal and negotiating a short sale.

Bottom line is the bank and the borrower are just parties in a business arrangement. It's possible there is language in their mortgage that allows the bank to call in their loan. Let's say in the next five years interest rates went up to historic highs or inflation began to seriously erode the value of the debt. Calling in the debt from the borrower and foreclosing would be a decision the bank would make as a matter of self interest. Honor or moral virtue would never enter into their calculation. That's one example but just in general I'd be careful about assuming banks are the party with moral authority.

IMO there is no reason why individuals cannot be practical in their decision making process when so much of their future depends on starting to make good decisions to replace the bad ones.

[FBaggins]

23. Banks can't "call in" a mortgage any longer

unless it's specifically a balloon loan. Or, of course, if you default. If you make your payments as agreed, they have no option to back out on their end of the deal.

That's one of the things that caused the Great Depression and has been illegal since then.

You're correct that it's a "business arrangement", but the arrangement doesn't say "I have two options". It says "I agree to pay". The lender has options once you default on your legal obligations.

The other thing that people here keep missing is that the REASON they're having trouble now is not because the home value has gone down. It's because their income has gone down. There's no way a policeman earns enough for a $650,000 mortgage. His wife is a realtor and obviously was making a killing four years ago.

If you're one of the people that thinks the banks and the realtors conspired to inflate home prices and loan amounts... then this couple isn't "a good template" for other couples around the country... they're one of the "bad guys" who caused the problem. I don't feel bad for the "flippers" who made a killing for a few years and are now stuck holding the bag on dozens of properties they can't sell... that's the risk you take. Similarly, a realtor should recognize that their business is incredibly cyclical and not live off of high income years as if "it will always be that way".

I feel bad for them... but I don't feel as if they deserve to get out from under their mistakes at the expense of people who DIDN'T make the same mistakes.

[Robb]

27. Well, not true, actually.

I have seen a lot of "accelerate for any reason" language in DOTs in the last five years.

That said, you're putting a moral stance on an amoral issue. And you're absolutely wrong, the contract in essence says "I agree to pay ... or these things happen." If it was as simple as "I agree to pay," the contract would be a single page long, like a promissory note. But it ain't, and there's a reason.

As an attorney friend of mine once pointed out, consider the number of pages you sign to buy a house compared to those you sign to get married... there are automatic legal ramifications to marriage that are simply not there in a loan.

Put another way, the "default" (pardon the pun) position is in the borrower's favor. A promissory note shows this in its brevity and enforceability (or, ultimately, the ways a borrower can escape it). The 150-page docs you sign to borrow against a home are a number of pages where you sign away many basic rights afforded to you otherwise.

You want us to feel bad for the banks because once or twice in a lifetime, the market is such that this situation is reversed and in the homeowners' favor?

...Or is it a "I didn't do anything wrong, but all you defaulters are making my housing investment go south?"

If the latter, guess what: you also fucked up. There's no moral issue here, either. If you bought in a neighborhood/state/country where everyone's going belly up, you made a bad investment, no matter what you believe about all the right decisions you made.

Suck it up.

[FBaggins]

29. Nope... it was exactly true.

Your post appeared to be spelled correctly... but little else was accurate.

If it was as simple as "I agree to pay," the contract would be a single page long, like a promissory note. But it ain't, and there's a reason.

It isn't just "like" a promissory note... a mortgage note IS a promissory note. There are a bunch of other documents involved in transfering ownership of the property, title insurance, allowing the note to be sold, and securing the loan with the real estate... but the note IS quite simple and short. It really IS just "we promise to pay"... not "we have the option of paying OR 'x'"

I have seen a lot of "accelerate for any reason" language in DOTs in the last five years

Not on a mortgage you haven't. Once again... it simply isn't legal and hasn't been so for decades. Morgages are not callable loans. Absent defaulting on the mortgage, they cannot call it in on demand. You could have a balloon mortgage, but then you would know it up front and that isn't really "called" anyway.

Let's make it real simple. You seem to have an unusual amount of respect for the banks (though perhaps you don't realize it). With their desperation for capital, what one Earth do you think has KEPT them from doing this if it weren't illegal?

[Robb]

30. You're arguing language.

...What is, for example, "securing the loan with the real estate" if not the "or 'x'" we're talking about?

And the language defining reasons the bank can consider you in default have become extremely broad in the past few years. Yes, it's not "calling" the loan, it's redefining what "in default" can mean, which is any number of things which 99% of homeowners are not in full compliance with.

My last note (OK, two notes ago) included, as reasons the bank could consider me "in default" and accelerate the loan immediately:

- renting all or part of the property to another party,
- running afoul of any local ordinances, such as lighting or fence codes (and yes, these are named specifically), and
- failing to maintain the property at a level acceptable to the bank.

The last one included phrasing allowing for an inspection, what kind of notice I would get, etc.

Now, of course, I've never been inspected by the bank. No one has ever checked to see if I've rented the property, or whether I'm in full compliance with the "Dark Skies" ordinances of my little town. It would be cost-prohibitive.

BUT the fact remains that if they wanted to, they could begin to find any number of reasons to find me in default, and call the loan in. I've never seen that kind of stuff until the past few years. Maybe the lawyers are just getting better. :)

Let's make it real simple. You seem to have an unusual amount of respect for the banks (though perhaps you don't realize it). With their desperation for capital, what one Earth do you think has KEPT them from doing this if it weren't illegal?

Why on earth would they actually want to foreclose on a property in this market? 1 in 7 homes are 90 days late or more in this country, yet actual foreclosures are flat. I think the best question any of us could ask is exactly what you have: why, when the banks have more tools and infrastructure at their disposal than they've ever had for doing so, is the rate of actual foreclosure so low in comparison to how screwed up the payment on the loans is?

I believe it's because even a late loan is worth more on the books than a home that won't sell. I think the "money" knows we're not at bottom yet in real estate. If we were, you're right, they would be taking advantage of a rising market scenario.

[FBaggins]

31. Not really

or at least... not entirely. It's arguing language in the sense that "no" and "yes" are arguing language.

What is, for example, "securing the loan with the real estate" if not the "or 'x'" we're talking about?

When arguing the difference between "I agree to pay - and if I don't YOU have options" and "I can choose to pay or give you the home"... you don't get anywhere with that question... as the loan would need to be secured either way.

And the language defining reasons the bank can consider you in default have become extremely broad in the past few years

That's really not true. The definition is pretty straightforward and hasn't changed. If anything, banks are LESS likely to declare a default today. It's perfectly reasonable for the bank to require you to avoid things that would damage the collateral value of the property. They're required for decades, for instance, that you maintain your property insurance.

NONE of that adds up to the bank being able to call in a loan just because it wants to.

Why on earth would they actually want to foreclose on a property in this market?

A year ago banks were on the verge of total collapse for lack of capital. Calling in the loan would improve that immediately.

1 in 7 homes are 90 days late or more in this country

It's bad, but it's nothing like that bad. I think Fannie's current 90-day number is about 3.5% - The national rate is higher, but even the subprime rate is barely that high. Moreover... that's the rate for homes that HAVE a mortgage. You would be surprised how many homes are owned outright.

[pa28]

28. I get the feeling your last point is the money point.

The value of my property has tanked too. There are many reasons for it including short sales and foreclosures but this one bothers me the least.

Once there is liquidation of the bad at least the debtor can participate in the economy again rather than being a perpetual servicer of interest. Many in this situation would eventually fail in the end anyway.

It's tough to take all the pain at once but it might be the best hope for an authentic recovery.

[Name removed]

26. Deleted message

Message removed by moderator. Click here to review the message board rules.

[northernlights]

17. I don't see the ethical dilemma

Contractually they can either continue to pay the loan or they can hand the house back and lose their credit-worthiness for some years.

FWIW, I went through the condo meltdown after St. Ronnie killed that market back in the late 80s. I bought at the peak, when rents had skyrocketed so high it was more expensive to rent than buy, and a few short years later, they were selling for a half the mortgage I owed...and that was *after* I'd put 20% down.

Many, many people turned in their keys and walked, pushing prices even lower. I hung in, paid off my 30 year mortgage in 10 years, lived there dirt cheap for a 7 more years and sold it at a small profit with my credit rating intact.

I own my house outright now and can't sell it without taking an enormous bath. And I mean enormous. Yet I don't now, nor did I then, resent the people who choose to bail. They were equally legal paths, each with different benefits and different repercussions.

We have *all* been fucked over by our Financial Overlords. We need to do what we can to get through it.

It is hard for me to feel terribly bad for the people in the above article, though. They bought too much house in too much neighborhood...so they put themselves into their pickle. :shrug:

[AtheistCrusader]

19. Oh god, my half million dollar+ house and horses

I should have so many 'problems'.

Fuck 'em.

[dixiegrrrrl]

22. The owners have a big surprise coming if they walk.

As I understand it, once you re-fi/2nd mortgage, you have a recourse loan.
The lender not only can come after your house, but most of everything else of value you own.
I do not know if Arizona also has first mortgage recourse laws. Some states do.
But most states, I have been told, have re-fi recourse laws.
It is what serves as brake to me if I am ever tempted to get a 2nd on our house.

[FBaggins]

24. I don't know about AZ (on edit - ok... now I do)

but it varies from state to state and you generally don't have to refi.

If you borrow $200,000 and defauly and they can only recover $150,000 from the home... you still owe them $50,000.

It's different in CA and (I think) a few other states that limit the recovery to whatever the home is worth... but as I said above, it generally isn't "I agree to pay or you can have the house"... it's "I agree to pay and if I don't you can take the house and I still owe you the difference".

The other option of course is the short sale route where the bank agrees to accept whatever the house brings.

Where the second mortgage (home equity/etc) comes into play is that you are generally personally liable for that amount even in states were you wouldn't be liable for a deficiency on the first.

A last item to consider is that defauting on the mortgage generally crushes your credit about as much as a bankruptcy... so the borrower can always go down that road.

Edit - AZ law generally doesn't permit a deficiency suit (the way they go after that reamining balance) IF the home is a single-family or single 2-family dwelling AND sits on less than 2.5 acres.

A home that cost $650,000 and has horses is likely to be over that line.

Ick... 2nd edit. The OP says it's 1.2 acres. Who keeps horses on one acre? Must be a development that's made for horse owners (or they're kept elsewhere).

[northernlights]

25. from what I understand

it's not uncommon in the built-up areas of the southwest to have horses on tiny acreage. A shitload of work (literally) but they don't really have any grazing so have to feed hay anyway unless they have many, many acres per horse, which only billionaire ranchers can afford.
So that situation is more common than many realize. (Not my cup of tea; it's real culture shock to people with a few acres of pasture/horse.

[roamer65]

34. Delete.

[roamer65]

35. Solution?

Devalve the dollar until their house is worth $650K again.:sarcasm:


That is exactly what the Federal Reserve is attempting as we speak.