Posted on 12/09/2009 10:03:59 PM PST by TigerLikesRooster
American Dream 2: Default, Then Rent
By MARK WHITEHOUSE
PALMDALE, Calif. -- Schoolteacher Shana Richey misses the playroom she decorated with Glamour Girl decals for her daughters. Fireman Jay Fernandez misses the custom putting green he installed in his backyard.
But ever since they quit paying their mortgages and walked away from their homes, they've discovered that giving up on the American dream has its benefits.
Both now live on the 3100 block of Club Rancho Drive in Palmdale, where a terrible housing market lets them rent luxurious homes -- one with a pool for the kids, the other with a golf-course view -- for a fraction of their former monthly payments.
"It's just a better life. It really is," says Ms. Richey. Before defaulting on her mortgage, she owed about $230,000 more than the home was worth.
People's increasing willingness to abandon their own piece of America illustrates a paradoxical change wrought by the housing bust: Even as it tarnishes the near-sacred image of home ownership, it might be clearing the way for an economic recovery.
Thanks to a rare confluence of factors -- mortgages that far exceed home values and bargain-basement rents -- a growing number of families are concluding that the new American dream home is a rental.
Some are leaving behind their homes and mortgages right away, while others are simply halting payments until the bank kicks them out. That's freeing up cash to use in other ways.
(Excerpt) Read more at online.wsj.com ...
Ping!
Even moreso in Las Vegas
My sis, who works in the banking biz tells me rents are about 1 / 2 of the old payment.
Easy to move up, and so long as Bammy is running things, unlikely to get better.... for the banks.
I am one of those still looking for work and we are on a three month payment plan with chase. We have made the three payments with no problems and we do not want to walk away.
We have to submit new paperwork again and we will see if they will extend these payments or foreclose on us.
I really do wish and hope they will work with us instead of forcing us out into the streets.
Sorry to hear that.
I hope you can get it all worked out, and get back on your feet.
Won’t the bank pursue them for the difference in property value when they sell it?
BINGO.
> Won’t the bank pursue them for the difference in property value when they sell it?
Generally, no.
So-called “recourse loans” which are common in other parts of the world are, for some reason, not prevalent in America.
Time for the taxpayers to default on the salaries, benefits, and pensions of government “workers” like these.
Well Glass Steagle ws undone by former Treasury Secretary Paulson, it took him two concerted attempts but he did the deed and we are suffering from it. Our banking system has reached 2/3 the size of our GDP and the consumer is super saturated with debt. This credit cycle is over.
Donald Trump leaves his creditors sitting on worthless paper twice and he is idolized.
Someone $200K underwater leaves his creditor sitting on worthless paper and he is demonized.
The contract was signed between two parties that specified the consequences of a default. These individuals are willing to accept those consequences - so what is the problem?
If I was in the same situation I would do the same particularly considering the behavior of banks (ie B.S. credit card fees, holding your payments to make sure you get hit with penalties and interest etc, out right lying to you). Not to mention taking all the Treasury and Fed money to cover up their gambling.
Uh, sounds as if they are SPENDING lots of money.
No, the banks didn’t act immorally. Don’t try to spread the blame. If you take a loan from someone, you, and only you, are responsible for paying it back.
To any significant degree, how exactly did the banks know the loans wouldn’t or couldn’t be paid back or the properties would be destroyed? Did the folks taking these mortgages state they weren’t going to pay or were going to destroy the homes? No, they signed agreements stating they WOULD pay and they had to submit documents (in the vast majority of cases) proving they had enough income to pay the payments.
So don’t try shift blame on everyone like a liberal does. Everyone is not guilty. All that does is spread the blame so much that everyone is effectively absolved or no one is guilty enough to be penalized. Yeah, the “system” did it, everyone made a mistake, etc. That’s a cop out!
I have accounts in 3 banks and almost every other month Citibank hits me with a monthly service charge in error.
I call them and they immediately remove it and apologize, but I have to think they do it on purpose figuring they can steal millions from people who don’t notice or think they should be paying the fee when in fact they had an average balance which exempts them.
Certain states prohibit lenders from pursuing borrowers for the negative equity portion. Arizona, for example.
Having said that, why did lenders like BofA and Wells lend 5% down loans in a bubble market with zero deficiency judgments?
I argue that lenders KNEW the risks lending in these markets and now people are strategically defaulting and the banks are whining about it. Sure, borrowers are morally obligated, but lenders and the gub’mint have an obligation to behave as well. They didn’t either!
Citibank held a credit card payment that was sent seven days in advance of the due date (going within the state even). They credited one day after the due date. I called and raised heck, and they removed it. I later signed up for an Amex Card which was an extension on my Mastercard account (these give American Airline miles). I was assured that no fee was involved - that it was covered with the MasterCard fee. I get the first Amex statement, and it had a fee associated with the card. It was an outright lie. They fixed it after I got real ugly over the phone. Once I get my miles (reach my anniversary date for the next fee) - we will part company permanently.
Recourse loans are much more prevalent in the United States than “no recourse” loans are. The frothiest of the bubble markets were in those states that are “no recourse.”
Certainly here in NC, you can be pursued for a deficiency judgment, for any shortfall between the amount owed and the amount the property fetches at auction or through an REO bank sale. No bubble here, either, unless it was second home properties on the coast, large recreational lakes and mountain resorts. Even most of these could be had at peak for less than a normal 1800 sf, 3 bedroom, 2 bath ranch in a decent neighborhood, in much of California.
The half-million plus that was normal for a regular house there, would have gotten you a very nice executive home in any city, or a lake house, or an oceanfront condo, here. Still does, just cheaper by 10-15%, generally speaking. Some areas haven’t fallen back that much, and a few not at all. Compare to urban and suburban California, -50%.
They knew going in, that they could walk with little consequence. It fuelled the speculation.
Banks knowingly lowered their standards, and then took bailouts and didn’t spend the taxpayer money the way they said they would when they asked for the money. The people who took the loans are to blame, and should pay them back, but the banks are not blameless.
Agreed!
Good post. The demise of Glass-Stegall came about after Citigroup had been in violation of G-S for a year or two. Rather than enforce the law Clinton signed the Graham-Leach-Bliley Act that effectively repealed the last of Glass-Stegall. It was actually Robert Rubin rather than Henry Paulson who helped undo Glass Stegall, not that Paulson is any better. If you’re interested in the topic Charlie Gasparino’s “Sellout” is a good book to read.
“To any significant degree, how exactly did the banks know the loans wouldn’t or couldn’t be paid back or the properties would be destroyed? “
Mortgage lenders jettisoned their traditional lending practices before the year 2000. With the invention of CMOs, CDOs and various other credit derivatives loan originators didn’t intend to hold the paper they generated. They sold it off to Wall Street where it was bundled and tranched and sold to investors. And the originators of the loans very often were not employees of the lender, they were loan brokers whose sole interest was in completing the loan, not worrying about its suitability or the ability of the client to service the loan.
To make matters worse the banks and Wall Street seriously underestimated the risk inherent in what they were doing and the rating agencies were compromised as well. Not that anyone cared because everyone involved was making tremendous amounts of money until it all blew up.
Lenders like other fiduciaries have a lot more financial knowledge than the majority of their clients. At one time it was inherent in the lending structure that they be prudent, since lenders kept their own paper and if they were reckless then they went broke. They wouldn’t give out bad loans. That built in restraint is now missing, and during the bubble lenders gave out a huge amount of crappy loans and many people in the industry were fully aware of it. The only part that surprised them is that they became collateral damage when the bubble collapsed.
Banks have been loaning money for about 1500 years now. Before the CRA they had come up with a pretty sure fire way to vet applicants. 1500 years of practice will do that for you. The CRA forced them to loosen their standards, and they knew that eventually this was a time bomb that would explode in their faces. Rather than choose to get out of the loan business, and force Congress to repeal the CRA, they chose to bundle, securitize and sell the loans. That way when they blew up, it would be on someone else’s balance sheet. They chose greed over principle, just as the people who walk away from loans choose greed over principle.
We agree there. What they should have done is quit lending money to anyone until Congress relented and let them determine what loan standards should be.
Something along those lines has become a popular story among radio hosts but it’s a case of special pleading. Blaming CRA is a convenient club for beating Democrats, which is always good fun, but it doesn’t accurately reflect the root of the problem. CRA loans constituted far too little of the subprime universe, and besides that CRA loans were conforming loans. The real excitement was in the liar loans, the Option ARMS, the NINJA loans (no income, no job, no assets). These were creations of the lending industry and Wall Street. They were time bombs waiting to go off.
The driving force behind subprime lending was the voracious pursuit of high yield mortgage paper by the likes of Bear Stearns, Morgan Stanley, Citigroup, Countrywide. The whole investment banking and mortgage origination industry. A lot of these people weren’t even covered by CRA. They were making incredible amounts of money off of the stuff and had waiting lists of months for the CDOs that they created out of subprime paper. Securitizing these loans was part of their business model, it freed up their capital for a new round of lending. They really weren’t doing it to avoid risk and in fact a lot of them simply had stopped paying any attention to risk. They weren’t about to stop what they were doing because the money was too incredible, so why worry about it?
There have been several good books on the development of the bubble written by people who were close to the industry. “Chain of Blame” by Muolo and Padilla, “Sellout” by Charles Gasparino, “Fools Gold” by Gillian Tett. You can find articles and interviews with these authors on the internet to get an idea of what they have to say.
bumpmark
The CRA opened the door to non-conforming loans. Once banks knew they could sell them, they care not whether the loan ever got paid back. I don’t club Dems because it’s convenient, although it is, I club them because they are destroying they country. Sometimes with the help of RINO’s. So, if your lender doesn’t care if you pay the loan back, why should you? Personal responsibility? That is a good reason, and admirable, but Wall Street doesn’t exhibit those traits any more than borrowers do. If you want people to be responsible with the money you loan them, you must be a responsible lender. Don’t be frivolous with your money. That includes paying $200 million bonuses and whatnot. Companies should be allowed to do that, but they shouldn’t cry foul when borrowers get sick of it and walk away.
Everyone has responsibility in this mess.
“The CRA opened the door to non-conforming loans. “
If that were true you would have a good point. But Wall Street investment banks learned of the high yields to be made in subprime lending by studying early hard money practitioners like Aames Home Loans and Household Finance. Aames and HFC long predated the CRA and were wholly independent of it. Wall Street took over that market and vastly expanded it. It provided tremendous profits while it lasted. CRA loans were in fact conforming loans, which made them far lower yielding than the non-conforming loans that were the invention of Wall Street.
“I don’t club Dems because it’s convenient,”
I didn’t have you in mind. I was thinking of some celebrity commentators who try to reduce every issue to mere politics. The credit collapse was largely the result of innovations in the credit and derivatives markets, which had little to do with politics. The politics that were involved were bipartisan efforts that removed regulations such as Glass-Steagall and reserve requirements.
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