Dumping the American Dream.

by sammielee24 10 Replies latest social current

• 

  sammielee24

  How many of you would walk away from your mortgage? Do you think it's a smart move or unethical? sammieswife.

  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.

  Rethinking the American Dream

  

  The housing bust has brought big changes to the 3100 block of Club Rancho Drive in Palmdale, Calif. See details on the homes, debts and residents.

  "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.

  Ms. Richey's family of five used some of the money to buy season tickets to Disneyland, and plans to take a Carnival cruise to Mexico in March. Mr. Fernandez takes his girlfriend out to dinner more frequently. "We're saving lots of money," Ms. Richey says.

  The U.S home-ownership rate has charted its biggest decline in more than two decades, falling to 67.6% as of September from a peak of 69.2% in 2004. And more renters are on the way: Credit firm Experian and consulting firm Oliver Wyman forecast that "strategic defaults" by homeowners who can afford to pay are likely to exceed one million in 2009, more than four times 2007's level.

  Stiffing the bank is bad for peoples' credit, and bad for banks. Swelling defaults could also mean more losses for taxpayers through bank bailouts.
• 

  Simon

  Depends on the mortgage agreement ... very often, banks will allow you to do this on face value but you still owe the debt and they can keep coming after you for years to come - even if they foreclose and sell the house below value, you still owe the remainder.

  Also, it is a short term situation ... at some point the market will level and adjust itself and rents will rise.

  Rents rise with inflation, a mortgage is a point in time snapshot.

  The problem is with the low-inflation economies we've been conned into believing is a good thing. Once upon a time inflation would have eroded the cost of a house to make it affordable (so people who'd bought ages ago always appeared to have tiny mortgages). Now, instead, house price inflation makes older mortgages 'cheaper' BUT it also made homes less affordable for current buyers.
• 

  VIII

  Here is a very good article from Realty Trac (trade publication) on the hows and whys of why people are walking away. Below is a small snippet:

  The idea of walking away from a mortgage remains far beyond the norms of either socially-acceptable or financially-responsible behavior. No less important, the act of walking away has substantial consequences.

  For most borrowers the threat of a monetary judgment cannot be ignored. Under federal rules, judgments can remain on credit reports for seven years or “or until the governing statute of limitations has expired, whichever is the longer period.”

  In many states, judgments remain in force for 10 years — a period which can be extended for an additional 10 years if the judgment is renewed.

  Not only do judgments remain on credit records for many years, lenders routinely require that judgments must be repaid before new credit will be granted for larger loans, such as those used for cars and homes.

  The result is that those who walk away from mortgages may be pauperized for decades because they will be unable to get credit at reasonable cost — if they can get credit at all.

  “In the same way that we expect lenders to meet baseline standards of conduct, we must also have the same expectations with borrowers,” says James J

  . Saccacio, chief executive officer of RealtyTrac.com, the online foreclosure site that receives more than three million visitors each month. “The idea that

  walking away from a mortgage is somehow acceptable should be seen for what it is: A destructive notion that will result in sharply-higher mortgage rates for all

  borrowers, something any thinking person should vehemently oppose.”

  http://www.realtytrac.com/contentmanagement/realtytraclibrary.aspx?channelid=8&itemid=4271

  Personally, I think people who purchased homes that are now underwater created the problem. Yes, they can rent for less. What is your credit worth? What is the judgement worth? You still have to work out all the details with the bank and there are legalities that need to be worked out. Everyone loses.
• 

  JeffT

  Back in the day, the point of owning a home was to provide stability for your family. As a co-worker said when this trouble started his parents (who are about the same age as my parents) bought the house and made their fixed rate mortgage payment on time every month for thirty years and now the family owns the house free and clear. My parents did the same thing, although they actually paid a little extra principal each month and were done in less than twenty years. This isn't as hard as you think, an extra few bucks each month in the first few years knocks an entire payment off the back end of the loan each time you pay it.

  A big problem for our economy was created by people who refinanced several times in a rising market, pulling out the equity which they then blew taking the kids to Disneyland or whatever. Now they're leaving the banks holding the bag. I'm unemployed now because my last boss, a real estate investor, was doing that with his properties. I have no doubt that many here would say he's a greedy businessman (I would probably agree). I don't see the difference between him and these people.
• 

  Sam Whiskey

  I'm torn on this issue. Having been in/from the mortgage industry, it's a two edged sword. If you default (walk away) you should consider bankrupcty, and get it all over with. Credit cards, vehicles and whatever else you want to walk away from. The upside is it gives you a fresh start, the down side is it will ruin your credit for about three years...not seven. Federal law makes the purchase of a new home available in three years after a mortgage default, two years after a bankruptcy...if...your income qualifies you. Really, it's not that bad. Just rent for three years. Better yet, find some schmoe that's NEEDS to get out of his house and make a purchase contract with him/her. By producing a purchase contract of the mortgaged home (the mortgage is still in his/her name) you're in the drivers seat, and in most cases, the homeowner will just let you "take over payments". Now that you're the legal owner of home, making payments directly to his/her bank, you qualify for a "refi" after just twelve months making payments.

  Yes, you heard it right, a little known secret in the world of finance. However, if you have defaulted on a previous mortgage within the previous three years this "refi" will not work. But...you can still "take over payments" until the three years passes. Then...refi it into your name. You may even be able to negotiate with bank on a short sale price from the previous owner since the home is no longer worth what it was, thereby giving you huge break.

  Back to the article, I DO feel that, as in the instance of the lady in the article, the home is worth significantly less what is owed, walking away should be considered. If you bought a home for $500K and it's worth $200K, how will it take to get back $500K? Maybe never! However, this mindset leads to other things. If you buy a new Cadillac SUV, you could argue that one year later it's worth only about 60% of what you paid for it, should you return it to the lender? In most cases, you keep the car and make the payments even though it's not worth anywhere near what you paid for it (or what the bank is holding the note for).

  You could reason the same way on Credit Cards. "Gee, I bought that new couch two years ago, and look at it, it looks horrible. But...hmmm...I still owe the Credit Card company $1,500.00 on it, should I default on the Credit Card because the couch is such bad shape and it's no longer worth what I paid for it?" Do you see where this goes, it's endless. You could just default on everything, you might as well. If you default on one thing, you might as well on all the things you don't want to pay for, the result on your credit report will be the same.

  The difference with the credit cards, is that a credit card is considered "unsecured debt". So...buy a car on a credit card and then default? Guess what? You may get hounded from the CC company but the car was bought on the CC and therefore considered unsecured debt, you get to keep it, just like the couch they wouldn't take from you. However, the CC co. may take you to court to get a judgement against for the amount owed. If that happens, you're back to step one, bankruptcy. But...in a bankruptcy....YOU get to dictate the value of car...within reason.

  I could go on for hours, but alas, my fingers wouldn't take it. I'll be happy to answer anyone's questions.
• 

  sammielee24

  I suppose that when I read the article myself, it is only making a parallel between what has happened with the big banks, Wall Street, the Insurance companies, government and on down the line throughout all of society.

  There was a time that we all worked within a social contract...and that seems to be gone. Greed has taken over at every level and we still haven't seen anyone held accountable for the mess we are in - no matter what level they were at from top to bottom. When professionals, as these two people were, are playing the game and walking away, I can't fault them because they are taking care of themselves first and hasn't that become the name of the game? It doesn't matter if the additional bank losses are picked up by the taxpayer as they take a trip to Disneyland, they are surviving in a culture that we have fostered over generations. I don't blame them because they haven't broken the law and they are better off to have walked away - why should they keep taking a hit when we still see all the shoddy business at the top going on?

  These people were in California where the banks can't go after them for the balance remaining, so it's easier for them and I think in their position, I would probably do the same - except I'm not so sure that I would spend that disposable money now on Disney and season tickets ....sammieswife.
• 

  sammielee24

  This is the rest of the article.....sammieswife.

  -----------------------

  Analysts at Deutsche Bank Securities expect 21 million U.S. households to end up owing more on their mortgages than their homes are worth by the end of 2010. If one in five of those households defaults, the losses to banks and investors could exceed $400 billion. As a proportion of the economy, that's roughly equivalent to the losses suffered in the savings-and-loan debacle of the late 1980s and early 1990s.

  The flip side of those losses, though, is massive debt relief that can help offset the pain of rising unemployment and put cash in consumers' pockets.

  For the 4.8 million U.S. households that data provider LPS Applied Analytics estimates haven't paid their mortgages in at least three months, the added cash flow could amount to about $5 billion a month -- an injection that in the long term could be worth more than the tax breaks in the Obama administration's economic-stimulus package.

  "It's a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again."

  Journal Community

  • Vote: Have you moved from home ownership to renting over the past two years?

  As the stigma of abandoning a mortgage wanes, the Obama administration could face an uphill battle in its effort to keep people in their homes by pressuring banks to cut their mortgage payments. Some analysts argue that's not always the right approach, particularly if it prevents people from shedding onerous debts and starting afresh.

  "The effect of these programs is often to lead homeowners to make decisions that are not in their economic best interests," says Brent White, a law professor at the University of Arizona who has studied mortgage defaults.

  Few places in the U.S. were better suited to attract true believers in home ownership than Palmdale. A farming community that expanded in the 1950s to accommodate the aerospace industry around nearby Edwards Air Force Base, the city more than doubled its population from 1990 to the present as it became the final frontier for Los Angeles-area workers looking to buy.

  About half of Palmdale's 147,000 residents endure a daily commute that can extend to two hours or more one way. In return, they get a homestead in a high-desert locale of haunting beauty, with Joshua trees dotting the landscape, and real-estate developments locked into a master grid of streets with anonymous names such as Avenue O-8 or Avenue M-4.

  • The 3100 block of Club Rancho Drive, built by Beazer Homes mostly in 2002, captures the essence of Palmdale's appeal. Winding along the southern edge of the Rancho Vista golf course just south of Avenue N-8, its spacious homes, verdant lawns and imported birch and sycamore trees exude a sense of middle-class tranquility.

    Club Rancho became a solid community of owner-occupiers, many of whom stretched their finances to the limit. As of the end of 2007, total mortgage debt attached to the 13 houses on the block for which records are available had reached $4.5 million.

    Fast-forward to the end of 2009, and the picture changes radically. Thanks to a 50% drop in home prices, at least two owners on the block now owe between $60,000 and $160,000 more on their mortgages than their houses are wor
• 

  sammielee24

  In the process, the block's total mortgage debt has fallen 37%, to $2.7 million.

  Much of Club Rancho also has converted to rentals, a shift mirrored across Palmdale. Five homes on the 3100 block are now occupied by renters, up from only two in 2007. In the past six months, at least three families have moved into those rentals after walking away from other homes.

  Ms. Richey, the teacher, arrived in Palmdale in 1999. In 2004, she and her husband, Timothy, bought a two-story home on Caspian Drive, near Avenue O-8, with a no-down-payment loan. They took pride in the amenities they installed: a powder room with granite countertops, a backyard pool and play area, and the purple-and-turquoise fantasy playroom upstairs for their three daughters.

  But the value of the house plunged to less than $200,000 in 2009. Their $430,000 mortgage, with its $3,700 monthly payment, began to look more like an unwanted burden. By May, amid troubles getting tenants for two rental properties she also owned, Ms. Richey decided the time had come to cut a deal with America's Servicing Co., a unit of Wells Fargo & Co. servicing the mortgage on the house.

  After three months of wrangling, she says she finally received a modification approval. The new monthly payment: about $3,300, far more than she had hoped. A Wells Fargo spokesman confirmed the bank offered Ms. Richey a modification under the Obama administration's Making Home Affordable program, and said, "The Richeys turned down the lowest payment we could offer."

  Ms. Richey and her husband had already been working on Plan B -- exploring the neighborhood's "For Rent" signs.

  On one trip, they drove by the house at 3152 Club Rancho Drive. It was bigger than their house on Caspian, had a pool with three waterfalls, and boasted a cascading staircase that Ms. Richey says she could picture her daughters descending on prom night. The rent was $2,195 a month.

  The situation presented Ms. Richey with a quandary now facing more than 10 million U.S. homeowners who owe more on their mortgages than their houses are worth.

  On one hand, walking away from her home would be easy. California is one of 10 states that largely prevent mortgage lenders from going after the other assets of borrowers who default. But she also had to consider the negatives. Her credit could be tarnished for years and, perhaps most importantly, she feared her friends and neighbors might ostracize her.

  "It was scary," she says, noting that people tended to keep such decisions to themselves for fear of being stigmatized. "It's still very hush-hush."

  Tom Sobelman, whose family of four lives across the street from Ms. Richey, at 3127 Club Rancho Drive, sees mortgages as a moral as well as financial obligation. He's still paying the mortgage on an investment property he owns nearby, despite the fact that the rent is about $1,000 a month short of covering his costs.

  Mr. Sobelman, 37, argues that people who choose to default are unfairly benefiting at the expense of taxpayers, who have put trillions of dollars at risk to bail out struggling banks. "All these people are gaming the system, and I'm paying for it," he says. "My kids are going to be paying it off."

  Mr. Sobelman has plenty of company. In a recent study of people who owe more on their mortgages than their houses are worth, economists Luigi Guiso, Paola Sapienza and Luigi Zingales found that about four out of five believe defaulting on a mortgage is morally wrong if one can afford to pay it. But they also found that the people become 82% more likely to say they'll default if they know someone else who defaulted.

  Moral or not, the individuals who want to shed their mortgage debts are quickly transforming the Palmdale real-estate market.

  Adam Robbins, who runs the local Realty World franchise and manages about 80 properties, says about 90% of his prospective tenants are people in Ms. Richey'
• 

  Robdar

  SW:

  The difference with the credit cards, is that a credit card is considered "unsecured debt". So...buy a car on a credit card and then default? Guess what?

  Yes, credit cards are unsecured debt but an automobile is always a secured debt. Depending on local rules of Chapter 13 bankruptcy, the debt may be divided into secured and unsecured portions but it will depend on how long you have had the vehicle and its worth.
• 

  VoidEater

  I was in a meeting today.

  A Project Manager said, "Let's go ahead and break Federal law in the way we process credit card payments. After all, it's not likely that the Feds will impose their maximum fine of $1,000 per transaction."

  There was no hint of embarrasement or trepidation in breaking the law. The only concern was the likelihood of prosecution, which she evlauated as very low.

  Ethics has become a simple matter of business. If the cost can be avoided or absorbed, following agreements or laws is stupid.

  I realize there are times when agreements or laws may be broken; however, living by ethical standards has become something to be shunned when simply inconvenient, or when greed allows an advantage. Failing in ethical standards used to be a safety net when all else fails.