A Realistic View

In an article today, billionaire investor George Soros told an Austrian daily, the Standard, that the United States is threatened with recession and the world is facing the worst financial crisis in half a century. I live in California and of course was interested in learning that lenders repossessed 31,676 residences in California in the October-November-December period, according to DataQuick Information Systems, a La Jolla research firm. That was a dramatic 421.2 percent increase from the same quarter last year.

If you have read my posts I think you realize that I am a true believer in the need to focus on the equity you have in your property before jumping to conclusions about which course of action you should take to resolve your particular situation. I sense often times that the approach followed by many is one narrowly focused on "saving their home from foreclosure." To be blunt, foreclosure for many of you may be the best solution given your particular situation. Before a rain of criticism comes, I'll be equally blunt by suggesting that many of you got yourselves into this mess because you didn't adequately do your homework at the time you decided to follow the path of financial misadventure. Maybe this time, before advancing down the path of loan modification, it might make sense to do your homework in a manner that follows a cost/benefit approach.

Key factors that seem to be ignored are relatively simple to measure. Ask yourself if the monthly cost of ownership (principle, interest, taxes, and insurance) exceeds the fair rental value of the property? If the answer is yes, then in a depreciating real estate market, where you have no equity in the property, your actions may simply be throwing good money after bad. Another important consideration is whether the borrowings associated with your real estate purchase are recourse or non-recourse in nature. Non-recourse debt effectively means that you are not personally liable for the debt and the lender's sole recourse is to foreclose on the home.

I think too that there is an idea out there that just because a homeowner successfully achieves the objective of obtaining a modification of their loan, their situation is dramatically improved. A number of outside factors, including market conditions will have more direct impact on what the future holds.

Daniel

[Tom H]

Professor,

Any guy who can bankrupt a country probably knows what he's talking about. I had thought you were in Florida, I'm in California also and I get what you're saying. I think it's good advice, although I'm afraid my debt is 'recourse' as it was a refi - I have heard that even still non-judicial is usually the way banks go in California.

I am still asking for the loan modification and will see where it leads, but if home prices fall another 20% or so - which happens to be about $100 grand or so in this market, I don't see any point in pursuing the modification route any further. I can come back here in 18 months and repurchase a similar house on a 50% off sale. I see your point, and thus far I don't see what I'll gain from a mod b/c in my case I'm probably just going to move (relocate) this summer anyway - so I'm in a different boat than most altogether.

However, you have to compare apples to apples and in more realistic markets with prices much more down to earth that 10 - 20 percent in loss may be worth the effort to avoid the inconvenience if possible.

Tom

Alrighty then - if that equation is to be taken at face value and promulgated to the final result I am an idiot. Once upon a time in the mid and late 1980's I lived in the great state of Colorado. Foreclosure bullseye of the world - 60 minutes came to town that did the famous One Hour episode on us - Foreclosure Capital of the Country. More per capita foreclosures than ever experienced anywhere, any time in the United States. We were in deep "stuff", horribly deep "stuff". Yes I was in the industry and like everyone struggling to keep food on the table and a roof over my head.

Oh - No, the balloon Mortgages (First Private Contract, Second Institutional) on my property came due, appraised the place, with the First and Second - I was underwater by over 40,000.00. I owed more than the joint was worth, forget the equity I had in it gone - evaporated, what an idiot - I of all people should have at least had a clue.

What to do, what to do - the Institution holding the Second and the Private Contract on the First wanted their damn money. I did not have the collateral to support the initiation of a new loan, let alone even consider having the courage to ask an institution to go that far out on faith (I wasn't that idiotic was I). Yes I was that idiotic - Hell this was my home I had over 25,000.00 in the place when I purchased it in cold, hard cash. I loved living here, it was HOME and I was damned if I was going to move.

So.....in all deference to the Bank that held the Second - I made them a deal, and it took eons to get the deal done, NOD was filed by the first during this hellicous time. I cobbled together over 11,000.00 and by the grace of god, knowing what I knew then about lending and property, and the almighty greed that pervades our Banking Industry (they already had REO out the @ss), I consummated the DEAL. Aside - I suspect their regulators were PO'd, really PO'd, but who cares, I was saving my home at that point who give a rusty rip about a regulator. I won, looking back at that dark time, kind of surprises me today - what happened to that feisty, never let 'em see you cry soul.

Yep, crusty, do buy something if it does not have a return ol' me, but I intended to stay there until dead and get buried in the back 40. Practically everyone I knew, Realtors, Lenders, Bankers, Appraisers, Parents, Business Partners', etc... told me what an idiot I was. The market was shot, values would never return, economic disaster. But there was something else driving me - then, I had hope, an abiding belief that there was something better, something more fair and equitable that the world would and could provide and that if your belief systems drove that and you actions support that, inherently it would be true. I believed that there was fairness and honesty, that you stood up for what you believed in and owed. You did the right THING no matter what. You got it, I was a hell of a lot younger and stubborn, I truly believed in the good fight for the right "stuff". I also knew something else - the old laws of Real Estate - it goes down and it goes up, sooner or later, that law holds true over the period of time you own it. Hold it long enough - it will go through a couple of those cycles, be tenacious enough and you will recoup your investment. Real Estate, home or not is a long term investment.

Twelve years later or so - I sold the place, did not want to - but this one I could not fight (lesson number 2 - do not get terminally ill in America, if the illness don't get ya' the finances will). At that point I realized a net equity of over 275,000.00 (yes I had paid the mortgage down some, but not that much). The damn place came back, of it's own volition, it was a long term investment.

Property is not a short term investment folks - it is a long term, not disposable and certainly not trivial investment. It is your home, and good, bad or indifferent it is where you live. There is a degree of your identity and self esteem tied into that equation, forget for the minute the "economic soundness" there is YOU tied into that home. Now, having said that there is the economic issue - how long before it becomes an asset instead of a loss leader? Who knows, I certainly do not, my experience aside it maybe 10 or 12 years, or it could be 5 or 6 years, there is no crystal ball that will give that data. This particular cycle does not have any models, we have had encapsulated and regional experiences of this magnitude, but never national or as seriously pervasive. As said before this this is a long term investment - not disposable.

So.....having said all of the above, less than important, and certainly an example of my folly.....we need to determine value in terms of self and in terms of dollars and cents. Combined, there is that balance of self and investment - and in this society our ethos has rapidly developed into waste and disposability. In my humble opinion - your house ain't disposable and it is a long term investment. Each person though in this situation needs to take a personal and financial inventory and make the final decision for themselves. It is a deeply personal and private decision and can not, I believe be boiled down in the final analysis to the almighty dollar. There has to be hope, there has to be that abiding belief that you are doing the right thing either way.

So you betcha this is an emotional decision, all the way around....there is no way to take the emotion out of this decision and if we have not gone through it, lived it for a period of time and seriously had those dark moments, boiling it down to the convenience of economics is just not that easy. Who knows what the future holds, whatever it is, it is not what the present is.

[Moe Bedard]

Poppy,
You are so right.........
At least now we here in Colorado, have the dubious distinction of being number "6"...
yay we are going down in the ranks.....

Alot of the issues in California and Nevada (number 1 and 2 states) are those toxic neg am/option arms. They were definately not right for everyone but a great majority of people were put into these loans that didn't quite understand the overall ramifications of such a loan. Borrowers were not being qualified on the fully amortized payments but instead on the lowest interest only payment, which of course sounded to good to be true.........I mean a 500-600k house for around 1200 a month what a deal.
Because you are one of the good guys I would venture that your office didn't do too many if not any of these types of loans. Just as my clients would not have even been offered such a horrendous loan.
I really love your insight around here!!!

Yes - but last 2006 Colorado was number 1 and part of 2007...in 1987 through 1991 (tapered off in 1991), Colorado was a disaster area, 200+ foreclosures a week in Colorado Springs metro area at one time. 60 Minutes did a really hard hitting and further economically devastating one hour expose on the "troubles" - really hit Colorado hard back then. Colorado had the distinction of being the top most foreclosures ever in the history of the US per capita at that time, and it may still hold it was that bad.

Correction to original post "Do NOT buy something..." can not figure the edit segment of this forum..... not a geek.