UPSIDE-DOWN
The inflation of housing prices has been a major cash cow for many of those with the same business ethics as Dan Stephenson. Remember the brain fever? People who stood in lines for hours just to sign?
The old work-around was called the 'balloon payment' and this little financial loophole led to much indebted misery in the past. It is not unreasonable that the new loophole, the 'interest-only' loan, will have much the same effect to the new homeowners who are beginning to understand how short two or five years can be.
To believe that real-estate can only continue up, up, up; is this naive? People who come up short on their mortgages sometimes use credit cards to keep up until things improve, but even if they can somehow manage to make it, then they will get the property tax bill on $350-500,000, combined with CFD special assessments. This is the straw that will break the camel's back, providing that extra little push to send homeowners into bankruptcy.
So a smart-minded conservative would do well to hoard their credit, because there will soon be plenty of short-sells to go around.
The old work-around was called the 'balloon payment' and this little financial loophole led to much indebted misery in the past. It is not unreasonable that the new loophole, the 'interest-only' loan, will have much the same effect to the new homeowners who are beginning to understand how short two or five years can be.
To believe that real-estate can only continue up, up, up; is this naive? People who come up short on their mortgages sometimes use credit cards to keep up until things improve, but even if they can somehow manage to make it, then they will get the property tax bill on $350-500,000, combined with CFD special assessments. This is the straw that will break the camel's back, providing that extra little push to send homeowners into bankruptcy.
So a smart-minded conservative would do well to hoard their credit, because there will soon be plenty of short-sells to go around.
posted by J. L. Kunkle at
Monday, December 05, 2005
14 Comments:
Quotes pushed up from Ed and Anon 8:13 in a previous post
From Edward Faunce
Anon 11:51 said: ". . . a lot of those loans soon are going to convert to loans where they have to actually have to start paying down the principle as well as the interest and that will push them beyond their financial limits."
Yes, but there are at least two other changes which could make the "real estate" bubble worse than the dot.com situation.
First, credit card companies are now required to bill for more than just interest. If I remember correctly, the monthly billing amount must include a payment against the principle which would pay the balance off in ten years. I haven't heard yet whether failure to pay, or a late payment, of this additional charge will activate the credit card company's right to increase the interest rate. But don't be surprised if they do. This is going to hit the consumer at the same time that they get hit with the increased mortgage payments.
And by the way, the increase in interest rates on credit cards can be triggered by a late mortgage payment even if you are not late on your credit card payment.
Second, the new bankruptcy bill may eliminate the consumers' ability to walk away from major debts, e.g., upside down mortgage payments.
Imagine, having to make a mortgage payment on a house you've had to walk away from because you cannot meet the balloon payment. Your credit card interest payment jumps to 20 to 30% and you'll never be out of debt - but of course you're not bankrupt for purposes of getting a fresh start.
I thought debtor's prison had been abolished.
This scenario is brought to you by our esteemed republican led congress and administration -- the same one that just gave us a drug plan that is so rediculously complicated that seniors will be unable to figure it out.
God help us because our leaders have been bought and paid for by the corporations!
Edward Faunce
From Anon 8:13
Ed - Thanks for your intelligent comments on the frightening relationship between the bankruptcy bill and the housing bubble. I have wondered why we have not heard more (than almost nothing thus far) about this subject. I fear we are looking at a future of indentured servitude in this country, with the credit card debtors becoming literally the servants of big time collection agencies (now backed up by power of the courts in addition to their famed harrassment techniques). A related scenario I fear is that if the real estate market and economy will concurrently slide backward (to whatever degree), people will (as they historically have done) use credit cards as short-term stop gap measures to keep up their house payments. If the economic slide then continues, an ever deepening trap is set from which there is no escape for the homeowner. The home and the credit card become "married" to the debtor, and any "divorce" in that strict union now becomes more painful and bitter than it has ever been before. The full ramifications of this inevitable real estate/credit card tragedy are more severe than I can describe adequately in this blog, but homeowners really need to think this matter through far in advance of the time when they might become tempted to keep their home afloat with credit card debt.
Edward,
Another thing about the bankruptcy bill, in my opinion, is it allows banks and mortgage companies now to become irresponsible (which I think has happened anyway, even Greenspan has commented on this) and give out loans to people they know can’t afford to fulfill their obligation knowing that they’ll be forced to pay them back without finical institutions becoming accountable for their own actions in giving loans. These intuitions are suppose to be filled with college educated people giving finical advice to a lot people who are finically inept and they trust those intuitions to give them good advice.
The bankruptcy law should be a two way street it should be judged on a case by case basis, sure people do abuse the system and they should be force to pay their debts, but finical intuitions that give loans that they know shouldn’t be given should be held responsible for their actions as well, and there are other circumstances like illness and death.
I still feel California is going to get hit hard in the bubble, people who have 15 or 30 year fixed loans will be fine; I just think that’s no longer a majority.
Anon 8:13
I heard an editorial on people who have used there homes like a credit card to buy “toys” like boats, big screen TV’s, etc. they were calling it paper wealth where people were spending money they actually didn’t have and were depending on the continued increase in their home value to pay off this debt…very scary.
Anon 11:51
By
Anonymous, at Monday, December 05, 2005 9:52:00 PM
Thank you Mr. Kunkle and everyone who is posting on this topic. There is a very dark future awaiting those who do not face and recognize the serious new world of legally enforced tyranny that is going to arrive with the next major economic downturn in this country.
By
Anonymous, at Monday, December 05, 2005 11:21:00 PM
I'd like to add another thought to this string because I think this subject is going to affect people's lives in the future much more than they think it will.
Even if you are a person who never gets near a debt catastrophy, you are still going to be affected by how this affects the people and the society around you.
Here is one key point to remember, and to warn others about: If home prices go "upside down" (fall below the debt owed on the home), one shoe has fallen.
If then a slowed economy affects your livlihood, the other shoe has fallen. And what, then, happens?
In the old days (like, up to a few months ago) it often made sense to keep the home loan alive, even if by exercising the credit card. It made sense to be optimistic, and hope for a turn of events. If worse came to worse, the bankruptcy safety net was there. In many if not most cases - there are always a few "if" scenarios - a fresh start was possible, and the family home preserved, and trauma to the family - particularly the children - was kept to a minimum.
That kind of optimism has been dealt a death blow. In many, many cases it now makes more sense to the family future to look squarely into the face of the dilemma of having NO safety net. The most prudent course may (and I emphasize "may", because individual circumstances can vary) be to walk away from the upside down loan before making a single credit card investment on it.
In that situation (leaving the home behind), a cheaper rental may become necessary for a while (which become more plentiful as home prices plunge). Then, when the economy and family income is once again stabilized, the credit has not tanked from supporting the upside down loan, and a purchase of a home in a market still priced low (it takes YEARS for a fallen residential market to recover) becomes a bright new prospect. If, on the other hand, someone had taken the opposite approach, they may be facing a mountain of debt while still owning an upside-down home and facing court imposed debt servitude for many bleak years to come.
These are new realities. We've never had to look at things this way before. America has changed. The time for us as individuals to think about this is NOW - and to talk about it with other home owners we care about - before the next economic cycle hits us. If we wait until then to think, then we will be guided by the emotion of the moment, and that could spell disaster.
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Anonymous, at Tuesday, December 06, 2005 9:03:00 AM
Anon 9:03 said that ". . .this subject is going to affect people's lives in the future much more than they think it will."
Let me also add that it will have a profound effect on Murrieta. In fact, all of suburbia will feel the hit.
What happens to our City if people suddenly stop buying (we depend on sales tax to run the City)?
Once consumer purchasing begins to decline, then businesses react with downsizing and layoffs. Commuter communities - like Murrieta - stand to take it on the chin because of the higher commuting costs.
Our City needs to factor in caution before extending our local debt load too far. I'm not saying that doomsday is upon us, just that there are enough warning signals that we should be prudent.
Edward Faunce
By
Anonymous, at Tuesday, December 06, 2005 10:05:00 AM
Things have indeed changed dramatically when the upside-down possibility arises that a family's long term financial well-being and even their credit could be helped (relatively, in a long term sense) by walking away from a mortgage. Lenders are going to fight this concept like crazy, but the sad reality will become apparant over time. The change in the BK laws seem somewhat noble on the surface, but the economic shift that results could (and likely will) become seismic in effect. Our government makes a massive mistake when it messes with any part of the traditional underlying foundation of our economy.
By
Anonymous, at Tuesday, December 06, 2005 11:39:00 AM
A lot of good points are being made here.
I’d like to comment on walking away from your home when you’ve become upside down and no longer can afford the mortgage for whatever reason.
In the past the financial institutions would take your home and you could declare bankruptcy and that would be pretty much the end of your debt in a simplified explanation. Well in the past when a financial institution would take repossession of your home they would just dump it on the market and get whatever price they could, and from what I understand financial institutions don’t want a lot of property on their books.
Okay, here is the problem. Let’s say you get a home loan for $400,000 the housing market takes a big downturn and now your home drops to a value of $300,000, the financial intuition sells your home for $275,000 to get it off of their books. From what I understand, and I could be wrong on this, but with new bankruptcy law you will still be obligated to payback $125,000 even if you’ve filed bankruptcy. This goes back to point others in the post made about our economy, if you’re still paying back $125,000 on something you don’t own and are now strapped with monthly rent payments you just can’t afford spend your money in the community.
So does it really make sense to walk away with today’s laws? Or should you go down fighting to keep your home even though you can’t afford it?
Here’s still my problem, financial institutions are still giving out these ridiculous interest only loans to people they know can’t afford it and it is greed because they are getting the maximum profit from those people because the principle is not being paid down so the margin of profit continues to stay the same.
One last thing when this housing bubble does hit, it will be much different than the dot.com bubble because in the stock market you can’t get loans to buy stocks, you need the money up front. There is getting loans on margin to buy stocks but that has very strict rules on those, for example if the price to your loan reaches a certain gap on the value of the stock and the price you borrowed you need to add more money to your account or sell the stocks to cover your margin, you can’t get buried into debt like people are with the way some home loans are being given out. When to dot.com bubble hit people lost real money not money they didn’t have.
Anon 11:51
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Anonymous, at Tuesday, December 06, 2005 7:58:00 PM
11:51 The big difference is between the legal consequences of secured debt (real estate for example, falls into that category in most but not all cases) vs unsecured debt (credit card for example). Unsecured as a term is really a misnomer, especially now, since it is actually secured by the financial future of the debtor. The drawbacks associated with the new laws for unsecured debt create a clear danger for using that kind of debt to subsidize anything held under a secured form of loan. The amount of equity at risk for the real estate owner is certainly a factor, but if that equity is long gone because of a shift in the economic climate, there is much to be concerned about in using credit cards to hold on to whatever secured-debt property is involved.
By
Anonymous, at Thursday, December 08, 2005 11:20:00 AM
Just to be clear, in CA the first mortgage on real estate loans are always nonrecourse loans. What this means is the loan is only secured by the property. If the borrower walks away from the loan there is no need to file bankruptcy as the lenders only recourse is to repossess the property. while this would be very bad for your credit it is much different than recourse debt such as credit card and other forms of consumer debt.
By
Anonymous, at Thursday, December 08, 2005 7:33:00 PM
Anon 11:20 I assume you’re also 7:33,
Let me ask you this, and I don’t know the answer, since the new bankruptcy law doesn’t that change everything since federal laws in some cases overrule state laws and now the holders of mortgage debt can recover everything they’ve lost even if you file bankruptcy?
Anon 11:51
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Anonymous, at Thursday, December 08, 2005 7:48:00 PM
No, you never had to file bankruptcy if your lender forclosed on your 1 st. I am not talking about your 2nd or your line of credit loans, I am talking about your 1 st. The loan is considered non recourse. What this means is you you are not personally liable to repay the debt even if the value of the property is less than the outstanding debt. This is why banks require PMI if you have less than 20 % equity in the property. It is to cover them in a short sale at foreclosure. Than Filing of bankruptcy was always to deal with recourse debt, debt inwhich you are personally liable to repay. It is amazing the number of people who borrow hundreds of thousands of dollars and don't bother to research the terms and conditions of their loans.
By
Anonymous, at Friday, December 09, 2005 7:30:00 AM
REGARDING THE MURRIETA CITY COUNCIL CONTROVERSY - for anyone who is interested and came looking, the next string in this sequence (titled 'flip flopping')is the string in which the Murrieta City Council controversy has had fresh posts.
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Anonymous, at Friday, December 09, 2005 11:16:00 PM
"I owe my soul to da company store."
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J. L. Kunkle, at Sunday, December 11, 2005 6:32:00 PM
Yes, that song is destined to be a comeback hit. Along with "16 Tons" and "Chain Gang". Look at those credit cards like they've grown fangs that can bite you, because they have.
By
Anonymous, at Monday, December 12, 2005 5:02:00 PM
Oops, hold on, that WAS 16 tons.
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Anonymous, at Monday, December 12, 2005 5:03:00 PM
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