WatchI am one of those homeowners with a house "underwater" and awaiting a final decision on a loan modification. I hear many stories of people walking away from their homes. I do not blame these homeowners in many respects. But one has to consider what happens "the day after" as follows:
1) You will be put on a black list operated by Fannie Mae and Freddie Mac. You will not get another home loan for ten years.
2) You will avoid Federal income tax liability through 2012. You will owe State of California income tax on any losses to the lender.
3) Yes, for now, you will find a rental. What happens when all of the landlords also default and all of the real estate is owned by the banks? When you go and apply for a rental, you might get turned down because you're on the big bank's black list.
4) You may believe that if everyone walked away, it would "bring the big banks to their knees." This is a false assumption. The monster banks will turn to the taxpayers for reimbursement. Your grand children will still be paying for this.
5) With a foreclosure on you record you will have employment problems and problems with your security clearance.
6) One day the market will come back. I have seen crashes like this in HOuston and Buenos Aires.
A saner strategy is to default on your second lien. If there is no equity to secure it, the bank will not be able to foreclose. If the second lien was purchase money, the bank will not be able to sue you. Your credit will take a temporary hit but you will survive it.
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Vain says
OK--maybe we're talking about different things here. What do you mean about short sales? A refi isn't a short sale. And banks understand that the vast majority of loans are paid back early--they factor that into their decisions. They don't expect to make $300K over 30 years.
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True. Ideally the bank would like to keep you on the hook making payments. If you refi, then another lender will be earning closing costs. I used short-sales in the example to show how they do not like to give discounts on their product (loans).
I was calculating this because I was bored and the numbers are fairly accurate. I am under suspicion that the banks have done this and have planned it as well.
I guess this is somewhat irrelevant, but I'll spill some numbers here. Assume all 3 scenarios as $300k loans, 30 year @ 5%.
Scenario 1: A loan which carried out over 30 years with $1610.46/mo payment.
Throughout the course of the mortgage, the bank would have earned $279,767 interest throughout the entire 30 years.
Scenario 2: Short sale in 5 years.
Payments for 5 years @ 1610.46/mo = $96,627
House depreciates from 300k to 200k
Principal remaining: $275,365.80
The banks want to call it a $75k loss since it would be sold for $200k.
Once it sold, they'd net $200k + $96,627 = $296,627. If you add in all the closing costs and points the borrower has bought initially, it seems like they are breaking even. Though they may be losing interest paid out to others to loan you the money initially, they probably loaned out the payments made to them out as well to recover some.
Scenario 3: It starts to look much better if the borrower short sales at year 7
Total payments made @ 1610.46/mo = $135,278
Principal remaining: $263,481
House depreciates from $300k to $200k
House sells for $200k
Claimed loss: $63,481
Payments + proceeds from sale: $335,278
Profit: $35,278 in 7 years.
Is this why the banks designed 5/1, and 7/1 loans? They figured that even if homes depreciated 33%, that year 5 would be their break even point, and at 7 years, is starting to look bright? These are the discounts I was referring to. The banks are holding the borrowers by their balls to get $279k, when they can really come to a small profit at year 7.
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Vain says
Banks don't make decisions assuming their collateral will decrease in value.
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I was implying that they could care less if it declined. As long as they gave you a low enough rate for you to keep on making payments for the first 5 years, it's okay with them.
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robertoaribas's website
vain, you have no idea what you are talking about. The banks have a cost of money too, they just don't have free money sitting around. right now, long bonds are paying about 4%, so figure that into your equation: the bank COULD have been earning 4% on their money by simply investing it.
so your examples are way the heck off the mark, the banks actually are losing tons of money on the short sales.
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They win some, they lose some. But I really think it's a case where a senior executive is yelling about not having enough profits. Even the new short-sale program. Really, the US Government gives them $1000 to approve a short sale? $1000 is a joke if you think the banks are really "losing" all that money.
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I would really like to see folks "walk away" en masse. There's not enough sheriff deputies in the land to do anything about it, and besides even if there is, probably lotsa them have the same negative equity problem at their own residence.
A gigantic walk away will be so disruptive to tax revenues that it will force some reforms of Prop-13 and also of the fringe benefits for "civil" servants.
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You guys who think the sky will fall if you walk away are dreaming. My cousin walked away from a condo in Fremont and bought a house twice the size for half the money. I know several people who have walked away.
People have been talking about how the banks would go after borrowers in recourse situations since at least 2005. It has never happened on any significant scale that I've seen. Now Fannie is talking about it like the Financial n00bs they are. I can't wait for those same borrowers to turn around and class action them for rubber stamping the loans in the first place. It's like begging someone to shoot you and then suing him when he does. The reason you haven't seen the mass lawsuits is because there is blame on both parties hands.
If anything they'll pursue it like credit card debt collectors, I think. They'll try to intimidate and bully to get people to dig through the couch for change. Legally their asses are too much in the fire to pursue it in the courts.
@sybrib, people ARE walking away en masse. I know people who are renting rooms from friends, moving back in with the parents, and going back to renting apartments. And the early walk-aways were able to trade up, in one case I know of, THREE TIMES. Yes, they moved THREE TIMES in two years, each time to a bigger and bigger house. She works for a RE Title Company (i.e. she is in the business).
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Oakland, CA
thunderlips11 says
AMEN! This is completely true. It's not even a dirty little secret anymore.
You won't get a good paying job without good credit. So guess what? You're screwed. No social mobility for you if you are truly talented, full of integrity, intelligent, industrious, and loyal if you don't already have Mr. and Mrs. Moneybags for parents. Your credit will be used to allegedly prove that you don't have the right kind of moral compass that is required for the position. You just aren't their "kind" or "breed" of person. Get to the back of the bus. Never mind that people who need money make the best workers because they tend to be the most grateful for the opportunities that are opened to them.
Yet we continue to allow employers of all stripes do all sorts of things to potential employees. We allow illegal search and seizure of bodily fluids and or tissues for drug testing. We submit to physicals that reveal intimate details to the folks in HR about our "health." And we have absolutely no protection against privacy invasion when your potential employer goes on the Internet to dig up any dirt they can find on you.
But we don't need no stinkin' labor laws or unions.
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elliemae's website
Jon says
Pretty much everything that I've read supports this statement. Even though people's credit rating scores are dropping, there are so many that are doing so that 600 is the new 750. It doesn't make sense to deny credit to someone who lost their house these days.
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Oakland, CA
UnitedSocialistStatesofAmerica says
But you gotta eat. ;-)
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Laurel, MD
"The buyer is just renting it from the bank for probably twice as much as he would pay in normal rent AND he’s (she’s) responsible for the upkeep at their own expense in exchange for the privilege."
I know this isn't the case in Maryland. To rent a decent three bed room apartment will cost you $2200/month. I just bid on a house and the mortgage + tax + insurance + PMI will be $2200. After tax rebates the cost to own will be $1700 per month. Keep in mind this is a 5 bed room house vs a 3 bed room apartment. There is no HOA. But you are right about the repairs. No getting around that. But I will have an extra $6000/year for repairs. I don't see much down side unless of course the house loses 23% of it's vaue while rent remains flat (even though that would still force me to break even). If the house loses 30-40% then I'm upside down but I think I'd be willing to take the hit for the privelage to have two extra rooms, two car garage, my own yard, and extra rooms I could rent out. If values do go down 40% banks will begin collapsing, more stimulus will be pumped in, and the day of reckoning will be accelerated.
If there is no more stimulus interest rates sky rocket. I don't think it's a terrible time to buy, atleast in Maryalnd which has the number 1 per captia in come in the nation.
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Scottsdale, AZ
robertoaribas's website
Newhomebuyer: the tax writeoff is NOT THAT BIG!!! don't fall for the #1 real estate lie; you have to itemize to get the homeowner taxwriteoff, meaning you will lose your standard deductions... for a married couple, the standard deductions are what these days, $13,000? so if your monthly payment is $2200, what could your interest a year possibly be? $15,000? 15K -13K = 2K, which reduces your income.
Even at the 30% tax rate, a 2K writeoff drops your taxes by $600 a year. While everyone's particular tax case is different, unless you have a ton of other allowable writeoffs, you will hardly see any tax advantage.
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Laurel, MD
robertoaribas says
I'm open to being educated and appreciate your input. There is a lot I don't know. What I do know is right now I'm single with no write-offs. Last year I was in the 35% rate for taxes. I ran the numbers in turbo tax using the interest payments (from an Amortization table) and property tax and obtained an additional $5000 rebate according to the program. I'm not expecting free advice that I should be getting from a tax advisor but do you see anything that I may be doing wrong or missing? Does me currently having no tax write-offs change things in a big way? BTW you were spot on regarding the interest calculation. The number is $13,174.
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Saint George, UT
elliemae's website
Don't forget that he can deduct property tax as well. In Maryland it must be quite a chunk of change. He's single so it's worth it to him to buy with these numbers, as long as he has a stable job.
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Alexandria, VA
newhomebuyer7, so you bid on another house?
You're not missing anything. You're gonna get additional rebate because you're a single and getting a loan bigger than 200K. And property tax, yeah, $5000 rebate sounds possible. Getting over $20000 tax rebate is not uncommon when your reportable income is relatively low and the loan amount is relatively high.
But before you got overly excited about the tax rebate, you gotta think about the nature of the word "tax" and "rebate" itself. It means you need to earn first to be taxed, spend first to get rebate, thus, you have to be able to afford the cost first. Also don't forget the fact that you need to pay some other additional cost you don't have to pay while you're renting. So make sure you take your time to figure out all the cost vs rebate, and see if it's worth it. Sure, you're gonna get your tax rebate, but remember you can not spend it before you get it in sometime next year.
How much you got left in your hand after pay PITI for home, and all other expenses? It'd better be positive numbers, otherwise you're trying to catch bigger fish than you can handle.
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newhomebuyer7 says
Just a thought, but maybe you should bid on a what you can afford to pay 20% down on and ditch the pmi. PMI is pure profit to the bank and pure loss to you. With the front loading of interest payments on a mortgage it takes many years to get rid of PMI. Also the more down payment the better your leverage on getting a more favorable mortgage. The very best option is to be able to put 20% down and get a 15 year. The rates for 15 year are very, very low right now, probably a once in a lifetime opportunity. No pmi and fast equity building, perfect together. I have never had a 30 year mortgage.
Be smart and leave yourself some wiggle room. Don't buy the most house that you can mortgage. My friend was an appraiser and used to leave me laughing with tales of $500,000 homes (in NE PA no less) that didn't have any furniture, except a couple cardboard things from walmart distress sales.
The tax rebate is a one year, one time shot so it shouldn't enter into your calculations at all. Tuck it away for repairs, you will need it.
If the cost of owning is near the cost of renting, you aren't moving soon, your job is reasonably stable, and 3x your income is more than the house cost then owning certainly makes sense. All real estate is local. I am not a real estate bear, but won't own in my area at this time. I'm just banking the substantial difference between renting and owning.
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Laurel, MD
seaside says
Thank you for the feedback. You and many others have been extremely helpful! I think I'm ready to make the move. I bid on a house in Clinton and the seller accepted. I got tired of looking at short sales that needed $30,000 in repairs to get them up to speed so I bid on a regular sale. If the house passes inspection I'll be moving in this August.
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UnitedSocialistStatesofAmerica says
The thread has meandered to another subject. Happens sometimes. For those people who aren't too self-righteous and are able to change in mid-stream, it's not upsetting.
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lmao .. now, you gotta laugh ellie .. that is funny.
USSA --- hard hitting points all around. Cheers.
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Saint George, UT
elliemae's website
I'm not attracted to incendiary assholes. He should tone it down and try again, I'm not that desperate (yet).
I can't get past his approach, haven't read much beyond the capital letters yelling at me and inflammatory language.
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shrekgrinch says
Where did you get that? I emailed an Argentinian friend and he says that there most certainly is property taxes in Argentina. He did say that there is no property tax bills (maybe that is what you meant), you must go down and pay each year without being billed. There is also something called an ABL tax (got no explanation on what that is) on property that is in addition to the actual property tax. It's not called property tax but asset or personal goods tax. Foreigners pay a higher rate by the way. I also looked on a couple of expat websites just to double check and they all say the same thing.
He also pointed out that any economic statistics about Argentina are pretty much useless. There is a huge pervasive underground economy there with almost all businesses keeping 2 sets of books.
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47 male
Lafayette, CA
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It appears that USSA was full of crap after all. Argentina has an asset tax based on the sum of all your assets within Argentina including real property.
In addition, most Argentina localities charge a municipal tax from 1.2 to 1.5%. At least one estimate I found online said that real estate taxes in Argentina approach 2.5%, which is about twice as high as taxes in California.
For someone who claims to own a house in Buenos Aires, this ignorance is unforgivable. Apparently USSA is a liar.
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47 male
Lafayette, CA
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UnitedSocialistStatesofAmerica says
I'm sorry, I can see now why this ambiguous statement would need clarification.
The difference between "NO property taxes" and "LOTS of property taxes" is a subtle one that might be confusing so maybe calling you a liar was a bit harsh.
Literally LOL here...............
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UnitedSocialistStatesofAmerica says
Looks like Nomo was right. Step 2--The name calling has begun...
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47 male
Lafayette, CA
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UnitedSocialistStatesofAmerica says
I try to give everyone the benefit of the doubt. Unfortunately by saying "there are NO property taxes in Argentina." with the emphasis on the word "NO" leaves very little room for alternate interpretations.
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UnitedSocialistStatesofAmerica says
I guess by "NEVER EVER EVER" you meant a little over an hour. :)
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Fremont, CA
Can't we all get along? Sorry I could not resist.
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UnitedSocialistStatesofAmerica says
UnitedSocialistStatesofAmerica says
huh? So, if my county calls it an asset tax based on property value then it's not a property tax? It's all in the name I guess.
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Fremont, CA
A tax means less money in your pocket no matter what you call it.
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47 male
Lafayette, CA
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UnitedSocialistStatesofAmerica says
Do you even know what the definition of property tax is?
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UnitedSocialistStatesofAmerica says
Suggestion for YOU then. Say that--instead of saying they DON'T have property taxes.
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Davis, CA
People think that because Amazon or NewEgg aren't obligated to collect a sales tax, that there is no need to ever report any taxes for items purchased. However, your state income tax form may have a requirement for it. And to dodge it, is just a game of whether it's a piddling amount or not and whether you get a hard-ass audit.
Many consider property tax to be the fairest of all taxes. If you are using a piece of property to generate income, you can easily pay it. If you are letting the land lie fallow, that does not serve the greater good. Having to pay property tax is a small lever preventing this guy:
from hoovering up land during every downturn, and building a dynasty by virtue of eventually owning all the land.
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UnitedSocialistStatesofAmerica says
So by your own definition it's a tax (property, asset, personal, whatever you want to call it) on your property, just with a different collection process and penalties. WTF are you splitting hairs over and why are you so fixated on this?
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47 male
Lafayette, CA
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An asset tax BY DEFINITION is a property tax. I've never seen someone so desperate to cover up for a mistake in my life.
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iwog says
It's not a mistake, it's a lie.
With a troll, the one thing you can count on is that everything is a lie. His very first post was a lie. He hasn't "lurked on this board for years". There was no "Las Vegas RE shill". He doesn't own a house in Argentina. He doesn't live in Forest Hills, NY.
It's all a lie for the sake of arguing with strangers on the Internet.
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Kew Gardens, NY
Consider these two scenarios:
1.Buy a property for $200K with 50% down @ 5%.Monthly $536.You will never see that down payment again unless you sell.
2.Buy the property with no down(VA if qualified) or 5% down(FHA if qualified).Ladder the $100K or $90K into CDs and make up the difference in payment($536) out of interest and out of pocket.If you have to default(job loss,etc.)you lose $0 or$10K and still have the CDs.
Why hand over $$$ to the lender?
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divelly says
Well, it's not quite that simple. There will be PMI in the 2nd case and usually a higher interest rate. But, I agree, putting down as little as possible is usually a good strategy.
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Alexandria, VA
Only if the interest rate is high enough, and when you're able to take some money out to make up your expenses. What's the current rate? Can you do that with CD? Think about it. CD in these days are more like a safety box rather than an investment.
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Here are some quotes from your article that you conveniently left out -
http://www.apartmentsba.com/argentina-real-estate-consulting-&-property-management-69/annual-property-taxes-in-buenos-aires-91/
"It doesn't really matter what you call the tax, there is a tax that is due each year based on the value of your property or assets owned in Argentina. "
"As a foreigner that is purchasing property in Argentina, it is ESSENTIAL that you pay this property tax. When you go to sell your property you must get the blessing of the AFIP office via a certificate/permit saying you are up to date on your property taxes. If you aren't up to date you will not be given this certificate. Not only do you have to pay the back taxes but there is a penalty of up to 25% for each year that you didn't pay the property taxes." (ESSENTIAL capitalized in the article)
"For all the economic problems in Argentina going on, one would assume the government would make paying this tax very easy. WRONG. The government won't allow you as a foreigner to pay this tax. Yes, you heard this correct. You must hire an accountant to prepare this property tax for you. Most of these accountants can easily prepare it for not a huge sum of money but not cheap either. I use one of the most respected accounting firms in town and I was charged about u$s 450 to prepare mine for EACH property. There are cheaper accountants out there but I tend to use the best in the business when I do business in Argentina. You might think you are saving money by using someone with a cheaper fee but more times than not it will come back to haunt you when it's all said and done with most professional services here in Argentina."
So Argentina has a property tax that you are required to pay or else you have to pay a hefty penalty when you try to sell. Not only that, but you also need an accountant (whom you have to pay) to prepare your property taxes. Sounds like pure utopia...