patrick.net
An Antidote to Corporate Media
1,365,053 comments by 15,735 users - Ceffer, HeadSet, Patrick, stfu online now
Comments 1 - 9 of 224 Next » Last » Search these comments
Peter P
@
2006 Aug 7, 5:22pm
I do not want to think like an FB. It is too dangerous because the negative energy can be powerful.
Again --sorry. I published before realizing Randy had just created a new thread.
When people get desperate, suicides and criminal acts (esp. killing spouse for insurance money and embezzling) may become more common.
The burger flipper with 14 houses is screwed and will land in bankruptcy, probably with chapter 13. But most housing speculators are not in that deep, they'll have negative equity, but not so extreme an amount that they'd want to go into chapter 13. I predict they will be extremely unhappy for the next 10 years (Or shorter, if Randy's inflation/real growth comes about and bails them out. Or longer, if we reached some sort of Japan redux.)
#2 is a clear winner. Especially if there was no refi involved.
Here's a related article:
http://ocregister.com/ocregister/money/housing/article_1206268.php
If they previously refinanced and their lender decides to foreclose, they may not only lose their house, but the bank also may be able to go after their other financial assets including stocks, savings and their paycheck.
And even if the bank doesn't go after their other assets, a foreclosure may mean a big tax bill from the IRS and state Franchise Tax Board for any shortfall between what the bank gets for the sale of the owner's home and the value of the loan.
And I bet once this starts happening, Prop 19203 will be passed to "Save Homeowners and The American Way of Life - Think of the Children" so that taxes won't be owed on bailouts anymore.
For instance, if the foreclosed homeowner has a $500,000 loan and the lender sells the house for $450,000, the homeowner will have to pay taxes on the $50,000 difference. The $250,000 tax exemption for singles and $500,000 for joint filers does not apply to debt relief income, in this case the $50,000.
The tax owed on the debt relief is based on the homeowner's ordinary income tax rate, not the lower capital gain rates. The exclusion, however, may still be available to reduce any capital gains in the difference between the sales price and the homeowner's basis.
That's actually not that bad. You could work out a payment deal with Uncle Sam to pay the taxes on that $50k of income.
I wouldn't think too much about this - FBs will be saved to live another day.
Hilarious picture!
Great topic!
Classic FB scenarios...Yikes!
Randy H
@
2006 Aug 8, 12:12am
HARM,
We can run more than 1 thread simultaneously. It'll be good blogging practice.
I agree with Astrid. The likely outcome on the BA is that there will be an extended period of time where homeowners will be living with negative equitty on a place that will cost perhaps 30% less or more than what they paid. The result, as mentioned countless times is a sluggish economy. My big question is will the enevitable recession be sporatic and localized to the areas that participated in the boom, or will it affect everywhere across the country? many parts of the country are experiencing record economic growth and are also usually places that didn't have runups in prices.
Comments 1 - 9 of 224 Next » Last » Search these comments
If there's one thing that distinguishes your average Patrick.net blogger from your typical robotic SDCIA.com perma-bull, it's the ability to consider your opponent's P.O.V. and to see things from others' perspectives. This thread is dedicated to this proposition. I want you to put yourself into the mind of a F@cked Borrower.
Peter P has already suggested this concept --in jest-- with his thread, "A cry for help". I would like this one to be approached from a more serious mindset. Image for a moment that you --as our hapless friend from the SDCIA-- find yourself saddled with 14 underwater properties, all bought on margin with exotic financing, and are now unable to make the ARM-reset payments on your night manager's salary from Taco Bell. Never mind that you could have avoided your unsavory predicament by merely applying a modicum of logic, some cursory market research and a dash of high school math to the dubious principle of "it always goes up". It's too late for regret now --you let your greed get the best of you, and so here you are. You now have a "diversified" portfolio of 14 equity-negative properties in different states, and all of them are heading in one direction: down.
So, let's assume you've gotten past the denial, anger, bargaining and depression stages, and have picked yourself up off the floor (after spending several days there whimpering in the fetal position). You've finally reached "acceptance" and are ready to rationally assess your sorry situation with cold, hard-eyed reason, and you must determine a course of action before events progress to the point where your creditors begin making all your decisions for you.
At this point, you have basically three options, none of them particularly good from your P.O.V. Which one do you take?
1. Confront your creditors (MBS shareholders) and request permission to start making "short sales" (i.e., selling the property for less than the amount owed).
This option has a number of attractive advantages, particularly the ability to avoid bankruptcy and/or liens and legal actions against you, as well as the ability to be quickly rid of those 14 "equity alligators" before they eat your alive. If your creditors agree to this, it amounts to a non-BK debt forgiveness, and you will not owe any money after the sales.
It also carries a few drawbacks: (a) Exactly whom do you negotiate with? Your loans got bundled up as MBSs and sold off before the ink even dried. Do you call Fannie Mae, Fredie Mac, the Bank of China, Fidelity, Vanguard, CalPERS --other? (b) Your creditors will undoubtedly require you to bring your entire life savings to the closing table in order to minimize their own losses. Of course, being a reckless speculator who used other people's borrowed money, you're not likely to have much anyhow, so no biggie. But there's another drawback: (c) your creditors will have to report the amount forgiven to the IRS as "cancelled debt", which will be taxable as income. Given your 14 underwater properties, this amount may be quite large. Bailing on your creditors? Relatively easy. Bailing on Uncle Sam? Not so easy.
2. Leave 14 sets of keys on 14 granite kitchen counters and walk away.
Pros: Perhaps your creditors will eventually realize you have no money, no reasonable chance of paying off the debts, and just write them off and leave you alone. To borrow a phrase from J. Paul Getty, "If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem.†Even better, if all of your mortgages are "firsts" (no refi's) and you live in a non-recourse state (CA), then your creditors basically have to eat the loans. You'll still be on the hook for tax on the cancelled debt, however.
Cons: Aside from trying to sue you for any current assets and garnish your future earnings (assuming any of your mortgages were refis/recourse loans), your creditors may also try to intercept your tax refunds, ruin your credit (ha-ha, I know --like you care!) and generally harass you and try to make your life miserable.
3. File for Chapter 7 bankruptcy.
Pros: Means a "clean start" no more debts, and no tax liabilities --if you can get it.
Cons: Thanks to the new creditor-friendly Bankruptcy "reform" law, you have to qualify for means-testing and prove you did not commit fraud to obtain the loans in the first place. Uh-oh. That last part could really bite you in the a$$. How much did you inflate your Taco Bell night manager's salary to get those 14 $0-down NAAVLPs? Don't remember? Better consult with an attorney first. If you can't qualify for a Chapter 7 under the new rules, then your only option is to file for Chapter 13 (repayment plan --not good) or reconsider options #1 & 2.
Discuss, enjoy...
HARM
#housing