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Thursday, March 10, 2011

Walk Away or Pay to Stay: The 2011 Housing Question

Is Your House Underwater like the Titanic is under the ocean? 

Short Sale may be the answer, because the big banks are not going to help you anytime soon...

The nasty principle forgiveness can of worms that was reopened today on CNBC-- it was orchestrated by money hungry monster bank retail services CEO, Chase's Charlie Sharf.  Here is an excerpt from the article and the interview: 
"We've got to be very careful that we don't create an environment where we encourage people not to pay, and that's the danger you have when you get into broad based principal forgiveness," said Scharf.
Scharf is really just watching his bottom line here.  I'm sure his butt-zillion dollar bonus structure relies on keeping 68 year-old former hippies tied down to a mortgage that is 40% underwater.  I'm guessing that there is a 'negative equity retention report' that is updated weekly and passed upon to drones of mindless minions in Mumbai and Atlanta, who follow scripted answers when they tell angry callers that they need to keep making payments and to try to modify their loans.

Touche Scharf-- You have to protect your investment buddy.  If not I'm sure your corporate buddies will eat your brain and throw your worthless body in a dumpster somewhere before they replace you with another robot. 

The problem with the monster bank 'keep paying and modify programs' is that you will never get ahead.  Sometimes a bad buy is just a bad buy and you have to sell (I know half you people have taken a beating on QID in the last few years trying to catch the falling knife).

Housing is not recovering this year-- I'm firm on that.  There are still too many people unemployed and there is too much inventory.  On top of this, mortgage credit underwriting only makes slightly more sense that Charlie Sheen's rants-- not technically WINNING in the world of mortgages.

I know this is not a popular stance for many, but I say in MOST cases it makes more sense to walk away via short sale than to pay.

Here are my top 6 reasons WHY to walk away via short sale:

#1) If you bought during the bubble in many cities and took a 100% loan you need to Walk away.

    Looking at the bubble year prices, it is obvious to see the credit bubble fuelled by non-prime lending.  The only reason the bubble occurred was due to manipulation of mortgage credit-- there was never any fundamentals, regardless of all the media hoopla during the time that hyped a never-ending housing bull. 

2004 - 2006 saw a dangerous level of subprime loans originated.  These loans correlate with the above chart to create the peak.  You can see the taper off as the suprime market died.

The only way to inflate the bubble again is to bring back subprime lending and ease underwriting standards.  This is about as likely as getting master wizard Ben Wizzie to admit that inflation has arrived due to QEII MUCH.  Why is this a valid analogy?  The housing boom was orchestrated by another Fed Chair-- the Sorceror 'see no bubble' Alan Greenspan. 

#2 Math Does Not Lie.

For this data I will use a Chart of Seattle-- Seattle was proclaimed to be immune to the housing market crash due to so many smarty pants and high-roller big wigs that lived there.  Well, that didn't work out so well.  Higher number of advanced degrees or crack huts in Cleveland it doesn't matter-- a bubble is a bubble is a bubble and bubbles always pop.  Seattle's average price has dropped from $453,000 to $337,000 in the last 4 years.

Hey Math, can you assist?  Math responds:  'Yea dude.' 

Amortization is a funny tool, but it is consistent.  If you bought an average Seattle home in 2007 and put down 0% you would have a $453,000 mortgage in 2007-- this is NOT an uncommon form of financing at this time in 2007.  100% LTV and 95% LTV one loan programs were popular when subprime started to fade.

The red box shows the balance of the loan today-- Still $116,000 over the fair market value today.

The Blue boxes show the total interest and the payments.  Taking the payment of $2715, we know that 4 years of payments on principle and interest = $130,320 paid into the house so far. 

The total interest to be paid on the home is $524,746 + the principle financed of $453,000 = $977,746.

Just under a cool million to own that 60's tri-level in the land of Starbucks and seahawks. 

TODAY you can buy the same house for $337,000 on an FHA loan at 3.5% down.  This means you will have a mortgage of $325,205.  Ahem... MATH...

The payment is the obvious difference (other than the loan amount) and shows a savings of $1000 a month.  This is equal to 3428 gallons of gas per year at $3.50 a gallon, or 1500 $8 burritos per year.  Sadly they don't sell the Make Believe Car of the future, the Chevy Volt, in Washington, but if they did you could OWN one in about 4 years of savings at $1000 a month.

The total interest is $294,360 + $337,000 (loan plus down payment) = $631,360

The home in 2007 is actually over $360,000 more expensive to own vs today-- more than the price of the home in today's market. 

There is NO reason to hold onto this house.  In addition to the scary numbers, please note that selling a $400,000 home will also cost $24,000 in real estate commission-- with this also taken into account, if you bought this home in 2007 you will probably not be able to sell the home until 2018 - 2020 and BREAK EVEN on the sale.  12 years of 2007 payments is equal to $390,960. 

If you are in this scenario, count your losses NOW-- housing values are expected to decline further.

#3 Short Sale MAY Not Cost You Anything.

I am getting into legal issues here, so make sure YOU contact a lawyer if you consider walking away from a home.  I am NOT a lawyer.

In most cases you will NOT pay anything if you walk away from a home that is your primary residence.  Why? 
  • You pay no capital gains on real estate if you live in the property for at least 24 months in a 5 year period.  underwater balances are presented as 1099 income, or personal gain. 
  • H.R. 3648  (extended to 2012) allows for short sale of primary residences with no repayment of the underwater balance, provided that:
  • The property sold in the short sale is the taxpayer's principal residence, as that term is used in IRC §121.
  • The cancellation of debt is Qualified Principal Residence Indebtedness
  • The indebtedness is discharged after January 1, 2007 and before January 1, 2012.
Mind you that there is some fuzzy wording if you ever took cash-out, but I have witnessed many short sales over the last 3 years an I have never encountered one instance of a lender pursuing the underwater balance.

If you are underwater by $116,000 and paying $1000 extra a month in payments like the Seattle example, you would be foolish to not look into H.R. 3648.  If you won't do it, your neighbors will. 

#4 Modifications are stupid.

Most modifications do nothing to help the homeowner-- they only help the bank.

The most common modification is to reduce the interest rate and to extend the term to 40-50 years.  This does nothing to help an underwater borrower.  They still are in a gaping hole of debt that will not be paid back and the reduced interest rate has no benefit with an extended term. 

$1000 payments for 30 years = $360,000 in payments.
$800 payments for 50 years = $480,000 in payments.

If someone is leaving a house because they are underwater on the loan, don't be fooled by the modification trap.  The modification rarely makes sense-- though banks have improved this process, but have yet to perfect it (that would take principle reduction...).

#5 Credit recovers faster than you think.

If you walk away from a home you will reestablish your credit sooner than you think.  You can go buy a boat and a Volvo today, walk away tomorrow and in a year from now, when you are vacationing in Boca with the oodles of money you saved, your score should be near the same as it is today as long as you kept your nose clean on all your other debts. 

In the above scenario with Seattle, you have to ask yourself-- 'What is my credit score worth?'

You will also be able to purchase again in a few years at a reduced price-- heck you can buy your old house back at a 35% discount if you want. 

#6 Retirement Planning

If you do not have ample retirement funds and your home is a debt and not an asset, and you are in your 50's or 60's, you are killing your retirement. 

Consider the reality of paying for that home with your Social Security checks.  You could be putting more money away, opposed to throwing it down a hole and lighting it on fire.  Most people will not be able to carry an expensive mortgage after they stop working.

If you can't sell it for a profit, and you are underwater on it, it is a debt.  If you are 58 and you have 26 years left on a mortgage I really hope you have Charle Sharf's but-zillion dollar salary.
There they are-- my top 6 reasons to walk away via short sale. 

Of course walking away via short sale is not for everyone-- some people have not seen the declines of Seattle and some people don't care-- if they took the debt they should pay the debt.  I'm down with that, but I also think that banks should help in the process.  I find it maddening that banks essentially have a blank check from the Feds and they still fail to do anything to help customers.  Not noted in the above cnbc article was a comment by a Chase rep that stated that the big banks would pass the cost of fee increases onto the bottom tier customer.  No shame and no sugar coating what-so-ever. 

Big banks suck-- they deserve a $30 billion dollar hit to the books-- maybe then they would treat their customers better.

Maybe then the banks would start giving away free toasters again.


  1. Oh that the sheeple would read this fine argument. BofA for 3 months now have people working overtime on mods, once this bankster realized the MERS problem. There are a lot of takers, according to my neighbor, an ex-Countrywide mortgage exec now with BofA. They reason that it is better to have some cash flow rather than none. Btw, they have 1000s of empty homes out there, and they are playing games with the locals on r.e. taxes.

  2. Quite a good article, with good use of charts and tables to support your argument.