Friday, November 18, 2011

Irvine Housing Blog

Irvine Housing Blog

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Many who strategically default are glad they did

Posted: 18 Nov 2011 02:29 AM PST

Most people who strategically default have one emotion in common: relief.

Irvine Home Address ... 312 DEWDROP Irvine, CA 92603
Resale Home Price ......  $360,000

When you try your best, but you don't succeed
When you get what you want, but not what you need
When you feel so tired, but you can't sleep
Stuck in reverse

And the tears come streaming down your face
When you lose something you can't replace
When you love someone, but it goes to waste
Could it be worse?

Lights will guide you home
And ignite your bones
And I will try to fix you

Coldplay -- Fix You

Many loan owners are hoping the government or the bank will fix their problem by forgiving the principal on their debt. Banks are not charities, so they are not in the business of giving away money. The government is too broke and running a deficit in order to come to the rescue.

As loan owners come to accept a personal bailout is not forthcoming, many turn to their next best alternative: strategic default. After all, foreclosure is a superior form of principal reduction.

They Walked Away, and They’re Glad They Did

By TESS VIGELAND -- Published: November 8, 2011

JON WITTENBERG and Bill Sawyer have never met. One lives in Walnut Creek, Calif., the other in Wilsonville, Ore. But if they did, the conversation might be littered with exclamations like, “That’s exactly what happened to me!”

Their stories start with a mid-decade home purchase and turn sharply as they simply walk away from those homes and the mortgages that accompany them. What was supposed to happen next was that their financial lives would crash and burn for years.

Or so the dire warnings went. In reality, both men said, walking away turned out to be the best financial decision they made.

It is essential for the banks to maintain the illusion that dire consequences await those who strategically default. As the moral arguments fall flat, fear becomes the only weapon they have left.

As people talk to the survivors of strategic default and realize the consequences are greatly exaggerated, the fear will slowly dissipate, and more and more loan owners will strategically default and move on with their lives.

In 2005, Mr. Wittenberg, 42, was working in the pharmaceutical industry in Boulder, Colo., when his employer told him he would be relocated to Southern California. It was two years to the day since he had bought a house, and he had no trouble selling it.

When he got to Agoura Hills, north of Los Angeles, Mr. Wittenberg said, he could not believe the pressure to buy another home. “Everybody was making tons of money,” he said. “My company had a relocation expert who said, ‘I’m going to have to insist that you buy property.’ My only hesitation was it seemed like prices were inflated. Little one-bedroom condos were half a million dollars.”

I wonder if the people who were giving out advice like that during the bubble have experienced any consequences for their advice? I imagine a few disgruntled buyers have wanted to look these people up and inflict a little pain in return.

Mr. Wittenberg bought a two-story, 1,300-square-foot condominium for $450,000 in April 2006, putting 20 percent down on a 30-year fixed mortgage with Wells Fargo. And the bank promptly offered him a line of credit, he said: “They were handing mortgages out like candy, and I was able to borrow from the house on Day 1 of signing the loan.” A Wells Fargo mortgage spokeswoman, Vickee Adams, confirmed last week that Mr. Wittenberg had been a customer but said that because of confidentiality laws, the bank could not release any additional information.

A year and a half after getting his mortgage, he was laid off, along with 3,300 co-workers. But he found a new job almost immediately, with a renewable-energy company. It meant yet another relocation, to San Francisco. So he turned the condo into a rental and headed north.

The need to relocate comes up far more often than buyers realize. One reason Shevy and I emphasize rental parity is to allow the rental plan B to work. People who pay less than rental parity can move to take other work without an enormous hole in their balance sheet. Those who don't heed our advice and have to move end up with an ongoing loser with no relief in sight.

But Mr. Wittenberg found himself agreeing to lower and lower rents, eventually resulting in a monthly shortfall of $1,200 between the rental income and his mortgage payment. By 2009, comparable homes in the area were selling for $210,000, and he still owed more than $300,000. He tried for a year and a half to get the bank to modify his loan, he said, to no avail. So with the help of, he decided to stop paying. is a company that sprang up in 2007 to help homeowners through the foreclosure process, specifically what is called a strategic default. In that instance, even if you can afford to make mortgage payments, you stop paying to force the bank into foreclosing.

The company charges clients an enrollment fee of $199 to $395, and monthly membership fees ranging from $29.95 to $99.95, depending on which assistance plan a homeowner chooses. Then it essentially coaches clients through the process of walking away from their mortgages, helps them figure out which threatening letters to pay attention to and which to ignore and provides access to lawyers versed in each state’s property laws.

As points out in its materials, there is usually no paperwork or response required from homeowners: they should track what documents the bank sends, but other than that, the process is fairly simple. “We looked at how much my home was under water, how much I’d lost thus far and how much I would continue to lose until I started to break even,” he said. “And that could be 20 years away. It was a no-brainer.”

Anyone who is underwater and paying more than a comparable rental would likely benefit from strategic default. It largely depends on how far underwater and how much the rental savings would be. Underwater mortgages still have option value. Even though the property has no equity today, if a small increase in values would create equity, many owners may opt to hang on. Hope and delusion will prompt these owners to tell themselves everything will be okay soon.’s chief executive, Jon Maddux, said that was how it should be — a no-brainer — for hundreds of thousands of people who were underwater on their mortgages.

I think as more and more people know someone that’s done it, they know that, O.K., these people have moved on, they kind of pushed the reset button, and they’re starting over,” he said.

Jon is exactly right. Right now fear is the only thing holding most people back. Once they realize these fears are unfounded, many will opt to walk away.

For many Americans, a mortgage is about more than money. It’s a contract that should not be broken, a debt that should under almost all circumstances be paid. In this context, walking away has been framed as an ethical or moral issue.

But many economists, and legal professionals, say it’s not and is simply a matter of contract law. “If your home is a financial asset, and it’s financially rational to walk away, that’s what you do,” said Nicolas Retsinas of the Joint Center for Housing Studies at Harvard.

Mr. Maddux of said his site had helped more than 7,000 homeowners walk away and that, for most of them, a change in their all-important credit score was the biggest downside.

all-important? A credit score is not important to people who don't use credit. It's only those who are addicted to consumer credit who fuss over their credit scores.

Among the company’s clients, the average score drops 100 points, he said. Fair Isaac, which provides the industry-standard FICO credit score, released a study this year showing similar results.

But if someone’s original score is on the high end, say a 780, that person will take a bigger hit (150 points on average) in a foreclosure or short sale than someone who has a lower score of 680 or 720 to begin with.

The bigger surprise, according to, is that many clients are finding their scores begin to recover within the first few months of a foreclosure’s becoming final. Mr. Wittenberg said he knew the decision to walk away could spell doom for his score, which was in the low-to-mid 700s, and he didn’t know what other financial complications might arise.

Banks would love to punish strategic defaulters, but in reality, this group is creditworthy and economically savvy. They are a low risk for future credit, and creditors will acknowledge that fact by extending them credit again as soon as the mess is cleaned up.

“Am I going to have to pay this back? What are these banks capable of doing to me? Buying a house again? Out of the question,” he said. “So here I am, upper middle class, I have two degrees, and I’m stuck. Just because I wanted to end the hemorrhaging.”

The impact so far? There hasn’t been any. At least for him.

Mr. Wittenberg lives in his girlfriend’s house in Walnut Creek, so he didn’t have to worry about a landlord checking his credit. He has a job he enjoys. And he said he was done with debt forever. He doesn’t have any credit cards. His car is paid off. “I live in a cash world, and I want to keep it that way,” he said.

Hallelujah! This man has escaped the bondage of debt, and he is not looking back. Kudos to him.

He hasn’t checked his FICO score and doesn’t want or intend to. He shredded every last piece of paperwork from his mortgage and foreclosure.

That’s not to say he has not paid a price, though. He lost his entire down payment and drained a significant portion of his savings account to make up for the monthly rental shortfall.

Mr. Wittenberg said he never planned to walk away from his debts and if the bank had lowered his interest rate by a percentage point or two, he could have continued to rent it out.

In the end, his financial stability, both short term and long term — it would take up to 20 years to break even on the home — trumped any ethical or moral questions he had about honoring his contract with the bank.

What saddens Mr. Wittenberg, he said, is the loss of a home. “I did a lot of work on it, did it all myself, and it was nice,” he said. “But it’s O.K. I’ve moved on.”

I admire how this man has abandoned his attachments along with his debt.

He did note that the lack of permanence in the job market made owning a home for any length of time more difficult.

“It’s not like our parents, where they worked at the same place for 40 years,” he said. “So when you own a house, it’s a huge burden. It’s almost like renting is peace of mind.

It's not "almost like renting is peace of mind." Renting is peace of mind when prices are falling and the job market is uncertain.

SIX hundred miles north, in the rural community of Wilsonville, Ore., Bill Sawyer, 50, sat at a desk just off the kitchen in his apartment in a multiunit complex near the I-5 freeway, about 17 miles south of Portland.

Mr. Sawyer, who works as an operations and policy analyst for a state government agency, said a couple of years ago, his credit score was in the low 700s. That’s about average on the Fair Isaac scale, which tops out at 850.

He knows his score has gone down, because he stopped paying the mortgage on his former residence, a small town house in nearby West Linn, more than a year ago. But he has no idea how much. He bought the town house in 2000 for $138,000, with a loan from the Federal Housing Administration and a small down payment. Mr. Sawyer was a single father to Vanessa, who was 12 at the time, and Daniel, who was 11.

Over the next few years, the town house’s appraised value grew to $256,000. The mortgage holder, Wells Fargo, approved two cash-out refinancings, and Mr. Sawyer said he used that money to pay down other debts.

He was living like many Ponzis of the housing bubble era. He racked up credit card debts living beyond his means, then he went to the housing ATM to pay them off. The foolishness of this style of financial management was not immediately apparent, so many others adopted this way of life. Few of those people are still living in the same houses.

“They just crunched the numbers like a car salesman might, and, you know, you sign the dotted line,” he said.

Then in 2007, his son, then 18, was killed, along with a friend, in a head-on collision with a truck.

Aside from the emotional and psychological devastation, the accident sent Mr. Sawyer into a financial tailspin. Insurance coverage was minimal, he said, and he was billed by the towing company and the volunteer fire department that responded to the accident.

“There were financial hardships as a result of funeral expenses and so forth,” he said in a low voice. “That started a chain reaction. A maxed-out credit card and line of credit. When you have a limited income, and you make minimum payments, well, that debt just keeps going.”

His story is very sad, but that doesn't change the fact he was living beyond his means. Having a personal tragedy does not mean lenders or taxpayers must give free money to the aggrieved. The man was living as a Ponzi, and the tragedy made matters worse.

Within a year, the housing market collapsed. Similar town houses started selling for $180,000, and with the equity he had taken out over the years, he owed more on the mortgage than his home was worth. He said he spent months trying to negotiate with the bank for a loan modification. When he was unsuccessful, he abandoned the property in March of this year, with the help of YouWalkAway.

Mr. Sawyer had not wanted to check what that had done to his credit scores, but he did. “Oh, boy,” he said, with a small, uncomfortable chuckle, as he waited for numbers to pop up on his laptop’s screen.

“Oh gosh. Never has it been that low. TransUnion 535. Equifax 520. Pretty much start over from the bottom of the barrel now.”

It’s not the bottom of the barrel, but it’s close, and it was made worse by a bankruptcy filing over the summer. The resulting damage to his credit history is what Mr. Sawyer worried about most.

The man is now totally free of debt, yet he is worried about his credit score. He should be celebrating his financial freedom and making plans for the future -- a future without Ponzi borrowing and unsustainable living.

He has what he thinks is a stable job, he said, and he made sure to secure his current apartment before leaving his other property, in case a low score scared away potential landlords. But if something happened with his job, and he had to move, he said his decision to walk away could make everything more difficult.

A future landlord could decide not to rent to him. Insurance companies could decide to raise his rates.

One thing Mr. Sawyer and Mr. Wittenberg do not have to worry about is banks coming after them for the mortgage debt they left behind. California and Oregon are nonrecourse states, which means that lenders cannot take homeowners to court to get that money back. Many other states — including New York, New Jersey and Connecticut, as well as Nevada, a foreclosure hub — do allow recourse. In those cases, walking away can exact a much higher price.

For now, Mr. Sawyer said he felt relief. “We were happy in that home,” he said. “But I didn’t see any other way to resolve this matter without pretty much putting money down the drain for years to come.”

And the financial recovery appears to have started already. Mr. Sawyer was approved last month for a credit card through Capital One. It has a $300 limit and a 22 percent interest rate, but he said he planned to use it and pay it off each month. “I’m going to live within my means and kind of start from scratch,” he said.

Devin Maverick Robins contributed reporting.

The debt-aholic left rehab and went to the bar for another drink. I don't consider that a recovery, I think that is a big mistake.

The bottom line is that most people who strategically default feel a great sense of relief later. The soul-draining debts are gone, and they are free to start over and rebuild a better life.

750 Days on the market

The owner of today's featured property paid $345,000 on 11/19/2003. The purchase price may not be correct as the first mortgage was $344,674. On 11/22/2005 he obtained a $150,000 HELOC which he didn't fully use. On 6/26/2007 he refinanced with a $472,500 Option ARM first mortgage with a 1.72% teaser rate. This investment didn't turn out as planned.

The owner put this property for sale nearly 3 years ago. After 750 days on the market, it's still for sale.

This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707 

Irvine House Address ...  312 DEWDROP Irvine, CA 92603
Resale House Price ......  $360,000

Beds:  2
Baths:  2
Sq. Ft.:  1155
Property Type: Residential, Condominium
Style: Two Level, Modern
Year Built:  2003
Community:  Quail Hill
County:  Orange
MLS#:  P708690
Source:  CRMLS
Status:  Active
On Redfin:  744 days
Beautiful 2003 built condo in the Quail Hill neighborhood. Just minutes from Verizon Wireless and the Spectrum. Spacious 2 bedroom home with attached garage. Do not miss out on this great condo and value. 
Proprietary IHB commentary and analysis 

Resale Home Price ......  $360,000
House Purchase Price … $345,000
House Purchase Date .... 11/19/2003

Net Gain (Loss) .......... ($6,600)
Percent Change .......... -1.9%
Annual Appreciation … 0.5%

Cost of Home Ownership
$360,000 .......... Asking Price
$12,600 .......... 3.5% Down FHA Financing
4.06% ............... Mortgage Interest Rate
$347,400 .......... 30-Year Mortgage
$111,423 .......... Income Requirement 

$1671 .......... Monthly Mortgage Payment 
$312 .......... Property Tax (@1.04%)
$133 .......... Special Taxes and Levies (Mello Roos)
$75 .......... Homeowners Insurance (@ 0.25%)
$400 .......... Private Mortgage Insurance
$288 .......... Homeowners Association Fees
$2878 .......... Monthly Cash Outlays

-$260 .......... Tax Savings (% of Interest and Property Tax)
-$495 .......... Equity Hidden in Payment (Amortization)
$18 .......... Lost Income to Down Payment (net of taxes)
$65 .......... Maintenance and Replacement Reserves
$2,206 .......... Monthly Cost of Ownership 

Cash Acquisition Demands
$3,600 .......... Furnishing and Move In @1%
$3,600 .......... Closing Costs @1%
$3,474 .......... Interest Points
$12,600 .......... Down Payment
$23,274 .......... Total Cash Costs
$33,800 ............ Emergency Cash Reserves
$57,074 .......... Total Savings Needed

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