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Upside Down on Home
stateoftheart
Registered User new member
Registered User new member
So we got our property statement for the coming year and it's bad.
We paid $197,000 in 2007 for an 1800sqft home with 3 bedrooms and a den. It's in a nice Phoenix suburb and I think 109$ per square foot is a good price.
Our property statement assessed our home value at $77,000 for 2011. That means we're upside down about 60%.
We have no trouble making our mortgage payment but we're not sure we want to live in Phoenix for the long term, we're both finished with school and might find better opportunities elsewhere.
Anything we did to get out of our home would probably wreck our credit for the next 7 years, but at the same time we might not be able to sell this house for a decade.
At what point is it okay to consider a "strategic foreclosure?"
We paid $197,000 in 2007 for an 1800sqft home with 3 bedrooms and a den. It's in a nice Phoenix suburb and I think 109$ per square foot is a good price.
Our property statement assessed our home value at $77,000 for 2011. That means we're upside down about 60%.
We have no trouble making our mortgage payment but we're not sure we want to live in Phoenix for the long term, we're both finished with school and might find better opportunities elsewhere.
Anything we did to get out of our home would probably wreck our credit for the next 7 years, but at the same time we might not be able to sell this house for a decade.
At what point is it okay to consider a "strategic foreclosure?"
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Also, before you start worrying too much, make sure the $77k is actually the real assessed value, and not the "taxable value" or something like that. My home just recently appraised for $135k, but the taxable value is like $70k. How the taxable value is calculated differs based on where you live, but just make sure the number you're looking at is what you think it is.
You really don't want to fuck up your credit behind a foreclosure. Employers see that.
A better idea would be to go to Zillow.com and pop in your address. It's not a real assessment but it's a good snapshot idea of the sellable price of your house, and they give a range as well.
2) This would be a good time to strategically default if someone threatened your life to force you to sign the loan documents. Otherwise, I would suggest that you made a bad investment, but one that you can live in. Do what you can to save up money or pay down the balance, so that you won't be underwater when you do sell it. Besides, who knows where the market will be when/if you decide you want to leave town?
My assessed value is substantially lower than the actual value because certain kinds of exterior rooms don't count (seriously - my house is taxed as one bedroom because the other bedroom has three walls with exterior windows, thus qualifying it as an enclosed patio right now. That might change in 2013, but for now it's kind of funny) and neither most outbuildings nor landscaping contribute.
The rules vary place to place, but in many states, just the fact that you do or don't own additional lots can contribute to the assessed value of your primary residence. In my municipality, you get a substantial homestead reduction if you only own one piece of real estate. It'll show as a massive drop in your assessed value with the township, but the actual sale value of the home is obviously unaffected.
Also be happy that your property taxes just went down
The house is now worth 370K and the mortgage is like 528K. Between the two of them, they had more than enough income to cover the mortgage payments.
Strategic default was the right move for them.
Also, it more than likely is the right move for you if you ever want to move. Your house will not be worth 197K for another 10 years, and may not reach the inflation adjusted price of 197K again in your lifetime. The more money you dump into a bad mortgage, it is just money you are flushing down the drain. The sooner you get it over with, the sooner you can get on with your life.
You will have to pay cash instead of credit the next 4-5 years. This is something that is very easy to do as long as you are not financially retarded. You will need to save up money for a down payment to buy things like cars and a new house. You will have all your credit cards busted down to $500 dollar limits because the companies think you are liable to declare bankruptcy. The initial credit bump is around 200 points. It will get slowly better after that once the foreclosure goes through.
Things to do:
Verify that you will not have any liability for the mortgage if you stop paying. Verify this with the property taxes. Verify it with the 2nd mortgage if you have one. (You are not liable for any of these in California, I believe Arizona is the same, but I did not do in depth research on that states laws) If you have a 2nd mortgage, did you refinance it at any time or is it still considered "purchase money"? (Yes, this matters)
Once you have figured those out, ask yourself the following questions: Do I need to buy a new car in the next 1-5 years? If yes, go figure out the car you are going to buy and buy it. Do NOT buy it with cash even if you can, you WANT to finance it. (Getting a 0% interest rate is fine, I recommend 3 years/0% if you can find it.) This car is going to help you rebuild your credit quicker after the default.
Stop paying your mortgage. Put the money you are not paying in mortgage and property taxes into an account. You will use the money in this account later to ensure that you can find a place to live despite your credit. If a apartment community does a credit check on you and then tells you that they will turn you down because of that, let them know that was due to a foreclosure and offer to pay 3-6 months rent up front.
Save up 78K over the next 4-5 Years that you are not paying on your mortgage and buy whatever house you want. Trust me, in 4-5 years, if you can give a 50% down payment and show income, no bank is going to turn down your loan if they see a foreclosure in your distant past. Or never buy again, you are better off financially doing that anyway.
How better off financially will you be? Im bored at work, so Im going to tell you. I will assume a 5.5% interest rate on 197K mortgage. I will also assume that I can buy your house today for 77,000. This means you are underwater 120K. I will assume that housing prices will increase 2% a year (it wont, but im being nice). I will assume that if you invest the cash you arent paying on the mortgage at 5% after inflation (conservative estimate) and I will assume that rent where you are is half your montly mortage payment of $1,118.54 or $559. (Rent can be more than this, remember that you also are not paying property tax or homeowners insurance)
Basically, this means that you will $559 a month, instead of paying a mortgage of 1,118.54 a month.
After one year, you will have saved 6,896, if you were still paying your mortgage, you would owe 194,346 on a house worth 78,540
After year two, saved 14,114. If not, mortgage 192,020 and house price 80,111
After year five, saved 38,192. If not, mortgage 182,147 and house price 85,014
After year ten, saved 87,207. If not, Mortgage 162,606 house price 93,863
If you wait all 30 years. Saved 467,397. Mortgage 0. House price 136,740.
So, basically with this example, you pay 467,397 for an asset worth 136,740.
Why are you acting so Right? How do you know so much? Why shouldnt I give you another strike for telling the truth?
I can also guarantee you that I have done more research on this subject that all of the people above combined. Then multiply all the time they spent by 10. I have spent more than that.
A friend of mine went to a lawyer for advice. The laywer gave him information that is incorrect. (It was correct in 2008) So I know more on this subject than a lawyer that charges $300 to deal with it.
And one last little nugget. If someone walked up to you on the street today and said, "Hi, I want to give you $120K but in order to do so, you must find somewher else to live and take 200 points off your credit"
Would you do it?
Because that is the situation you are in right now.
Jesus, Kath. This is just terrible. These are young professionals stating out, having a huge black X on their credit can really fuck up their professional opportunities. I've seen offer letters rescinded for shit more trivial than this.
It's a moot point anyway, because the posters above are probably right. The county has litte interest in your home's market value aside from the property taxes, so it's likely just a tax assessment.
Actually it's more important than ever. This isn't a "keeping up with the jones" type thing. Fuck that shit. This is how much mileage you can get out of your resume and your word in a world where credit is a helluva lot harder to get than it used to be.
Who cares about the assholes on the block. It's harder to move to a new block if you can't pass a credit check or get a mortgage without paying $TEXAS.
The wealthy can quite fucking literally afford to say "fuck the haters", because they have money. When you have money, it's a lot easier to repair / do without credit and wait it out.
Of course! Ruining your credit for $60,000 of imaginary market money is completely insane imo. Rebuilding your credit sucks balls and takes years and your $140,000 house could be worth $250,000 in 5 years. Real Estate is motherfucking funny like that.
With respect, the stigma of walking away from your mortgage isn't something that is diminishing or going away any time ever. If anything it's just another way of sorting people into their class buckets.
That is rather terrible advice, Kath. I'm a mortgage professional who works with delinquent homeowners, and this sort of scheme is how people really screw up their financial future.
Remember that a homeowner has absolutely zero power over a bank. Depending on the loan and state laws, a deficiency judgement for over $500k may be able to be obtained on a foreclosed home (numbers specific to this case). Garnishment of wages and endless collections calls (which are far shadier and often have a far worse effect on credit ratings) are what one can look forward to.
If you want to try a "strategic default" know that getting something from mortgage servicers can be both difficult and tiresome. Often, resolving a mortgage delinquency is a process that can take up to a year, and commonly lasts at least 3-6 months.
What you'd want to attempt would be a loan modification under the Home Affordable Program. You would need to be able to prove "immanent default", which simply means that while you can afford the loan at the current time that a default will be immanent unless the payment is adjusted. The HAMP program works off of a flat rate payment equal to 31% of your gross monthly household income. So if your payment is already under that 31% you'll have a really tough time.
The HAMP program, in some instances, will forgive principle balance. This is far from common, and in my professional opinion adjusting values is simply not something that banks are willing to do.
As others have pointed out, the tax assessed value is not an indicator for market price. Check Zillow and keep an eye on any sales in the surrounding areas for compare and contrast.
Most helpful would be if you were able to make additional principle payments over the next few years to try to adjust the balance, though you'll have a hard time breaking even for more than a few years.
In any case, attempting a modification and/or paying down principle while waiting for markets to recover some is the best bet.
If you ABSOLUTELY need to move, a short-sale would be the best option. Mortgage companies are sometimes willing to allow a sale for less value than the loan to satisfy the entirety of the debt.
Good luck.
No, really, its not. Its real money that you WILL be paying back over time.
I can see you have done no research and you have no real arguments except that it will be some huge black mark on someone's resume.
Let me put the financials in little baby terms you can understand.
You finance an XBox for $300. The next month, Microsoft cuts XBox prices to $100. So your neighbor can go out and buy the EXACT SAME THING YOU HAVE, however, you still owe $290 on your XBox.
A rational human being would say, here you go Best Buy, you can have your XBox back and Im not going to pay the $290. BECAUSE AT THIS IMAGINARY BEST BUY, YOU CAN DO THIS. ITS ALLOWED. (Just like he can walk away from his house) If I decide I really want an Xbox, I can go out and buy one for $100.
And Deebaser, I dont know if you work for a bank, or are just one of those that believes everything the media says, but I will bet every penny I own and then every penny I make over the next 5 years that their house will not be worth 250K in 5 years. If you have done any research at all, it is very easy to see this.
Oh, and back to big numbers, if stateoftheart wants to move, that "imaginary" money you are talkign about become VERY real, VERY quickly when a real estate agent says, I can only get 80K for this house, youll need to bring $117,000 to closing if you want to sell.
My house is valued at like 177 on Zillow, i paid 250 for it. Discouraging yes, but i'm not freaking out just yet.
I thought strategic defaults were only really done when it would take you to the brink to make your payments. Rather than spend all disposable income on your mortgage and never be able to save anything, you take the hit and default. if you can comfortably afford your payments, I don't really see how defaulting would benefit you. The bank isn't just going to say, oh he doesn't want to pay his mortgage, we'll take the house, ding his credit and call it square. I hear short sales are a HUGE pain in the ass, but i'm betting that it's better than what's involved in a foreclosure.
Basically, don't freak out. look on zillow for recent sales in your hood, talk to an agent, just get a better idea of what kind of situation you are in before making any sort of decision.
Walking away from a mortgage means you will have to pay a different bank a shitload more money if you want to get another mortgage in the next seven years, and possibly longer.
If you'd bet a property that you only barely know the location of can't possibly increase 50% in value over five years, you are very silly. Real estate is a funny thing, champ.
Under-educated and over-opinionated is no way to go through life, son.
Oh good finally getting the straight up lies from a bank person. This is great.
Currently banks in California are trying to get homeowners to refinance their loan. Its to help people out right?
Nope. Wrong. Banks in California want you to refinance your loan because then the loan is no longer "purchase money" and you ARE THEN LIABLE for the loan. In California, banks CANNOT garnish wages, get court judgements, or come after you for one dime, if you walk away from a house made with purchase money.
Ok, then why shouldnt I short sale?
Banks want you to short sale because it is better for THEM. (Not for you.) In a short sale, banks continue to get your higher mortgage payment right up to the point where they sell the home at a lower price to someone else. Wait, that makes no sense, why would a Bank what to DECREASE the amount of money they are getting out of a home? Remember a bank is not a person, they are not giving you a short sale because they are being nice, they are giving you a short sale so you dont do the alternative (which is walk away) and then they get nothing for the months the home is unoccupied.
So what does the bank do? Dangle the carrot of the short sale in front of you. They will have you continue to pay for months and months while they try to "sell" your house. However, most real estate agents will not even bring their clients looking to buy to a short sale home. Why? Because the bank makes it as difficult as possible to actually buy the house. They do not want new people moving in paying less. A bank is in the business to make money, not help people. Remember, when the bank FINALLY makes the short sale, they are selling the house to someone other than you and eating the difference on your mortgage. If the bank really cared about you, why wouldnt they just reduce the principle of your mortgage?
The endless collection calls are true. Except if endless only means until after your foreclosure. And if you live in California, all you have to say is, "As per California law, I am asking you to please contact me by mail from now on." And then guess what? The endless calls stop.
And HAMP is the worst piece of garbage ever invented. Read the XBox box example. I could "afford" a $10,000 Xbox, but why the hell would I choose to overpay for an Xbox that is really only worth $100. It is a simple matter of value. Whether you stretch out the payments to 40 years or 100 years. I am still paying $10,000 for a $100 Xbox.
Oh, and if you really want to know what kind of things the banks are doing, listen to this. The CEO of Fannie Mae announced publically that he expects a market turnaround VERY soon and that people should continue to pay their mortgages and to not strategic default because it is evil and immoral. Later that week, Fannie Mae annouced earnings, in their earnings documents Fannie Mae said they they believe they will take further losses the next two years as the housing market CONTINUES TO DECLINE.
So the CEO of Fannie Mae tells people publicly that the housing market is improving while at the same time puts in company documents that the company expects the market to continue to decline.
If you have any problem with it, read the following paper. It's from a professor at the University of Arizona. After reading it, google strategic default and look for some forums with
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1597835
Then go to the loansafe.org forums and look for people in the same situation as you, brush up on the law if you are going to do it yourself. Most of the research has already been done. Its just a matter of figuring out what you want to do with your life. And whether or not you want to pay $300 for a $100 Xbox.
And so is eating out of a faceless bank's trough and trying to spread their misinformation, bro.
Actually, I've run nationally award-winning non-profit Foreclosure Intervention programs for the last two and a half years.
I assure you I'm no "bank person".
I have handled over 2000 distinct cases of negotiation with major and minor banks. Homeowners have no power, and playing chicken is a damn dangerous game to play with hundreds of thousands of dollars at stake.
OP, if you're serious about this contact HUD and have them refer you to a local non-profit Housing Counseling agency. They can look, concretely, at the numbers and give far better advice than a bunch of people in H/A.
I'd do it myself if I were in Az. I'm also happy to speak over PM if you have questions or care to give some basic numbers for an analysis.
Also, that paper is utter crap as an authoratative source, aside from any issues on whether strategic defaults are moral or immoral. He cites zillow as a source in lieu of actual government figures.
At any rate, OP you currently have little reason to strategically default. Apparently you enjoy the place you are living and wish to live in a house. While Arizona is a non-recourse state, you would still be incuring pain by walking away. The foreclosure process is long and drawn out and the damage to your credit will take years to repair. In addition there is a chance you will be unable to purchase another house for several years after the foreclosure regardless of your credit. In addition you don't know the actual value of your house as has been mentioned many times.
There are so many 'ifs' in your post that it seems as though you are just trying to justify your feelings of taking a potential bath on an investment. If those potential things pan out, then you may want to evaluate your options. Right now it seems pre-mature.
If you don't have it in writing you don't have it at all. Someone tells you they'll drop your payments by 20% over the phone? Until that's in writing, its a lie. You're supposed to miss a payment to get placed into a modification program? If it isn't in writing, its a lie.
If you're dealing with a large financial institution regarding large amounts of money, avoid phone communication whenever possible and consider any offer given in person or over the phone to be nebulous at best. For any offer, deal, adjustment, balance, plan, modification, or what-have-you, get it in writing or assume it doesn't exist.
Go to loansafe.org
Read the paper I posted and read the news articles that have been made on it.
Its a rough decision to make, good luck.
My wife and I walked from our home, also in a Phoenix suburb. We are paying almost $1000 less a month and renting a home that is 50% bigger than our old one, and the rental is in one of the best school districts in the Phoenix metro. We bought our home for around $300k, and it sold at auction for $85k (yes, Phoenix's housing market is/was that fucked).
People talking about credit are, in my opinion, over-estimating its importance. My wife and I virtually never use credit cards. We bought our last car with cash so no financing was needed. It's been about a year and a half since the foreclosure, and my credit has already recovered to mid 600s - I've even been able to obtain an unsecured credit card to rebuild my credit rating faster. If you are looking for a new job or something involving security clearance it's something to think about.
It's a huge decision and I talked to many people, both online and offline, for months before we decided to move forward. If you do decide to do so, consider yourself lucky AZ law protects you. You are also fortunate that the Mortgage Forgiveness Debt Relief Act will likely protect you from having to pay income tax on the "income" from dropping an upside-down home.
In my opinion, a short sale is not worth the hassle in AZ, where you are protected from a judgment anyway. However, a short sale will shorten the time before you can finance a home again, which is something to consider.
If you have questions about what it's like to go through the whole thing, feel free to PM or ask. I think it's one of the best decisions we've ever made. For those who haven't seen it in AZ, literally every other home on some suburb streets is foreclosing or vacant. I find it highly unlikely that in 3 years banks will reject all of these people assuming they have otherwise flawless credit and good income.
Sorry, i don't want to get knee deep in this, but this is for anyone, anywhere who reads this logic.
This is not how utility works. 10 dollars today is NOT worth 10 dollars tomorrow. Money in the hand is more valuable than expected money in the future. This is called the discount rate, a fundamental idea in economics.
I have a buddy looking at options on an upside-down mortgage and without the person that got banned posting here I probably would have given my buddy the wrong advice. My friend is upside-down about $100K, and I know with that amount of money on the table he would prefer the right advice in the wrong tone rather than the wrong advice in the right tone. (Granted, the rules of friendship are different than the rules of forum-posting.)
I do want to see if I understood this all correctly though, as I’m not versed in the legalities of the housing market.
The OP’s original question was ‘at what point is it okay to consider a strategic foreclosure’? The answer coming down to a balance of these things:
-By doing a strategic foreclosure they would take a 200-point hit to their credit score and have to build this back up. (Ways to plan ahead of time to do this were detailed in the first post by Kathris, such as financing another large purchase before the foreclosure).
-A foreclosure and associated credit hit could negatively affect employment opportunities as well, but people disagree how large an issue this is. The best information we got here
was from Deebaser posting, ‘employers see credit scores’ and ‘offer letters rescinded for s--- more trivial than this’, but Deebaser didn’t actually mention experience with a case of a credit score being the reason for a rescinded offer letter. This issue was seconded by mcdermott later, though the consequences are difficult to judge.
-A foreclosure guarantees a move, as well as having to rent for the next few years until their credit score recovers. (Kathris also mentions ideas for planning ahead for this as well, essentially saving a 3-6 month up-front rent payment to off-set your past foreclosure when you try to rent).
-Most purchases in the next few years would probably need to be made in cash, as getting credit after the foreclosure will be difficult.
-In a positive light, strategic foreclosure gets you out of your bad investment, in many cases a six-figure number, and is much easier in certain states ‘protected by law from deficiency judgments’. Essentially you have to balance two things. On one hand it’s the amount upside-down your mortgage is and your beliefs on how much your home and the housing market will recover. Then you compare that to the negative aspects listed above.
-Other methods of saving your mortgage were also mentioned, but do not address the OP’s question, and many of the methods were shot down as ‘not a good option’ by multiple people in the thread.
Do I have that right?
I know as a rule you don’t argue with moderators, but I found it frustrating that after slogging through tons of crap online to try and help my friend and finally finding an unaffiliated person who had done the research, gone through the process, and was willing to discuss specific numbers and options I might not be able to contact this person (hopefully PMs get through to banned people). Most people on this issue seem to be affiliated one way or another, or just give a quick opinion to get their post-count up, or, as evidenced in this thread, tend to give very poor advice- which I would have followed if not for the banned poster.
I know moderators have a job to do, and the banned poster wasn’t exactly polite, but the person whose input seemed most valuable in this help thread was banned, and the person (people) who were not addressing the OP’s question and apparently were giving very poor advice are around to give more poor advice. I just read this today, maybe there was something truly heinous that got deleted, in which case I apologize. I know it doesn’t matter if I agree or not since it’s not my thread to moderate, but that’s my piece.
P.S. That was a simplified example, and I believe that poster went into how that amount would all become very real money right now (if the OP decided to sell and had to cough up the $120K difference at closing), plus for people more versed in economics they posted a mathematical analysis with estimated inflation and discount percentages per year by holding onto the mortgage.