When I grew up, I watched my parents work hard and pay their bills. Their house payment was the largest of of their bills, but they sacrificed to pay down their mortgage to eventually become payment free. This was the experience of most Americans, a collective lesson we learned about responsibility and deferred gratification. Lenders destroyed that and replaced it with a culture of Ponzi borrowing and a series of poisonous beliefs that turned responsible homeowners into reckless and irresponsible loanowners.
How sweet it is…
It wasn’t enough to merely give millions of Ponzis billions in free-money loans. That alone would have irreparably harmed out culture. No, lenders didn’t stop there. When the ATM benefits ran out, they allowed the Ponzis to remain in the houses they could not afford for years without making any payments.
Think about the experience of many people over the last fifteen years. While most of us were working and paying for our housing costs through rent or steady mortgage payments, a large cohort was converting the appreciation of their properties to spending income. Rather than the house being a monthly expense, it was actually a source of income, and many came to depend on this income as a way of life. When that income dried up, these same people were not asked to pay for their housing. For a big portion of their adult lives, housing has not been an expense. Think of the shock and horror when the foreclosure finally happens and they have to pay rent. After fifteen years of HELOC dependency and squatting, such a change will be quite disturbing. It will be rough on them when they have to learn to live like the rest of us.
This problem was created entirely by lenders. They created a generation of Ponzis who view free housing money as an entitlement. And now with assistance of the government and federal reserve, they are forcing the rest of us to pay for their mistakes with bailouts and reduced interest income on our savings. As the final insult, we must watch as banks allow these people to squat in what should be our homes so they can prop prices up and make us pay more for what should be our houses.
Does Florida Have A ‘Culture Of Delinquency’?
August 23, 2012, 6:10 PM — By Robbie Whelan
Not all of the “sand states” are equal when it comes to the share of borrowers who are behind on their mortgage loans.
A new report out Thursday from real estate services provider Zillow found that while Florida is not the worst state for negative equity, the Sunshine State’s borrowers have disproportionately high delinquency rates on their loans.
In Miami-Ft. Lauderdale, 43.7% of borrowers are underwater, while 24.9% of them have missed at least three months of payments. In Tampa, where 46.6% are underwater, 17.6% haven’t made payments for three months. In Orlando, it’s 51.9% underwater and 18.2% delinquent.
Those are very high numbers. Apparently the word got out that if you quit paying, the banks would not foreclose.
Strategic default is a wise course of action under those circumstances. Why pay when you can have the house for nothing? In fact, I would go as far as to say anyone who is underwater in Florida — or Nevada for that matter — is foolish to pay their mortgage.
Compare that with Phoenix, where 51.6% of borrowers are underwater, but only 8% are seriously delinquent, or Atlanta, where 54.4% are underwater, but only 7.8% are seriously delinquent. Even lowly Las Vegas, where a whopping 68.5% of borrowers owe more than their home is worth, only 13.6% are 90-days delinquent. (Zillow’s delinquency figures — which come from credit rating firm TransUnion – jibe with the Mortgage Bankers Association’s figures.) So what is it about Florida? Why are so many more of the state’s borrowers delinquent on their home loans when fewer of them are underwater?
In non-judicial foreclosure states, lenders have done a better job of randomly foreclosing on enough borrowers to create uncertainty in the herd. It’s a terrorist tactic of random violence, but it works. If the individuals in the herd do not know if they will be executed or spared, fewer are willing to take the risk. In Florida, borrowers know they can quit paying and stay for free. With little uncertainty, there is little risk, so everyone does it.
Part of the answer could lie in foreclosure timelines. Florida is the only one of the four notorious “sand states” (the others are California, Nevada and Arizona) that has an exclusively court-based foreclosure process, and the state’s courts have been jammed with thousands of cases. As a result, the foreclosure process is taking longer than ever – an average of 861 days in April – from start to finish.
The average foreclosure takes nearly two and a half years. How long does it take if people fight or game the system?
So even if Florida has a similar rate of default to that of most other states, defaulters stay delinquent longer, so at any given time, there are more of them.
“There are a lot of people hanging out in that pipeline,” says Stan Humphries, Zillow’s chief economist.
Borrowers could also be encouraged to default by others whom defaulting has benefited – if you can live two and a half years rent-free, before they kick you out, why not, right?
“If you’ve been around people who’ve defaulted, you’re much more likely to default yourself,” Mr. Humphires said.
Plus, it makes economic sense for these people to strategically default. They will likely not obtain home equity in their lifetime.
Ponzis are the only deterrent to irresponsible lending
It’s easy to get upset about the behavior of Ponzis when we are being asked to pay their bills. When it was merely a private contract between a lender and a Ponzi, whether or not the borrower repaid the debt was none of my concern, it was between the two private parties. It was when these parties to a private transaction were rewarded for their foolishness with taxpayer money that it became an issue everyone should be concerned about.
In the end, the moral hazards of the bailouts will create more Ponzis as lenders are emboldened to make more bad loans. Ponzis are like a virus to banks. If they proliferate out of control, the losses these borrowers generate will wipe out the banking system. This latest round of Ponzi creation caused an international banking crisis and nearly crashed the world’s financial system. The bailouts will likely create more. How bad will the next crisis be?
The only way to prevent banks from further damaging our culture by creating another generation of debt dependent losers is to force the banks to absorb these losses. Alas, that is not what we did. Lenders created a culture of dependency and delinquency in America, and we will suffer from this for another generation. I wish I could point to some legislative act or some enlightened policies of the federal reserve as evidence that we learned our lesson. I can’t. We haven’t learned out lesson. I think we are doomed to repeat this mistake, and next time, it might even be worse. I worry for our children.
The former owners of today’s featured property lived there as owners for 17 years before losing it due to their excessive borrowing. Many people have paid down a significant portion of their mortgage after 17 years. These borrowers went the other way.
- This property was purchased on 12/5/1995 for $240,000. The owners used a $228,000 first mortgage and a $12,000 down payment.
- On 8/30/2001 they refinanced with a $246,500 first mortgage.
- On 5/16/2003 they obtained a $45,000 HELOC.
- On 11/18/2004 they refinanced with a $420 first mortgage.
- On 1/7/2005 they obtained a $60,000 HELOC.
- On 3/30/2007 the refinanced with a $490,00 first mortgage and obtained a $62,000 HELOC.
- Assuming they maxed out the HELOC, total property debt was 552,000 and the total mortgage equity withdrawal was $324,000.
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Proprietary OC Housing News home purchase analysis
24642 VIA VALLARTA Yorba Linda, CA 92887
$448,900 …….. Asking Price
$240,000 ………. Purchase Price
12/5/1995 ………. Purchase Date
$208,900 ………. Gross Gain (Loss)
($19,200) ………… Commissions and Costs at 8%
============================================
$189,700 ………. Net Gain (Loss)
============================================
87.0% ………. Gross Percent Change
79.0% ………. Net Percent Change
3.8% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$448,900 …….. Asking Price
$15,712 ………… 3.5% Down FHA Financing
3.55% …………. Mortgage Interest Rate
30 ……………… Number of Years
$433,189 …….. Mortgage
$112,639 ………. Income Requirement
$1,957 ………… Monthly Mortgage Payment
$389 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$112 ………… Homeowners Insurance at 0.3%
$451 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,910 ………. Monthly Cash Outlays
($292) ………. Tax Savings
($676) ………. Equity Hidden in Payment
$18 ………….. Lost Income to Down Payment
$132 ………….. Maintenance and Replacement Reserves
============================================
$2,092 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,989 ………… Furnishing and Move In at 1% + $1,500
$5,989 ………… Closing Costs at 1% + $1,500
$4,332 ………… Interest Points
$15,712 ………… Down Payment
============================================
$32,021 ………. Total Cash Costs
$32,000 ………. Emergency Cash Reserves
============================================
$64,021 ………. Total Savings Needed
The property above is available for sale on the MLS.
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29 Responses to “Lenders created a culture of delinquency”
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IR: ”I think we are doomed to repeat this mistake, and next time, it might even be worse”.
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It is assured the next time will be worse simply because an un-backed fiat system is entirely faith-based.
In other news:
Housing assets plunged 29% from the peak in mid-2006, but mortgage debt only edged down 8% from its peak in 08. This has left left the aggregate loan-to-value ratio at 60%. Prior to the crisis, the loan-to-value ratio averaged 40%. To restore a normal loan-to-value at the current level of housing wealth, households would need to pay down their mortgage debt by US$3.2tn.
http://www.zerohedge.com/news/3200000000000-question-why-housing-has-much-more-drop-it-bottoms
pay down debt? It’s sounds like a foreign language. Debt is is wealth.
Seriously, according to this chart in loan-to-value in the early 80′s was in the low 30′s. We have fallen so far.
I sort of see 4 different housing groups owners:
1) No debt home owners
2) People with around 25% to 35% equity, but have 15 year loans
3) New FHA debtors with no equity
4) The squatters and the negative equity loan owners.
Where do i fall.. I have 15% equity and just bought in late 2011?
There are a few who closed late last year who timed the market very well. However, even if your property has increased in value by 15%, if you were to sell it, you wouldn’t get that full amount, and you would have to pay sales commissions. Your timing was excellent, and as a result, you probably could get out for what you paid, perhaps even with a small profit. That is very unusual. Most people have to wait two or three years to get back to breakeven.
Nonsense! In the new economy, nobody knows for certain how much equity they really have until it is technically realized. That means you have to sell.
Whether or not this makes nominal prices drop, it will certainly contribute to ongoing deflation. Banks will continue to write down loans, and they destroy money in the process.
For me, debt is wealth when I collect 30%-100% more then the fully impounded mortgage payment in rent on a 4% handle fixed rate loan.
Debt destroys you when you used an O-ARM to buy a property at double its rental value.
To me, you pay off debt because it makes you feel good. With interest rates where they are at, I am not sure it make compelling financial sense.
“Debt destroys you when you used an O-ARM to buy a property at double its rental value.”
That’s the type of debt I’m talking about. I need a $65K car, when a $35K will do more nicely and can put the extra money to my retirement.
I’m going to rent out my existing place, when a purchase a new one after prices go down. Although it will be closer to 25%, on a 15 year loan.
Problem is, US wages are not indexed to inflation so you can only raise rents by what the local economy can support.
The problem with “good financial sense” is that it is good only in terms of numbers, but it is not so good when you realize that sense is relevant to people who contend with emotion, wants, desires, denial, rationalizations, etc.
Good financial sense leads to over leverage whereas the paying down of debt is better financial sense in reality.
“To me, you pay off debt because it makes you feel good.”
There is an emotional relief that comes with paying off debt. It may not be quantifiable, but it makes sense emotionally whether or not the dollars and cents say so.
I would add that beyond feeling good, living without debt is a lifestyle; maybe quantifiable, maybe not. I contend that living without debt enables one to make much, much, much better financial decisions and enables one to see more clearly the events that will affect one’s financial future. I think it is much easier to see reality without the onus of debt influencing one’s thinking and emotions.
You’re probably right. Without debt, you don’t face the threat of a lifetime of servitude to pay for what has already been. It keeps me focused on the possibilities for the future rather than the hangover from the past.
mortgage costs are going to rise
GSEs to Raise G-Fees by Average of 10 Basis Points
Before the end of this year, Fannie Mae and Freddie Mac will raise guarantee fees (g-fees) on single-family mortgages by an average of 10 basis points.
When the GSEs provide mortgage-backed securities (MBS), they guarantee the payment of principal and interest on the securities and charge a g-fee for the guarantee. The fee is used to cover potential credit losses in case a borrower defaults and for administrative costs.
On Friday, FHFA, the GSEs’ conservator, announced it has directed Fannie Mae and Freddie Mac to increase g-fees as a step toward encouraging more mortgage market participation from private firms.
“These changes will move Fannie Mae and Freddie Mac pricing closer to the level one might expect to see if mortgage credit risk was borne solely by private capital,” said Edward J. DeMarco, Acting Director of FHFA, stated in a release.
The increases are scheduled to take effect on December 1 for loans exchanged for mortgage-backed securities. For loans sold for cash, the increases are scheduled for November 1, 2012.
In addition to making the announcement, FHFA released a report on single-family g-fees for 2010 and 2011, which found the GSEs, on average, increased g-fees by 26 basis points in 2010 and 28 basis points in 2011.
FHFA also noted the report revealed higher risk mortgages were generally subsidized by lower-risk loans, and most single-family mortgages bought by Fannie Mae or Freddie Mac came from a concentrated group of large lenders. According to the report, in 2010 and 2011, the top five lenders accounted for around 60 percent of the GSEs combined business volume compared to under 10 percent for lenders ranked below the top 100.
FHFA stated the issue will be addressed by having the g-fees charged to lenders who deliver large volumes of loans more “uniform” compared to those who deliver small volumes.
Cross-subsidies will be addressed by increasing g-fees on loans that take more than 15 years to mature. According to the report, 15-year fixed-rate loans have a history of lower credit losses.
Congress might increase the fees again, but this time for the mortgage tax. So there might be 2 increases.
The new implemented mortgage tax might increase next year
By Jon Prior August 31, 2012 • 4:30pm
Congress will consider raising the guarantee fees Fannie Mae and Freddie Mac charge to lenders in order to pay for tax cuts and avoid the coming fiscal cliff.
Lawmakers voted last year to raise g-fees in order to pay for a previous round of tax cuts. The Congressional Budget Office estimated at the time the increases would bring in $3.3 billion and $4.6 billion in revenue lost from the tax cuts per year.
Lenders pass these costs to the homebuyer, meaning taxpayers are essentially paying for their own tax cuts.
The Federal Housing Finance Agency raised the fees another 10 basis points effective Nov. 1 for loans Fannie and Freddie purchase with cash. JPMorgan Chase ($37.14 0.24%) analysts said Friday the 10 bps increase from today’s levels would bring $25 billion to the GSEs through 2021.
But in order to avoid roughly $500 billion in simultaneous tax hikes and spending cuts beginning in January, Congress may look again to the mortgage giants.
Adding costs to mortgages will reduce loan balances. Not good for a so-called recovery.
Not to turn this all political, but it is convention week again. There were essentially crickets last week from the GOP on future housing policy while standing above the ruins of Florida.
This week the Democrats will spout off on the following:
http://www.democrats.org/democratic-national-platform#economy-built-to-last
While Democrats may have the balls to mention housing policy at all, they’re perspective of past events doesn’t exactly raise confidence in future policy improvements:
“President Obama took swift action to stabilize a housing market in crisis, helping five million families restructure their loans to help them stay in their homes, making it easier for families to refinance their mortgages and save hundreds of dollars a month, and giving tax credits to first-time home buyers. He also cracked down on fraudulent mortgage lenders and other abuses that contributed to the housing crisis. Democrats have held the largest financial institutions accountable by requiring them to provide relief for homeowners still struggling to pay their mortgages and to change practices that took advantage of homeowners. Democrats also understand the importance of helping communities fight back against the foreclosures that threaten entire neighborhoods, which is why the President proposed to expand the successful neighborhood stabilization efforts in his American Jobs Act.”
It’s 2012, but you still gotta love the “fight back AGAINST foreclosures” line.
Maybe it will win votes away from the other guys.
“Everyone who has a mortgage is good. Every foreclosure is bad, both for the borrower and the surrounding community.” That’s the essence of their housing policy.
Yes, and it is completely and totally wrong. Bad concepts lead to bad policy.
The Democrats will point to everything the government attempted as a success. In reality, even the attempt was futile, and the results were a dismal failure. It’s all political theater designed to placate the Democratic base.
One notion I have had is for the IRS is to create a statute that would define mortgage non-payment to lenders as “imputed income”.
In other words, go ahead and squat in your house, but the IRS is going after you for the rent equivalent income that you otherwise would have paid.
Probably hard to enforce, but would be a useful tool for otherwise egregious abuses.
The “imputed income” from living in a home at less than equivalent cost has been discussed before regarding taxation.
Another advantage:
Anybody who squats would then automatically have their IRS secret score value increased that decides who’s tax returns get audited and whose doesn’t.
Great for the IRS, as it would seem to me that a prototypical squatter would also have a tendency to incubate other tax scams.
Until recently, forgiven debt, which is what non-payment eventually becomes, was taxed as income.
“IRS is to create a statute that would define mortgage non-payment to lenders as “imputed income”.”
I love the idea. It would make the squatting less annoying, and it would provide incentive for squatters to leave the property.
What idea? It is already tax code. The recent “Mortgage Forgiveness Debt Relief Act” has temporarily negated tax on forgiven debt. Non-payments eventually become forgiven debt unless paid or relieved through bankruptcy.
We really don’t need any new ideas or creative solutions. We really need to get rid of 90% of the Federal Government and its interference.
Debt forgiveness used to be taxed, but the value of free housing as measured by owner’s equivalent rent is not yet taxed. If OER were taxed on every household with a delinquent mortgage, that would strongly encourage people to either pay up or get out.
IR,
The loan owner did not lose the house. He sold it to the bank for profit of $250,000 in 2007 (assuming no HELOC taken) and was able to live there for free of some time.
The $250,000 profit (tax-free) can be a over a decade in rent payment or used for a very nice downpayment on another house or condo.
He did what anybody who got a MBA would do — maximize profit. He sold the house to the bank at near the peak, with an option to buy back the house via loan payment or lump sum, then excercised the right to squat for a few years. The banksters, directly or indirectly MBA trained also maximized profits by collection the origination fee up front, got got their bonus, left no personal responsiblity for the loan (no prison time), likely go some retention bonus during the collapse, a severance package upon leaving the bank, and a sign on bonus to move to a new bank. The bank is trying to maximize their profit with the bailout, fuzzy market to market accounting and transferring liability to the taxpayers. The taxpayer without an advocate or very back stabbing advocates are left holding the bag.
I love your cynical outlook. Well said.