Great News! We are NOT in a recession!

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<p>mercymom,</p>

<p>Sorry to disagree with you here. If there is negative equity in the house, the rational thing to do is to walk away, protect your assets and jump back in when houses are much cheaper. This is a business decision, not a moral one. Businesses do it all the time.</p>

<p>[FT.com</a> / In depth - Big deals under threat over bank losses](<a href=“Big deals under threat over bank losses”>Big deals under threat over bank losses)</p>

<p>Paulson was trying to suggest that those who walk away are speculators who are not honoring their obligations. What nonsense. It was a business decision of the banks to lend money to those who could not afford it. It was the banks that decided on the “no money down” policy. Not walking away is the real moral hazard. If enough people walk away, perhaps the banks will be more careful next time.</p>

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<p>I don’t pretend to know business law, so it may be true that businesses easily walk away from their debts by declaring bankruptcy, with no penalty. Would this be because they can reorganize under a new name? </p>

<p>If I declare bankruptcy or just “walk away” from my mortgage, it will follow my credit rating around for 10 years. Too bad I can’t reorganize under a new name. Oh yeah, that would be illegal.</p>

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<p>Canuckguy -</p>

<p>What may (or may not) make sense for a business can make no sense whatever for an individual home owner, esplly as regards their HOME. This isn’t just any asset, it is the house they LIVE IN. The car you purchase loses value the second you drive off the lot. One year out, most people have negative equity in their car. They aren’t rushing to unload the vehicle cause of that, and the car ain’t ever going up in value, it just keeps depreciating the whole time you own it.</p>

<p>With the house you live in,( assuming you bought it to live in cause, well, you need to live somewhere, right?) if you can afford the note (otherwise you wouldn’t have bought it, right?) and there’s no ARM financing muddying the waters, then just live in the darn house. Ten years out the lost value will most likely return and in the meantime all your loan pymts will have reduced the loan principle so you come out way ahead. It’s cheaper than rent. And it’s better than writing a check for $65,000 to close on the sale, or ruining your credit rating, just cause you’re “scared”. I don’t think your business analogy works at all for an individual homeowner.</p>

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<p>The good thing about forums is our ability to disagree. Canuck; I too have to disagree with your premise that if you have negative equity in a home that you should sell it. As a private homeowner using it as their primary residence, there are tax advantages to keeping the house. Also, as mentioned earlier, you have to live somewhere. If you sell it you have closing costs, Realtor’s fees, moving expenses, etc… Then you have to turn around and do the same thing when you buy the new house you are going to live in. Unless of course you’re stupid enough to RENT. We won’t even go there. There are definitely times to rent; but if you are capable of buying a home, and aren’t on a temporary job in that location; e.g. Military, energy worker on a 2 year contract, etc… then renting should be not done unless it’s your last resort.</p>

<p>So, by selling your $200,000 house because it is now worth only $185,000, you still owe $15,000 to the bank; you owe about $12,000 for realtor’s costs for selling the house; another $5000 for misc closing costs and minor repairs required prior to selling it. Add another $2000 for getting into a new house as well as tying up about $30,000 for the down payment on the new house. </p>

<p>Sorry; but OWING $32,000 after selling a house and then having to come up with another $30,000 for a down payment on the next house; or worse yet renting; is really stupid. If you have negative equity, then chances are you haven’t had the house that long. That means you probably are paying the majority in interest. Those interest payments are still a good source for writing off on your taxes. Also; the $32000 plus down payment on the next house has to be considered when you look at your devaluation of the current house. I suppose if your $200,000 house was now only worth $140,000 you might justify unloading it, taking the loss, the new investment on another house, and moving on with your life. Personally, I haven’t see real estate prices drop 30% that quickly. Renting makes no money, but buying if held long enough will always net a profit. (Profit defined as compared to renting). If you lived in a house, chances are you have too much property to move into an Apartment. Therefor renting a HOUSE is as much or more than owning it.</p>

<p>Anyway; as described earlier by others, if you aren’t being evicted or forced to relocate, then there is absolutely no reason in the world to sell your house because the value happen to have gone below what you owe. Hell, the first thing you could do is go to the bank and see about refinancing it with lower interest rates. If the market is that bad, the interest rates have probably dropped below what you got them at. Oh, and for what it’s worth, an ARM is the worst thing a person could do unless they are an investor and plans on selling the house in less than 5 years. If you can’t afford to buy a house at a fixed 15,20, or 30 years mortgage, then buy a cheaper house and work up, or wait another year until you can afford it. There are no free lunches. There’s a reason for ARM mortgages. If you know for a fact that in the next 3-5 years that your income will rise dramatically; e.g. inheritance in probate, major load that will be paid off in the next couple of years, guaranteed income increase, etc… Those are the only times an ARM should be used. An ARM will either get you a larger final interest rate or some type of cost up front or on the back side.</p>

<p>Anyway; as mentioned earlier, you have to live some place. Unless you are forced to relocate or are going to be foreclosed on, just sit it out. Economies, including the real estate market, are cyclical. They go up and they go down and then they come back again.</p>

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<p>Todays financial problems have been caused by a number of factors which have all come together at the same time in a bit of a “perfect wave” sort of scenerio.</p>

<p>In the last decade money has been very cheap due to interest rates being kept so low for so long and at the same time the lending standards became extremely and unrealistically lax. People were approved for mortgages without even having to prove income. At this same time many people borrowed the equity from the homes they owned w/these second mortages and purchased more “stuff”. In addition speculators bought homes hoping for a quick sale turn around w/ loads of profit. All of these mortagages were wrapped together and sold all over the world to banks/investors who believed they were a solid investment. Then the housing bubble burst and peoples houses were not worth as much. In addition many of the adjustable rate mortages were set to reprice at signifigantly higher rates than owners could afford. Speculators were unable to sell their homes. People started defaulting on mortgages and not paying. All the world banks/investment grps. that bought these wrapped mortgages realized that they were not safe investments after all and had no idea what they were worth. Banks and investers wrote of billions of dollars as they tried to determine how much $$ they were losing.</p>

<p>Same time consumer prices have risen. Milk, grain, gas (oil at record highs as I type) etc. The American consumer is 70% of of our economy. He is tapped out. Where can he go for $$$? He can no longer borrow his equity so he is forced to borrow on his credit cards. Now people are not able to pay their credit cards and they are defaulting on these high interest loans. This is a reality and banks are losing more money and no longer want to lend ANY money to anyone. Try getting your student loan yet? There is only one place left for people to get money and that is their retirement accounts which are being borrowed from increasingly. Many,many retirement accounts have all taken a 15% hit in the last 6 months.</p>

<p>So the consumer cuts back and retail stores feel it first, car sales are down etc… People lose jobs. People have also lost jobs at mortgage companies. We are in two months of national job loss. </p>

<p>This is ugly folks and will not get better for some time. The fed is trying to “fix” things but they can only do so much. The gov’t is panicked and the fed is panicked but they are not going to tell you this because they don’t want you to panic. Stay tuned…oh, and darn, I sure do hope I am wrong.</p>

<p>crosspost w/above</p>

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<p>Every recession is a little bit different in its cause but has a similar impact. Worry, fewer jobs, small and some large businesses close, asset values decline. I can barely count on both hands how many I have now lived through and it always seems like the end is near and then in a couple of years things pick up and life goes on. If we do slip into a full recession it’s not the end of life as we know it. This too shall pass and if you have some $$$ it’s a great buying time. I just heard gas in Europe is around $10/gallon–feel better.</p>

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<p>Canuckguy is spot on with regard to the morality of walking away from an asset which is overencumbered - at least as a business decision. Our legal system is set up with numerous opportunities for wealthy individuals to do just that. The corporate business form is designed specifically to allow the investors who own the business to walk away without paying their obligations if things go bad.</p>

<p>The thing is, we have a double standard. If a poor or middle class person walks away from $50,000 in debt by letting their home go into foreclosure or a short sale (one of the few ways an average person can legally ignore a debt, in most states), they are castigated as immoral, and punished in their credit rating and future borrowing abilitiy for years. The savings and loan failures during the Reagan administration were an example of the wealthy doing the same thing on a vastly larger scale, and walking off smelling like a rose - at the taxpayers expense. Charles Hurwitz and his Maxxam Corp. were classic employers of this tactic -which has resulted in Hurwitz amassing a nine-figure fortune.</p>

<p>But if Joe Homeowner tries the same thing on on everyday scale he will be castigated and punished. Just part of the everyday double standard in America.</p>

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<p>I just heard gas in Europe is around $10/gallon–feel better.</p>

<p>But their cars can go for 60 miles per gallon, some of the things Americans drive can go for half a block.</p>

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<p>They probably levy high tax on gas prices so people will have to use mass transit.</p>

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<p>I wouldn’t mind a tax if we had mass transit.
They levied a tax to pay for a monorail in Seattle and then killed it.
However- they keep raising price of buses but they drive on same roads as everyone else.</p>

<p>The routes suck too.</p>

51

<p>I think kluge understands where I am coming from. </p>

<p>Let me be more precise. I am not suggesting everybody with negative equity in their house to walk away. However, if it is in your best interest to do so, and you are willing to pay the price, by all means walk, and the earlier the better. No, I do not mean selling the house; I mean creating a deliberate foreclosure.</p>

<p>Who do I think should walk away? Two groups come to mind immediately. Those who will have to do so later anyway and those who are in over their head financially. Walk away early is the best thing they can do for themselves.</p>

<p>If I bought a home for 400 thousand and it is dropping in value even before ARM payments kick in, why should I not buy a second home selling at a lower price with more upgrades and stop payments on the first, triggering a foreclosure in the process? When I put no money down on the first house, even getting a bad mark on my credit rating for a few years is worth it. Just think how much further I am ahead financially. </p>

<p>If the value of the house goes down and the payments go up, forcing a foreclosure is a rational thing to do, even if I can make payments. My opinion, for what it’s worth.</p>

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<p>Jim Cramer from Madmoney has been suggesting “walk away” from mortgages. I think it depends on how much negative equity, if it’s 50% like $400K down to $200K. That makes a lot of sense. But if it’s $400K down to $360K. It’s not worth the hassle.</p>

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<p>Homeowners also receive great benefits in the tax code not applied to commercial real estate or companies. Don’t like the laws, change them but don’t ***** about them being unfair all of a sudden. They have been about the same for decades.
Most people in Europe have the same BMWs and MBs and others we have. They ain’t getting any 60 mpg on average.</p>

<p>Also the S&L debacle began with Carter. And of course Wall Street helped make it HUGE.</p>

<p>[Savings</a> and Loan Crisis - Wikipedia, the free encyclopedia](<a href=“Savings and loan crisis - Wikipedia”>Savings and loan crisis - Wikipedia)</p>

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<p>[US</a> Gas Prices](<a href=“US Gas Prices”>http://www.gas-cost.net/)</p>

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<p>I can’t believe you guys are agreeing with that crazy Jim Cramer. Here is an analysis of the pitfalls of “walk away” mortgages and forcing a forclosure that I read in the LA Times:</p>

<p>"Here are the options:</p>

<p>(1) Try to sell the property for enough to clear the mortgage. If that can’'t be done, then</p>

<p>(2) ask you lender if they will let you sell it for what you can get and forgive the difference between the selling price and what would still be owed on your mortgage. That difference between the selling price (lower) and what you owe (higher) will be considered income to you. You will have to pay income tax on it and how much depends upon your tax bracket with that amount added to your other income. This proceedure is called a ‘short sale’ and will show up on your credit report as a NEGATIVE thing that will hurt your credit. The lender writes of the difference that they ‘forgave’ as a bad debt. All the ‘forgiveness’ means is they won’t sue you for it.</p>

<p>(3) If it goes to foreclosure, the lender (creditor) will arrange for a foreclosure auction to be held. The property will sell to the highest bidder. Typically, if the price isn’t getting to a point equal to or greater than the amount of the mortgage and all the fees, then the lender will bid on the property for an amount equall to what they are owed (and they will try to sell it through a relator later.) Since the lender bid and ‘paid’ the purchase price in amount that is equal to what the lender is owed, you walk away owing nothing. There is no income to you as the bid paid the amount due, and thus, no tax consequences. </p>

<p>It would be highly unusual for the lender to let it be sold for less than they are owed. If they did let it go for less than they are owed, then you are still liable for the difference and the lender can sue you for it. </p>

<p>Unless the lender gives you a written document releasing you for any amount still owed after the foreclosure sale, you are on the hook for the difference for somewhere between 10-20 years at least depending upon the laws of the state. The odds of the lender releasing their claim agianst you for the balance are somewhere between Slim and None and Slim just rode out of town. </p>

<p>If there is still an amount owed after the foreclosure sale and you do not pay it, it will go on your credit record as a bad debt,</p>

<p>If the house goes to foreclosure, you are basically seriously screwed on your credit record. You will usually pay a lot higher rates for car insurance, individually purchased health insurance, and credit cards and anything else like that.</p>

<p>You can expect to have a hard time renting a place - landlords do credit checks and a foreclosure is a huge black mark.</p>

<p>You can expect to have a hard time getting a job - employers do credit checks and agian it is a huge black mark that will take your credit score into the sub-basement. (A ‘short sale’ ahs pretty much the same effect unless you personally pay the lender the difference between what is owed and what the house brings.)</p>

<p>You can expect to have financial problems because of your credit score and the foreclosure/short sale being on it for at least 10 years. The credit reporting agencies only go back and cover 10 years last time I checked."</p>

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<p>Apparently in Calif. there are things called payment money loans, or some such, that act like a non-recourse loan and they can’t come back against you personally after a forced foreclosure, but if you are not in Calif or you don’t have that kind of loan you could have a lien for the unpaid mtge filed against you and recorded for 10 years, renewable for another 10 years, and it can attach to the next piece of pty you buy, and maybe even garnish your wages and stuff like that.</p>

<p>If there is a short sale with a loan forgiveness provision, it triggers income tax consequences for the debt forgiven…how’d you like to have $200k or more in add’l income one year…for which you have to pay tax and yet you never saw the money? A foreclosure could get a 1099 rpted on you for income tax on the entire foreclosure amt in certain circumstances.</p>

<p>As for being able to walk away as a good business decision, that might be true if you had a non-recourse loan instead of a recourse loan on your house, but a non-recourse loan is usually a negotiated for item in a business deal - not something used for the purchase of a house by an individual.</p>

<p>Frankly, I was surprised that Calif (and apparently maybe Ariz) have any type of mtge lending that would even remotely let you walk away from a house mtge. Where I live they would come after you for the full 10 to 20 years, slap that lien on you and wait for the first available chance to execute a deficiency jgt after suing you for “walking away”.</p>

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<p>Purchase money loans are the things that work like non-recourse loans.</p>

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<p>According to this cars in Europe aberage 40 mpg–not 60. I can buy 40. The photo of one of the 60 mpg cars shows how limited they are in size and carrying capacity. It’s a mini car. Also most are diesel which is more expensive and harder to find here.</p>

<p>[U.S&lt;/a&gt;. ‘stuck in reverse’ on fuel efficiency - The Driver’s Seat - MSNBC.com](<a href=“http://www.msnbc.msn.com/id/17344368/]U.S”>http://www.msnbc.msn.com/id/17344368/)</p>

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<p>[Loremo:</a> The ‘Low Resistance Mobile’ - MSN Autos](<a href=“http://editorial.autos.msn.com/landingpage.aspx?cp-documentid=457882&landing=newcarresearch&icid=403&GTI=10863]Loremo:”>http://editorial.autos.msn.com/landingpage.aspx?cp-documentid=457882&landing=newcarresearch&icid=403&GTI=10863)</p>

<p>A good diesel getting 150mpg. Comes out in Europe this year and hopefully the USA next year. Diesels are much better for the ecology and economy. The problem with diesels in the USA is that the US car manufacturers were CHEAP and tried modifying gasoline engines. They couldn’t handle the compression and were junk. Because of that, they have gotten a bad rep. Besides the load; that’s another good reason on Semi trucks. They can run the things for years. Much longer and better than a gasoline engine.</p>

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<p>Good point, Mercymom. Not all states have what’s called “antideficiency legislation.” California does, and I’ve seen varying reports as to other states. And the antideficiency legislation doesn’t cover all situations, either. So the options are different in different states and circumstances.</p>

<p>The corporate shield from personal liability works everywhere, though, as long as basic rules of corporate operation are followed.</p>