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A friend of mine who lives in Sacramento, CA is planning to buy a second home and foreclose his first home which is losing value right now. He also borrowed around 80k from the equity (Equity Line of Credit) of his first house 2 years ago. Now the home's value dropped and he owes more than the home is worth. He also has an Option ARM mortgage and he is expecting his mortgage payment to balloon drastically in 2 months time.
He plans to buy a 2nd home then immediately stop making payments on his first home and just abandon it. What will be the drawbacks of this?
Ahhh, I don't know if it is jealously, or you are mad because you are beginning to realize the last man standing is the sucker.
I fail to see how to see someone who has a contract, that merely states that if you don't follow through, the penalty is losing your home... is scum for exercising the breach.
It happens everyday on all sorts of stuff, not just homes. It's not being a scumbag, it's just business buddy. He exercised a breach, and as such pays the penalty.
The only scums in this whole mess are the people at the top of the financial food chain who intentionally orchestrated this. Yep, it was intentional, I know, you can't believe it!
Well, find a high level banking exec and happen to become a "golf buddy" with him, and maybe you'll glean some inside info.
The reason for it is simple... the net gain, even after all the chaos. With the super low cap gains it allowed for money to be funneled out of the system in those in the know, that is where the collusion takes place. Even for the execs of these banks that failed, it was hitting the biggest jackpot in the world. They knew it was coming from the start, the trick was to have a good shell game to conceal it for as long as possible to keep that money coming.
Guess who lost in the scheme... everyone except the people at the top. The people who were employed by these banks/lenders/funds, to the individual investor, pension funds, tax payers, I mean literally everyone.
The question is, how much are you going to blindly give them in the name "ethics" towards thieves?
To them, it doesn't matter, the majority of the goals have been accomplished. They have already looted the earnings of the corps, made trillions from thin air, absorbed giant companies for pennies on the dollar, they now got the government to bail them out (not the homeowners, the banks) on any defaulted loan that they "renegotiate" which can maybe give them one more good run on this, and they have Soverign wealth funds with trillions waiting buy up all the foreclosures at 40 cents on the dollar for the scaps. Air tight.
Many of you can only think on the small picture, without understanding who won in the whole scheme, and why is played out. You think a bank is merely a robot that is designed to compute profit on loans. The fortunes made by a lot of people on the deravitives of these are insane, along with the opportunities to pillage the assets of thousands of other companies and funds. The things that were accomplished for the people who control the financial system are insane.
The biggest losers were anyone who didn't sell a home before it burst, but we all lose in this.
Let's put it into perspective...
I like how people blame the homeowners, it's laughable. They did not create the bubble, the banks did.
What if I stood out on the street and said this to everyone as they walked by: "Hey, if you want a $100 bill you can have it... if you pay me back $105 next week, even though I don't know you, you have no money that I know of, you aren't giving me any collateral, or any incentive other than goodwill that you will meet me here next week with my $105"
Does that make good business sense to you? Does that make any sense at all? Sure it does, if the money I gave them was created out of thin air, and I could sell that promise to someone else for even more. Some will pay me back that day, but I don't care, because I already unloaded the promise to some unsuspecting people for $101.
It all trickles back down, through the corps, the funds, the pensions, the economy, the homeowners, the tax payers... the winners were at the top of the pyrimid scheme.
So bottom line... the few at the top screwed the whole country, and they've done a great job at convincing people who operate in their minds inside the bounds of ethics and responsbility that this is just a couple shifty lenders and some trashy homeowners that caused this. Are you kidding me?
You can be diluded all you want and think that "responsible" people who will tough it out and eat out garbage cans if it can mean making their mortgage will keep this house of cards from crumbling. It's just a matter of how much you're willing to pay in between now and then.
If you've owned your home before the boom, you're fine, just keep going. But if you bought between then and today, you are upside down, and you better be prepared to throw good money after bad for another 10 years before you even start to recoup on the value of the house, maybe another 20-30 after you factor in the payments + inflation.
Oh, and ps... to the OP... I think your friend is a utter moron for buying another house right now at that price unless it's gold plated everything. Any financial sense he showed by ditching the losing deal was erased by that move.
I am not sure why I am wasting my time, but I'll give it one more shot. If you reread my post you will find that your rantings are illogical and inaccurate. To wit:
You are not wasting your time if your point was to prove:
You are a textbook narcissist
You have no clue regarding how the financial system works
You confuse personal responsibility (ie: caring for a child) with carefully evaluated business decisions
Since you made it a point to tell us you are from the LA ghettos, as if that somehow makes you a more special person than anyone else for improving their quality of life, you should be familiar with the old adage:
"Don't hate the player, hate the game"
The financial system is the game, and when you get a grasp of something beyond paying bills, credit scores, budgeting and income taxes, and actually know how the game is really setup, you'll have an epiphany, and realize you're the mark, fooled into believing you are playing it better than anyone else.
I am not the so called "unresponsible" you seem to despise. I put $120k in hard money into my house. I still have equity, not much, but still some. I also have a 6% 30-Fixed. But, you can rest assure, as soon as that equity turns into being underwater, and I can buy virtually the same house for a 40% less mortgage payment, I'll be putting it up on the market while I move and stop paying when I move into that other one. Why?
Because it will take 5, 10, 15+ years to get my equity back. During that time, I saved hundreds of thousands in mortgage payments, and that lost equity in the other will be recouped just the same in the house with cheaper payments as the one I originally owned. So where is the incentive to "stick it out", from a business standpoint? A bad investment can be hedged on my part. Even though the big boys made out like bandits in the financial world, their "bad move" (if you really think the banks lose on this, they already won, the losers already lost) was to artificially create this market for the purpose of looting.
If you're so truly upset by all of this, take the blindfold off, examine it all for what it really is, and go and do something the system that is causing this. I wouldn't mind if the whole nation foreclosed, because at least it would reset this ridiculous inflation, rigged financial system and get our government to stop subsidizing major corporations.
Oh, one other thing... the remark about it being wrong for the banks to have to pick up the tab when you foreclose... all the net gains aside, they are not doing that. The Federal Reserve is...!
I love how people start talking about personal responsibility, and handouts and all sorts of other nonsense, but you have no problem with a socialist market.
The reason the companies continue to scam one after another is just that... free enterprise when it comes to profits! Subsidize the mistakes and losses on taxpayers via corporate bailouts!
Seems like I can't lose deal to me... when they win, they keep it all, when the lose, they actually don't lose a thing.
You hear that everyone... let the bank have that house and when they start selling them back to you at half price and all that money won in the whole debacle by them starts to shrink up, they won't do it again, at least for a decade or two or until another corporate shill sits in the White House, which ever comes first.
Let me see if I understand the general consensus of those that think this guy is morally bankrupt...
It's ok to screw people over if they are not smart enough to understand the contract they are signing, or have not done their research and as long as you are a BUSINESS attempting to turn a profit.
If a company/corporation does what makes sense financially (ie: laying off thousands of employees, closing branch offices), when it is operating at a financial loss, then it is considered fiscally responsible and a necessity to stay in business, not immoral.
So by that logic, since I am an employee, and I WORK to turn a profit, if I make the tough decision to walk away from a financial loss (my home) and make a more financially sound purchase (a second cheaper home) to protect and secure furture profitability for myself and my family, that cannot be considered immoral.
It is refreshing to read someone who has logic that extends beyond:
"But... but... but.. you kinda sorta told a faceless bank you intended to make the payments no matter what... even though you have the right to exercise a breach of contract with a predetermined penalty for doing so, and you fully accept and honor that penalty... but still that's just wrong for you to accept the penalty that was clearly defined in your contract because the spirit of you going into it was to stick to it, even if it meant getting bent over and reamed for years on end! Not cool!!!!"
Suckers... keep throwing good money after bad. If the rule makers that caused this crap are on the winning end, I'll be darned if I'm going to be stuck on the losing end for the sake of what some jacks who can't seem to do basic math or have some sort of blind devotion to people who steal from them think.
Well.
The more people who walk away from their homes and mortgage obligations, the more the banks lose.
The more the banks lose, the greater the risk premium on mortgages and the more they will tighten credit.
The more credit is tightened, the greater the number of people who won't be able to get a mortgage and the higher the rates.
The fewer people are able to get a mortgage, the fewer potential buyers there will be.
Fewer buyers = slower market.
Slower market = lower prices.
Lower prices = more people underwater.
= MORE people walking away, more foreclosure blight and so on.
So. All those homeowners looking at the declining values of your homes - look no further than the guy who walks away.
And to the OP - I think your friend will be waiting a long long time for his new home to appreciate.
My lord, do you think in backwards logic naturally, or did that take some time to reorder?
Someone buys second home at cheaper price... less supply, more demand. + Price
Original home forecloses and is available at lower price... is now bought since it is affordable as well.
Housing market is reset, credit is reset, banks don't play this game again for a long time.
Losers = People who didn't shift homes.
Everything back to square one where it should be.
See, credit doesn't tighten because the second home is bought first. Credit doesn't tighten for those who should have it (actual hard and liquid assets to back it, unlike our currency, Federal Reserve and 90% of our debt).
If everyone did this it is zero sum, not a perpetual motion machine like you are describing.
The market is froze up because neither side is willing (or should I say can afford) to budge. At some point the ones who will budge are the homeowners who walk out. Either the banks pay for their mess now or later, it's just a matter of time.
However, one of the unfortunate results of government overregulation is that consumers let their guard down.
Bhahaha... now that's a good one... overregulation on the financial/debt markets. Where have you been living?
Seriously, as a fellow semi-Libertarian (yea, registered as such, but I'm not totally crazy) to another, what are you talking about? Are you sure you are not part of the fascist party, because we don't sponsor corporations. If they made bad loans, guess what, they eat them. They make a contract that makes it to easy to walk on, their problem. You can't make payments, you're problem. A real libertarian does not distinguish between personal responsibility and corporate, and if any, the burden is higher on the corps.
Who cares, it's a two way street. People jumped at the money being frivolously waived in front of their face, banks bad when blows up. They didn't have to take it, they didn't have to lend it. If it suits someone to walk, so be it. If it suits a bank to renegotiate or to hold firm, so be it.
Stop forgetting their ARE TWO SIDES TO EACH CONTRACT! If one side didn't protect themselves well enough... wahhhh! If they other side can't or won't hold it up.... wahhh! If the contract lives out its day.... wahhhh... I mean really, what makes a difference. You guys act like someone is extorting someone for simply deciding to breach their contract and own up to the penalty outlayed in the contract.
So much for free market enterprise that way you guys think. It's all about "that doesn't sound fair...!"
Wrong, it is an option available to a party of the contract. They can exercise it and pay the price. Simple as that, free f'in enterprise.
So this family member, whose FICO score with a bankruptcy is nearly as good as mine (over 720, and I only have a late tax bill payment in my history), was pre-approved for a second mortgage and will walk away from the first, almost scot-free. Including the bankruptcy, that could make two clean breaks from financial mistakes with little damage.
Wrong, the banks knowingly and intentionally made tens of millions financial mistakes at everyone's expense, and artificially inflated the market, giving even rational people a false sense of security.
Has no one here ever heard of a 1099-C? It's a real bit**. I read a lot of posts on this
forum, but I wonder why no one ever mentions this bit of prime legislature.
Kudos when "your friend" pulls off getting the new house. I'd love to see his face though when a 1099-C shows up for $80K+ and drives the amount he owes the IRS to $20K+ this year. Then "your friend" can come on here and complain about how the IRS is screwing him over.
Doesn't mean a darn thing if he used the $80k "substantially" towards his house (ie: Pool, redid the kitchen, whatever).
How about the little discussed bill passed in 2007 that blocks it. If he bought a car with it, thats another story, if he can't prove it was for the house. Got anything more scary than that to detract business minded people from doing merely breaking a contract?
3. So nobody gets hurt, huh? Just big bad bankers. I am sure you are smart enough to figure out that this is not true. What happens to his old neighbors (who are sucking it up) home prices when yet another foreclosure hits the market. You guessed it, their home value goes down. Now, what if that neighbor's kids need braces, college education, medical bills, or some other $ from equity to finance a perfectly legitimate need. Oh yeah! Their equity is shot because your neighbor wants to retire in a larger home in 10 years.
I am sure everybody here who thinks that this is okay because he is just taking care of #1 is just glad he isn't their neighbor. Oh yeah! Maybe he is!
Funny how everyone is all about... "F the irresponsible people", "Don't bail them out", "Send them to jail", "no handouts!", etc, etc... ironic how you want your neighbors to socialize your neighborhood, but when it comes to someone elses wants or needs, throw them to the sharks, every man for themselves!
Maybe you should have done your due diligence on your neighbors first, maybe you have joined a community that required 30% hard money for the house, maybe you... sheeshh... it goes on and on and on...
It's always someone else to blame for your problem and always the other person to blame for their problem.
Sh it happens, live with it... control your stuff. If you're so darn concerned with your neighbors foreclosing, move somewhere without neighbors.
Sorry, but the last thing I am going to do is deplete my savings to prop up the property values for neighbors if it came to that so little Jan can get braces. I mean, really?
And he's setting such a STELLAR example for his children. "Look kids, if you make bad decisions because you didn't think things through, or were greedy, you can just run away from them and let someone else take the hit." Oh yes, he's a wonderful family man.
And who would be taking the hit in this situation?
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