Remember that one-bedroom pre-WWII house with 500 square feet of floor space on a small lot in Compton, CA that sold for $340,000 in 2007? It’s now on the market for $69,900, a price that somebody who doesn’t have enough money to move straight outta Compton might conceivably be able to afford.
A dump in Compton
Fortunately, the Obama Administration has promised to announce on Wednesday a comprehensive program to prevent housing prices from falling to affordable levels like this. Bubble Forever!
According to Steve Sailer’s website, the top ten states with the highest average consumer credit ratings are found among the people of:
South Dakota 710
Minnesota 707
North Dakota 706
Vermont 706
Massachusetts 703
New Hampshire 703
Montana 701
Iowa 700
Wisconsin 699
Maine 699
In contrast, the ten populations with the worst average consumer credit scores are:
Texas 651
Nevada 655
Arizona 659
New Mexico 663
Louisiana 663
South Carolina 665
Oklahoma 666
North Carolina 667
Arkansas 668
Mississippi 668
California (672) and Florida (673) are closer to the bottom than than the top.
Texas largely escaped the mortgage meltdown due to low land prices and high oil prices, but this suggests there might be trouble in Texas ahead if oil stays around $40 per barrel.
Diane Shackle found it gut-wrenching to walk away from a mortgage she took out in times that were better for both her and the U.S. economy. But the reality was undeniable: While she was keeping up with the monthly payments, she said she could no longer afford to buy food for herself or even kitty litter for her two cats. So the 44-year-old cocktail waitress walked away from her two-bedroom condo in Southern California last July, turning her back on a debt of nearly $200,000.
“It ripped me up to do it, but I was tired of worrying and I had no food in the house,” said Shackle. “I decided, you know what, I’m not living like this. I’ve got to quit before I kill myself.”
Walking away from a mortgage has always been a homeowner’s last resort —- it flies in the face of the American dream. And experts say it should remain a worst-case scenario. But with the deepening economic crisis fast adding to the 12 million mortgages already “underwater” —- the term for when a home’s debt exceeds its market value —- it’s an option more are likely to consider as home prices continue to fall.
Mortgage and financial experts hesitate to recommend a voluntary action that not only threatens to wreck your credit score for years but can result in authorities coming after other assets. But depending on state laws, they acknowledge it makes sense to at least look at it in certain situations. “You have to make the best decision for yourself, business-wise, which could be walking away from the house,” said Nicole Gelinas, a chartered financial analyst and senior fellow at the Manhattan Institute, a conservative think tank.
Mortgage walking surfaced as a phenomenon in the wake of plummeting housing prices. The practice also is known as “jingle mail,” referring to the borrower mailing the keys to the lender and surrendering the house. Bank of America Corp. brought the practice to light a year ago, reporting that a growing number of people who defaulted on their mortgages were current on their credit cards. This suggested that at least some saw bailing out on their houses as a way to gain control of their finances. Though statistics aren’t readily available on the number of mortgage walkers, a year later, Bank of America spokesman Terry Francisco acknowledges that the problem still exists and said it has been exacerbated by the housing market’s further decline.
“The billion-dollar question is, is it going to increase?” said Guy Cecala, publisher of the trade publication Inside Mortgage Finance, in Bethesda, Md. “We really don’t know the answer.”
Speculators who bought houses for investment purposes rather than to live in are the likeliest to do it, he suggested. Shackle doesn’t fit that category. The single, first-time home buyer bought a two-bedroom condo in Calimesa, Calif., in 2006 for $191,000. She wasn’t required to put any money down despite her limited income as a waitress, thanks to a lofty credit score of 788.
The financing consisted of two interest-only loans with initial rates of about 7 percent and 10 percent. Her monthly payment, including an escrow account for property taxes and insurance, was about $1,400 a month. That was manageable until she had serious problems with asthma and missed a lot of work.
Shackle was never late with a payment, she said. But after paying the bills she had no money left over to buy groceries, and lost nearly 50 pounds. Despite her pleas, she said she couldn’t get the lenders to refinance once the collapse of the housing market had slashed the home’s value to about $150,000. Suddenly it was no longer about an investment or the tax advantages of homeownership, it was about trying to survive the crush of bills.
“When you’re a homeowner you think, ‘OK, I’m going to go ahead and try to pay this off,’ ” she said. “But when I tried to get refinanced and everybody pretty much shut their door on me, I felt like I had no alternative.”
Rather than stop paying and wait to be foreclosed on, she sought help from You Walk Away, one of the companies that has emerged to address the growing number of underwater homeowners. The San Diego-based business counsels the homeowners to, as its Web site says, “take control of their financial future” by making a strategic decision to default if necessary.
Jon Maddux, principal and co-founder of You Walk Away, which charges $995 for consultations about a person’s rights regarding foreclosure, says his company doesn’t advocate jingle mail per se, but rather staying in the home as long as legally allowable until the bank takes it back. Underwater homeowners should exercise caution when signing up for any service that offers assistance, because consumer advocates say much of the advice can be found online or through non-profit agencies. Shackle moved out of the condo in July and rented an apartment for $750 a month. Foreclosure still hasn’t taken place. But without the burden of a mortgage gone bad, “I sleep a lot better,” she says.
About 1 in 6 of the nation’s 75 million homeowners are underwater, according to Moody’s Economy.com, and the total has doubled in a year. Their mortgage debt exceeds home equity by an average of $40,000. Half of these negative-equity homeowners owe more than 120 percent of their home’s value. Mortgage law experts say the incentive to walk away from a home loan is highest in states that have anti-deficiency statutes, which prohibit lenders from suing borrowers for additional funds after foreclosure.
“These anti-deficiency laws make a huge impact on foreclosure rates because they are basically ‘get out of jail free’ cards,” said Todd Zywicki, a law professor at George Mason University and senior scholar with the Mercatus Center think tank who’s writing a book on consumer bankruptcy and consumer credit.
This handful of non-recourse mortgage states includes the high-foreclosure states of California and Arizona, which not coincidentally also are leaders in the numbers of mortgage walkaways. The full list includes Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah and Washington.
Donald Lampe, a Charlotte-based mortgage lending attorney with Womble Carlyle Sandridge & Rice, said the statutes generally prohibit or limit a lender’s ability to go after the borrower’s assets to satisfy the unpaid mortgage debt. “There are some folks suggesting that state anti-deficiency laws should be expanded around the country as a response to the “mortgage meltdown,” Lampe said. However, he noted, “It is difficult to see how these laws could be made to apply to loans already on the books.”
Arizona is joining other states asking Congress to liberalize bankruptcy rules so judges can modify home loans to help reduce foreclosures. Arizona Attorney General Terry Goddard has joined the attorneys general from 21 other states in the effort. Current federal law allows bankruptcy courts to adjust other debts and loans, but not home mortgages. Goddard and other state AGs contend the courts could make the change immediately, which would help reduce foreclosures and generate new loan terms that could help borrowers and lenders.
California Attorney General Jerry Brown also is among those making the written push to congressional leaders. A similar effort was launched in 2008 but failed to gain approval, but the odds could improve with Democrats gaining seats in Congress and the incoming Obama administration.
Home values have fallen so sharply since hitting a historic peak in the spring of 2006 that many Americans are wondering how much more prices can sink. As painful as the decline has been, history suggests home values still may have a long way to drop and may take decades to return to the heights of 2½ years ago. “We will never see these prices again in our lifetime, when you adjust for inflation,” says Peter Schiff, president of investment firm Euro Pacific Capital of Darien, Conn. “These were lifetime peaks.”
The boom in home prices — fueled by heavily leveraged loans built on low or even no down payments — made it easy to forget that housing values had been remarkably stable for a half-century after World War II, rising at roughly the same pace as income and inflation. Prices soared in most of the country — especially in Arizona, California, Florida and Nevada and metro areas of Washington, D.C., and New York — during a brief period of easy lending, especially from 2002 to 2006. That era’s over.
So far, home values nationally have tumbled an average of 19% from their peak. As bad as that is, prices would need to fall as least 17% more to reach their traditional relationship to household income, according to a USA TODAY analysis of home prices since 1950. In that scenario, a $300,000 house in 2006 could be worth about $200,000 when real estate prices hit bottom. The price plunge has wiped out trillions of dollars in home equity and caused the worst financial crisis since the Great Depression. Susan Wachter, professor of real estate at the University of Pennsylvania, fears that foreclosures and tight credit could send home prices falling to the point that millions of families and thousands of banks are thrust into insolvency.
“Homes are different than other goods and services,” she says. “The fragility of our banking system is tied to the value of homes.”
Home values have fallen before — during the Great Depression and in Texas after a 1980s oil boom, for example — but those drops were a response to other economic forces. This time, the housing price collapse is the cause of the nation’s broad economic troubles, not just an effect. “If we have another 20% decline in prices, we’ll need another bailout of banks similar to what we just did,” Wachter says. Other economists see a brighter picture in the long term. Wachovia economist Adam York expects home values to keep falling until 2010 but is optimistic they will recover. “The one saving grace is the population is growing by 3 million people a year,” he says. “They need to live somewhere. That means more roofs.”
A new four-bedroom house in Everett, Wa just sold for $295,000. “I’m very excited. It’s surreal,” The new buyer said. For less than $300,000, she got a 1,865-square-foot house in a new development that auction organizers say was previously valued at $365,995. Her agent was equally giddy, calling it a “great deal” for quality new construction. Homes priced at that point on the conventional market were older and required a lot of maintenance. “Anything under $300,000 is basically junk” on the regular market, she said.
About 300 people attended the auction on Sunday to pick over 92 homes on the auction block, lured by news coverage and sidewalk signs covering neighborhoods where homes were being auctioned. As housing prices have fallen and sales have slowed, developers are turning to auctions to quickly sell new, non-foreclosure condos, townhouses and houses. The auction sold 62 out of 92 homes for a total of $15.4 million and an average sales price of $248,387.
Real Estate Disposition LLC, a Southern California company, organized the Seattle auction and has conducted others throughout the country. “Builders come to us because their business, the market, has slowed down,” said Rick Weinberg, spokesman for Real Estate Disposition. “It’s basically stopped, so they want to sell properties by the end of the year, so they come to us to help them.” At the company’s auction earlier this year of 28 condominium units in The 400, a new waterfront condominium project in Bremerton, 17 sold. Bidding opened at $109,000. He said the prices on the accepted offers were “very close” to what they hoped to get, but less than the original asking prices.
While Sunday’s auction featured new homes from builders, the company does far more auction business in foreclosed properties, selling 23,000 foreclosed homes this year, Weinberg said. Michael Jackson tunes played in the ballroom Sunday morning as people registered to bid. To qualify as a bidder, attendees had to have a $2,500 cashier’s check in hand, photo ID and a personal check for a 3 percent deposit. Three men in tuxedos walked the aisles, noting bids to a motor-mouth auctioneer. Opening bids ranged from $89,000 for one-bedroom condos in Issaquah to $259,000 for four-bedroom, single-family homes in Tacoma. The auction also featured townhouses in Kittitas County and houses in Lake Stevens and Stanwood.
The current real-estate market is reality. All the inflated prices are gone and there are real estate bargains still available. New members of Bargain.com can search foreclosures free with a trial membership Click here for Bargain.com.
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California Bankruptcy Law will help explain the federal bankruptcy process and the common surrounding issues as they pertain to California residents.
Find information about filing bankruptcy in California including:
If you have other questions you can explore California Bankruptcy Law’s Frequently Asked Questions section.
Before considering bankruptcy there are several options you might want to pursue. The availability and usefulness of these options will depend on your employment (or income) situation and the type of assets you have. These other options involve consolidating your payments through a credit counseling service or consolidating all your debt through a debt consolidation loan.
There really are two types of debt consolidation loans, one that is secured by equity in your home and one that is not. (see California Exemptions) With a debt consolidation loan that is not secured by your home a company simply loans you money to pay off your debt. You make one monthly payment to the consolidation company and they take care of the debt with your creditors.
You may also be able to lower your cost of credit and improve your financial circumstances by consolidating your debt through a second mortgage or a home equity line of credit. Think carefully before taking this on. These loans require your home as collateral. If you can’t make the payments-or if the payments are late-you could lose your home.
This option is especially important to consider if you have more equity in your home than you are allowed to protect with your California home exemption. If you have more equity in your home than can be protected with your California home exemption you will either have to surrender you home under a Chapter 7 bankruptcy or, if you want to keep your home, create a payment plan under a Chapter 3 bankruptcy. If you are considering a Chapter 13 bankruptcy to keep your home you might want to first pursue the debt consolidation option.
Also see:
One option you may want to consider before filing bankruptcy is (see California Exemptions) Consumer Credit Counseling. Under a consumer credit counseling plan your creditors may be willing to lower your interest rates and accept reduced payments if you enter a debt repayment plan. Generally, in these plans, you deposit money each month with the credit counseling service. Your deposits are used to pay your creditors according to a payment schedule developed by the counselor. As part of the repayment plan, you may have to agree not to apply for-or use-any additional credit while you’re participating in the program.
A successful repayment plan requires you to make regular, timely payments, and could take 48 months or longer to complete. Ask the California credit counseling service for an estimate of the time it will take to complete the plan. Some credit counseling services charge little or nothing for managing the plan; others charge a monthly fee that could add up to a significant charge over time. Some credit counseling services are funded, in part, by contributions from creditors.
While a debt repayment plan can eliminate much of the stress that comes from dealing with creditors and overdue bills, it does not mean you can forget about your debts. It will not erase all of your debt and provide a complete fresh start as Chapter 7 bankruptcy might. (see California Exemptions) You still are responsible for paying any creditors whose debts are not included in the plan. You are responsible for reviewing monthly statements from your creditors to make sure your payments have been received. If your repayment plan depends on your creditors agreeing to lower or eliminate interest and finance charges, or waive late fees, you are responsible for making sure these concessions are reflected on your statements.
A debt repayment plan does not erase your credit history. Under the Fair Credit Reporting Act, accurate information about your accounts can stay on your credit report for up to seven years whereas a bankruptcy will stay on your record for 10 years. In addition, your creditors will continue to report information about accounts that are handled through a debt repayment plan. For example, creditors may report that an account is in financial counseling, that payments may have been late or missed altogether, or that there are write-offs or other concessions.
Another option that may provide an alternative to filing bankruptcy is debt consolidation. Please see our California Debt Consolidation page for more information.
Under a chapter 13 bankruptcy, a debtor proposes a 3-5 year repayment plan to the creditors offering to pay off all or part of the debts from the debtor’s future income. You can use Chapter 13 to prevent a house foreclosure; make up missed car or mortgage payments; pay back taxes; stop interest from accruing on your tax debt (local, California state, or federal); keep valuable non-exempt property (see California exemptions); and more. If you can stick to the terms of your repayment agreement, all your remaining dischargeable debt will be released at the end of the plan (typically three to five years). The amount to be repaid is determined by several factors including the debtor’s disposable income. In addition, the total amount paid to creditors under the Chapter 13 plan must also be at least as much as creditors would have received if the debtor filed a California Chapter 7 bankruptcy. To file Chapter 13 bankruptcy you must have a "regular source of income" and have some disposable income to apply towards your Chapter 13 payment plan.
Chapter 13 bankruptcy is generally used by debtors who want to keep secured assets, such as a home or car, when they have more equity in the secured assets than they can protect with their California bankruptcy exemptions. Chapter 13 bankruptcy is a reorganization whereas Chapter 7 bankruptcy is a liquidation.
A chapter 13 bankruptcy allows them to make up their overdue payments over time and to reinstate the original agreement. Also, where a debtor has valuable nonexempt property and wants to keep it, a chapter 13 may be a better option. However, for the vast majority of individuals who simply want to eliminate their heavy debt burden without paying any of it back, Chapter 7 provides the most attractive choice.
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