A friend of mine is a bank examiner for the U.S. Currency Dept....
She said a lot of the defaults were people who ""NEVER"" made the first payment even....
Come on....how can you get a mortgage, and never intend on paying it back ""PERIOD""

But EVERYTHING will be OK now since the brain trust at the FED decided to step-in and bail-out the big-boys. . . never mind that Joe and Jane Public are toying with the 'ol "midnight move" routine. But soon I expect W to go on TV and tell the public to keep on shopping, that everything is OK. . . THAT will solve everyone's troubles.

How much does a black mark on one's credit history actually cost? I'm wondering how far below the amount remaining on a mortgage the value of a house would have to fall before a rational homeowner can no longer justify making payments. I really have no idea how difficult it would be to get another home loan, or how much higher the interest rate would likely be on that one. Perhaps there are other costs that aren't so obvious?

Subprime borrowers, with poor credit histories, might not be very concerned about the prospect of another black mark on their credit history due to a foreclosure.

But what are the effects of the new bankruptcy law? Is it possible someone could mail the keys to the bank, eventually declare bankrupty, and still be liable for the difference between the value of the mortgage and what the bank fetched through foreclosure?

Just a perspective from Daytona Bch might help understand, what's going on down here....
I live in a townhouse section of a large upscale developement...Units currently listed @ $250-300K..Builder hasn't sold one in over a year, with 8-10 in finished inventory & 20 sitting unfinished...
Resales add another 10 units of the 80 total completed....

YOU CAN RENT SEVERAL UNITS FOR $1000-1200/mo...
You do the math...taxes are @2.5% of market....
PICTURE THIS!!!
You could turn your keys into the bank, and move down the street 200 ft, and save a bundle....
Then you pick-up the paper everyday, and see ads that say...WHY PAY RENT???...

Cuz it's cheaper...DUHH!!!!

Dean:
Any idea how far housing prices would need to fall before there is a significant rise in "negative equity"? With many more no or little down payment mortgages, it may not be very far, but I'd like some idea of the relation.

A reply to Zipper:
We vacated the West Palm area 2 years ago, because it just got ""TOO"" pricey....Sold our RE holdings....
Median family income in West Palm area, @ approx $60k/yr, while median housing price @ $370K [?]
Using the rule of thumb 2-3x income...I would surmise area housing prices have a very long way to plunge...
And ""YES""...5 years ago, median home prices were ""$180K """

HOW TIMES HAVE CHANGED????

Seems I remember 10-15 years ago, when you had ""VERIFICATIONS"" and documentation on """EVERYTHING"""
They wanted to see, the cancelled checks for the previous two years, and whether you graduated magna cum laude, etc....and whether your family had a blue blood history...and whether your mother was a virgin @ your birth...
I MEAN IT WAS RIDICULOUS BACK THEN....

Fast forward to recent....

That's all they wanted to know, is if you drag your butt into the office to sign the papers, so they could sell them to somebody waiting the back room..

PAY NO ATTENTION TO THE MAN [LAUGHING] BEHIND THE CURTAIN!!!!

"How much does a black mark on one's credit history actually cost?"

Well, if you are rich (yes, rich folks actually welsh out at times), the costs are negligible. As for us regular schmuck homeowners, if you are paying thousands per mo. for a property that is worth less than the mortgage--bailing out is a rational response. After all, you are paying price higher than what the market says it's worth; you're tied in to tens of thousands in interest payments; and you have zilch equity to borrow against.

If you bailed, you could get a credit card (there's a bank somewhere that will provide the credit line--even these debts are securitized these days) and use the money to, you know, but actual STUFF.

Sorry to be off topic, but I would like to request you post your assessment of Lester Thurow's column in the Times, "A Chinese Century? Maybe It’s the Next One"

I would be interested in your analysis. Thank you.

Excellent summary Dean, but I have a question about your use of "homeowner" in paragraph 4. Because some part of this is being driven by speculators who lied their way into loan programs designed for low credit homeowners. And behavior that is irrational for a homeowner may make perfect sense for a speculator.

I know investors are using sub-prime in inappropriate ways, because I have seen it done up close. And somehow I don't think investors in Riverside, Las Vegas, or Phoenix are less ruthless than us relative rubes in the Northwest.

"In an analysis done early this year, the FDIC found that 10 percent of the subprime adjustable rate mortgages issued in 2006 were seriously delinquent (missed three or more payments) or in foreclosure within 10 months of issuance."

It would be interesting to see this broken out by region with perhaps some examination of the ownership. Because if I was a speculator who had made a lot of money in the boom between 2001 and 2005 using fully leveraged sub-prime loans, but then stayed on too far into 2006, it might well pencil out to use a strategy of delay and even default. Either the market recovers in which case I exercise my right of Redemption (in Washington State you have the right to redeem a foreclosed property for a year after the forced sale) or it doesn't in which case with a 100% LTV I don't have real skin in the game anyway.

The reason I ask about ownership is because you can hide a lot of liability by running your purchase through an LLC. I don't know that you could totally protect your credit or totally limit your liability, but you could go a long way.

Most everyone wants to make this a morality play about clueless borrowers but some part of it, and more than most people expect, is the result of shrewd operators working right up to and across the line, in the process taking advantage of the 'smart money' running Wall Street. Sub-prime lending left an opening and some people went right through the gap.

Bruce,

you're absolutely right that some of the defaults were on investor units where people were gaming the system. As a practical matter, most of these loans wouldhave been categorized as "Alt-A," not subprime. They had decent credit scores, but generally incomplete documentation, probably because they weren't being honest.

For the record, my option to rent proposal should not help investors since it should only benefit people who were actually living in their own homes. Some folks will cheat, but presumably many will get caught if they try.

A dumb question - how does a homeowner "bail out" from his/her mortgage payment obligations (if there is a negative equity) without going through a foreclosure ?

A dumb question - how does a homeowner "bail out" from his/her mortgage payment obligations (if there is a negative equity) without going through a foreclosure ?

SM-VA,

How? You walk into the offices of whomever is holding your mortgage, throw the keys on their desk, and say, "here's your house back."

Don't forget to also stop making the payments.

Sooner or later they will go thru the legal forclosure process.

BobbyP reply;

I think you are being short sighted, in over looking they will send you a 1099 for the money you""DIDN'T""" pay them....
ERGO: You will pay the IRS taxes on that....
""""PLUS INTEREST...PLUS PENALTY""""..

IN THE END, YOU'LL HAVE WISHED NEVER TO HAVE OWNED A HOUSE

Liberal:
If you are willing to pay $50 for the one hour on line credit counseling, the new bankruptcy law is not all that awful. If you have no/few assets and are willing to go straight liquidation (Chapter 7), it takes a snap shot of your situation, liquidates what you have, divides it among your creditors, and you get a new start. Any assets gained after the "snapshot" i.e. wages, lottery winnings, whatever, are yours to keep.
If you do have assets or you want to avoid the "black mark" you can do a wage earner plan (Chapter 13) for 3 years, or 5 years if your creditors force you into it, and at the end whatever hasn't been paid off is discharged and you get your new start then.
The people who are screwed are the "flippers" and "hot money investors" who want to protect their other assets from liquidation -- basically, BK doesn't help them -- at least if they and their lawyers are honest.
As always, do not rely on legal "advice" you get from the web, instead check with your legal counselor about your particular situation.

Ethan... I like that!!!

"""If you have [NO?] or few assets"""....

Ask yourself...these are the guys that just bought a house.....NO OR FEW ASSETS????

YOUR ARE CORRECT...YOU CAN'T GET BLOOD OUT OF A TURNIP!!!!

Ethan wrote, If you are willing to pay $50 for the one hour on line credit counseling, the new bankruptcy law is not all that awful. If you have no/few assets and are willing to go straight liquidation (Chapter 7), it takes a snap shot of your situation, liquidates what you have, divides it among your creditors, and you get a new start.

How is that any different from the law before the new law was passed?

Liberal reply:

Both you & Ethan, are OVERLOOKING the fact, that to go into bankruptcy, you'll most likely need an attorney....
"""ATTORNEYS COST MONEY"""

And with ''few, if any assets'', just how do you suppose these people are going to be doing this/it...