Three months ago we received the following note from a plugged-in reader:
I used to live at [701 Minna #19]. In April 06 I had it listed for $930k and ended up selling for $890k, thinking I made a good choice. Though at the current asking (already been lowered from $1195k to $1095k), it would give the owner about $200k appreciation for only spending maybe $2 to $3k for the motorized sunshade/skylight, maybe the paint job cost an arm and a leg.
And while our reader might have been second guessing himself in November, a tip we received yesterday might put his mind at ease (and some others’ not):
Check this one out – first listed early Nov. for $1,195,000 then dropped to $1,095,000, then dropped to $899,000 for a few days and now available for $700,000. Purchased in 2006 for $889,000. It’s loaded with loans (check out Property Shark) and sits in the glutted cookie cutter loft ghetto. Looks like a desperate short sale.
And speaking of “others,” we’ll note that the list price on 701 Minna #3 (about 600 square feet smaller than #19) was recently reduced from $664,900 to $629,900 (the listing still notes: “Seller wants this off the books for jan. Fax any offer today.”).
∙ Listing: 701 Minna #19 (2/2.5) 1,781 sqft – $700,000 [Prudential via Pacific Union]
∙ Listing: 701 Minna #3 (1/1.5) 1,173 sqft – $629,000 [MLS]
Oh man, the next few years are going to be sweet ones for the bears!
I never understood these “lofts”, but I’m a curmudgeon. In NYC in the early 80s, the lofts on the lower east side (Bowery), LIC (especially), and even in SOHO (although the first inklings of gentrification were showing up there by then), all “lofts” had vaguely menacing exteriors, huge, foreboding brick walls, and large steel door sometime secured with chains and padlocks. Huge, unfinished spaces, sometimes heated with only space heaters. It all looked pretty cool.
Here, they just look like wimpy “lifestyle” choices. (“Waiter, I’ll start with the Wasabi-encrusted Ahi, with a crisp chardonnay, and – uh, a side order of *loft” to go with that….”) Probably the same in NYC by now too….
The ugliness of these loft buildings on the outside is only matched by the ugliness and ordinariness of the space on the inside (metal staircases, 8 foot or lower ceilings in the non-lofty areas, etc.)
Perhaps we will see a real meltdown of all these SOMA lofts that are piling up on the MLS come spring. It could be like NASDAQ 2000. I know house prices are not supposed to move like that but some of these owners have got to see that getting out ASAP is the wise move. These price cuts here look like some serious air coming out of the wheels.
I always enjoy listings that say “want instant equity!”.
Oh in that case, I’ll offer you $490,000 and HOA paid for a year since the owner wanted it off the books for Jan and you’re accepting any offer via fax.
Well folks…we have a true-to-life bloodbath here. That is a garbage location though, so it probably deserves to sell for the same psf as warehouse distribution space in Modesto.
That’s why I sold my loft in 2005 at $650/sf. Glad I’m riding this out in a SFH.
My first thought was, in two years, whoever buys this for 700K is going to be just as unhappy as the guy who paid 869K.
But that guy (the current seller) actually did it right. He lived better than he probably could have if he had rented, probably making only minimum payments on an option arm, took lots of cash out, and now he walks away, sticking his foolish lenders to eat the loss.
I think the seller here did everything right. He took a $400K place, bid whatever he needed to to get his hands on it, when then gave him license to milk it to the most irresponsible degree possible, and then he absolutely milked it until it was dry. Good for him. Bad for his lenders.
The problem is that the person who pays 700K is still getting a 400K place, but gets none of those benefits received by the last guy. It’s the next buyer I feel sorry for. The seller got maximum value from it. They buyer is going to eat the loss of the entire downpayment, and when the place next door sells for 400K, his lender will eat the rest.
And who made out best of all? The PRIOR seller. Sell your home and buy it back in 5 years for half of what someone paid you. God bless America.
Lofts like these are a strange circus mirror on the past. The NYC lofts that inspired them were true rescued industrial spaces where occupants, who early on were rarely owners and often not renters either, were lucky to have roofs, walls, and floors in good order. Typical decorations would involve white wash paint and found and recycled appliances and furnishings. They would be filled with art and materials anyway, so why worry about fancy floors since they would just get damaged? These new lofts are the exact opposite. Many of them are new constructions made of mostly plywood and put up in January to make sure everything gets thoroughly soaked. Then the finest materials are laid on top to make the structure look fancy and solid when it is most likely a plain, underengineered, underbuilt wooden building.
And even with all of that I would still like a unit like this if they were a bit less expensive and if there were a good roof deck involved. This location is prime south of market with easy access to everything including the grocerty store just steps away. Anyone who doesn’t like this location probably doesn’t want to live south of market which is fine, but one shouldn’t project. The Marina gives me the creeps such that I avoid even driving through it, but I accept that some clearly choose to pay to live in that kind of place.
“God bless America.”
Everyone should really reread tipster’s comment above. That sums it all up.
The true irony (or tragedy, if you care) is that these fraudsters who through their actions (foaming at the mouth bidding with other people’s money) have now enlisted an entire class of unwitting supporters: current HOMEOWNERS, who are DESPERATE to keep the illusion that their homes are truly worth what they think they are. As a class, they will support any measure, any program, really ANYTHING to keep housing values from falling. Foreclosure moratoriums, upping the conforming limits, workouts, direct government bailouts, high inflation, debasement of the currency, literally ANYTHING – the country be damned, I need to protect my “equity”!!
None of it is going to work, though. As Lenin said, and not without irony when applied to the homeowners who believe the “market value” of their homes should be protected by whatever nonmarket measures are available, “When we hang the last capitalist, it will be with the rope that he himself manufactured [various translations exist]”.
It is not even going to be difficult for the Fed and the banking industry to trap people in their depreciating assets IMO.
Does anyone know anyone who has “walked away” from a mortgage (especially here in SF)? The Wall Street Journal had an article on “Mortgage Walkers.” It mentioned that the walker’s credit rating would suffer and the walker could be sued for a deficiency judgment. Also, a tax event might occur. The Mortgage Forgiveness Debt Relief Act of 2007 allows a homeowner to avoid federal taxes on a loan forgiveness via a short sale, foreclosure, deed in lieu, loan workout or refinance. However, a straight walkaway does not quality for the tax forgiveness.
Fred, someone can correct me if I’m wrong, but I don’t think a “walkaway” ever spawned income taxes for forgiven debt because no debt was “forgiven” (unlike a short sale) and thus this was not part of the Debt Relief Act. And in California, as long as there was no refi, the lender cannot go after the buyer for any deficiency. It will be a mark on your credit history.
Not really surprised. I’ve always thought what passes for “lofts” in SF we’re really just poorly built boxes with no character. The surprise is that they haven’t fallen further, faster.
For a loft building it is better than average. I saw some of these a few years back when brand new. Finishes are above average for a loft, decent floor plans, quiet street. True “lofts” are a challenge in SF because of earthquakes and building codes. Retrofitting warehouses or old masonry buildings is extremely expensive. New is built out of wood and steel for construction costs and ability to go through an earthquake.
As far as the value. $700,000 for this much space seems to be a significant value compared to a boxy one bedroom condo in a new(er) high-rise in a little bit better SOMA location. Even looking at rent vs. buy, it is looking pretty decent. This would probably rent for about $3500 a month. Thats a lot of mortgage with 20% down.
Hope it sells quickly…or it really is a canary in the coal mine here.
Even the new construction SF lofts in better locations are absolutely disgusting. There is not one iota of comparison to NYC renovations.
Perhaps the whole idea of “new construction lofts” is silly. But there are a few developers doing good stuff: Martin Building Co and Stanley Saitowitz.
I feel much better now, I paid $629k back in Nov 03, thinking I was getting a deal. At the same time I looked also at lofts over in the dogpatch area around the same size and they were $600-$625k. Who I really feel sorry for are the guys who bought the unit next to mine back in Aug 05 for $970k. One last thing, recently I was looking at the MLS and had agent access, it noted the property selling for $860k, I wonder if the buyer did a cash back deal without me knowing.
Your mortgage is secured by your house — plain and simple. Walkaways will become more prevalent for sure as you’ve nothing really to lose versus taking a massive loss or write down. Sacthel had a great post on this the other day.
Lot’s of people set their SUVs ablaze (literally) when gas prices went through the roof and homeowners with houses worth less than their mortgages by several hundred thousand will be forced to either walk-away, take a massive loss (for many this will no be possible) or continue to pay on a mortgage that far exceeds the value of your house, or more importantly, your neighbors house. You might even see the random case of self-inflicted arson, but I’m not sure this will really help the homeowner.
That’s not a loft. It’s a crap new construction condo with a mezzanine. I wish people knew the difference.
Satchel – thanks for quoting Lenin and confirming everything I assumed about you.
amused,
“Satchel – thanks for quoting Lenin and confirming everything I assumed about you.”
I assume that you offered this observation with the same irony with which I offered the quote!
OT – For the record, in case it hasn’t been obvious from my rantings – almost impossible to construe them any other way – I am about the furthest thing from a Communist sympathizer one could possibly imagine. I am an “utra” conservative, in the classic sense that I believe in an extremely limited government, with coordinately extremely limited domestic powers. I idolize the Founders, and spend more time reading the Federalist papers and the Constitution than the San Francisco Chomical, or the New York Slimes, or the Washington comPost. To bring it back to the subject of housing, if it were up to me (which it isn’t and never will be), there would be no Fed, no Fannie Mae or Freddie Mac, no government-sponsored welfare schemes like social security or Medicare, and while I’m at it, no Federal supervision over the education function (I’d even like to see state public schools go away, leaving the function to localities where necessary). It’s a radical vision today I guess, and VERY 19th Century! Government should regulate, where appropriate, and NOT engage in planning, subsidization and wealth transfer schemes and redistributive policies designed to rob Peter to pay Paul. I deplore the slow slide into socialism that appears inevitable, and which started (near as I can tell) under Wilson, and which was kicked into high gear by FDR (who in my view was probably the worst President that we have had – in the sense that he has done ultimately the most damage to the American ideal).
Now, back to our regularly scheduled housing bull-bear slugfest!
Holy Moly Satchel! You can’t be serious about that claptrap! The 19th century?! Yeah, good times….
Right on Satchel! I’m with you – minimalist govt, low taxes, back to the founders’ principals. Does anyone running for office think this way anymore? I would rank FDR a bit higher based on his leadership qualities. I’d like to think that he’d be appalled to see how his New Deal has turned out.
“The 19th century?! Yeah, good times….”
You’d be very surprised out how good the 19th century was in fact! Remember, everything needs to be examined in terms of progress and increasing freedom. The industrial revolution, beginnings of the division of labor, large-scale “industrialization” of agriculture ensuring a (relatively) stable source of food for the first time (really) in human history, development of two truly revolutionary technologies (please don’t bore me with the internet….) – steam power and the internal combustion engine, electrification and power generation, the laying of a trancontinental railroad system (after the technology was discovered just 20-30 years’ prior), intantaeous communication for the first time in human history (the telegraph), continous and dramatic rise in the standard of living for Americans, the transition from moderate trade to worldwide trade (few people know that as a % of GDP, trade was actually greater at the end of the 19th century than at any time since – with the possible exception of the last few years – need to check the data again), the taming of an entire continent, growth in the United States from a few colonies with 10-20million people to 100 million (maybe more) and just about the most powerful industrialized country in the world (save Britain possibly) by the eve of the First World War, etc., etc.
The 19th century was a pretty impressive time, indeed. It had its problems. The Civil War was awful – nothing like the teeny tiny (by comparison) Iraq situation. If it were today – with today’s population, it would be as if 6 MILLION men died. Yet the country came through – something which we can’t seem to do with less than 5,000 dead today in Iraq. Slavery was a mess. But show me a country anywhere in the world that voluntarily (well, perhaps not so voluntarily for part of the Union) renounced the institution, and paid for it with such blood, and yet came out so strong, and unified. (If you care about history, and have read widely, you might want to contrast what came after the abolition of slavery in the US with what came after the freeing of the serfs in Russia in 1861 – there should be no doubt as to the superiority and genius of the American system.) If you are into comparative methods of dealing with crises by political systems, you might want to look at how China handled its transition to communism (not good for the 30-40 million people who are no longer here!)
Show me another country – anywhere in the world, at any time in history – that so successfully integrated such disparate peoples in such waves of immigration. Go try to become “Chinese”. Go try to become “French”. You can’t do it (unless you are French or Chinese, of course).
Well, I could go on…. The 19th Century was a pretty impressive time…
FSBO,
You know – about FDR – I agree that the problems have largely manifested themselves AFTER FDR, and you’re right that he probably would be appalled. But I think he made the classic mistake that all elitists do – and to the detriment of the people and the system that the U.S. created – namely, that a small group of people (i.e., government) can do a better “job” than an ordered system of rational actors in a free market. He did have leadership skills – no question – but it might surprise many that his policies were derived in open admiration of what was going on in the Soviet Union under Stalin and Italy under Mussolini at the time (this was all swept under the rug post-WWII). Amity Shlaes has written a good book on the economic fallout from the New Deal (which was widely viewed as a disaster by the common folk at the time – I can confirm this from personal recountings from some of my relatives): “The Forgotten Man”. I really recommend that book!
In fairness to FDR, he was hampered tremendously by the Fed, which after engineering the spectacular credit inflation of the 1920s, then engineered the deflation of the 1930s (all of which was done deliberately IMO). Let’s see how we deal with the upcoming credit deflation, and if we do any better than FDR!
Yikes – drink some chamomile tea people. Back to the issue about whether a lender can come after you in a foreclosure…apparently there’s a couple of factors going on. From what I’ve read (and please correct me if you know better because I’d like to know this for certain): the original purchase loan is non-recourse so if that’s the only loan you have, you can walk away and they can’t come after your assets. Then every refi loan after the purchase is recourse (i.e., they can come after your other assets). However, if there is only one loan when you go into foreclosure, there’s something called the “one-action” rule where they can only take one legal action against you (the foreclosure action) and then can’t take additional legal action against you for the balance even if it is a recourse loan. So in that case from what I understand you are still OK. The worst case scenario is when you have a 1st that you refi’d and a second loan or HELOC. The first will foreclose and use up their “one-action” against you, but then the second can come after your other assets for the balance. Kind of makes sense why they were pushing the 1st/2nd combo in the refi frenzy of the last couple of years. Can anyone confirm that this is how it works?
LOL! You’re right, Miles, about getting off topic. Sorry guys!
About nonrecourse versus recourse, and the one-action rule, I think Miles is right here, basically. However, the crucial distinction as I understand it is not so much the 1st versus 2nd (or HELOC) distinction, but rather whether the debt was acquired in connection with the acquisition; that is, whether the debt can be characterized as “purchase money”. In CA, ALL “purchase money” debt is non-recourse, and I think this is the case in most states (but not Nevada, for example). So, I think that even if you use a 1st and a piggyback 2nd (or HELOC) in connection with the original acquisition, neither is recourse in foreclosure. At foreclosure, the junior lien (the 2nd or HELOC) is extinguished, and I do not think that the one action rule will come into play. As I understand it, the one action rule really refers to the option that the senior lender has: “one action”, either to foreclose and take the asset, OR sue the borower for performance under the note (at which point the borrower can hand the deed over if he chooses).
I remember somewhere reading that there was some controversy regarding the status of refi’s. Some commentators thought that to the extent that the refi was a non- “cash out” refi, in which the refi just lowered the interest rate without changing the principal balance, then the purchase money characterization would still apply, and the new loan would still be nonrecourse. I think there may be some gray area in the law here, and I don’t know if case law has coalesced. And, I guess, there weren’t too many non-cash out refi’s anyway! Maybe a real lawyer could comments here.
Over the last several months, I have been standing on the sideline checking out the comments you “experts” post in this forum. The above comments finally pushed me over the edge to chime in….
I have to assume that most of you are in the Real Estate business in some fashion. If that is correct, this “bubble” or “Meltdown” is due to all of you (mortgage, agents, etc). I can use my situation as a prime example: I loved San Francisco and decided to finally plunk down all the money I saved for a meager down payment on a home. It took me 3 years of looking every weekend for a house (condo, loft, etc) that my wife and I could afford. During this process, I would attend open houses and investigate homes online. Almost every interaction I had with RE Agents was negative during this time. Some would not even allow me to place an offer on a property because all I could afford was the asking price. Every Agent wanted 10-20% more than the asking price on everything I looked at (and I was pre-qualified and looking in my price range). Also, all the mortgage folks I tried to work with kept trying to put me in what now is labeled as subprime loans because I only had 5% down rather than 20% down. When we finally found a property that we liked at a price we could afford, we bought it (we were first time homebuyers). Over the course of one year, I left from one Employer to another which screwed me out of 2 months pay. Rather than be late on my monthly payments on the mortgage, it forced me to refi WIHTOUT taking money out just so we would not be late on future payments. However, the damn mortgage company got me on a huge prepayment penalty and other points (total of 50k extra). Now, all of a sudden, I am upside down on my property. And because you have to pay 6% to sell, plus more fees, plus a SF transfer tax of $10k, it forces you to short sell if you want out. From my point of view, the entire RE industry needs to be overhauled. My wife and I are honest, hard working people who know nothing about the tricks of the trade. And over the past 5 years, somehow, you “experts” have found a way to squeeze every penny out of us and other normal folks AND complain about why the market is so bad. Furthermore, you have inflated the market so badly for so long, that it is going to take years for things to get back to normal. Forcing people to have to rent. Frankly, it make me sick.
I am sure I am going to get flamed on this by the same people who flamed the seller of this property. That is your right I guess. But it would be nice to stop and think about your words in an open forum like this when it pertains to peoples lives. Not everyone is a greedy, SOB trying to rob the government, taxpayers or banks. Some of us are actually just trying to stay afloat after the mess all of you created!
Condolences James. There will be many people like you, who just wanted a place to live, who will be impacted as this thing unwinds.
Consider your options ruthlessly. Do what is best for you. And be glad it was only 5% you put down and not 20 or 50.
I couldn’t have said it better than you, James, and condolences, as well. The real estate and banking industries have acted criminally. And they have been helped – intentionally, in certain aspects, and unwittyingly, in others – by the USG and the Fed. The collusive fraud continues to this day.
Perhaps situations such as yours will result in sensible lending standards again, although I do not hold out too much hope. No one – NO ONE – should be allowed to purchase a home if he dos not have 20% down. Scams like PMI and 2nd mortgages should be eliminated. If I had my way, 25-30% down should be required, and the distortive mortgage interest tax deduction should be eliminated. People might think that this would make it impossible to buy a house. Just the opposite. House prices would fall to sensibly affordable levels, and a lot of bankers, mortgage brokers and various mortgage bond traders would be out of jobs. Which would be a good thing for the country. Perhaps all those out of work people could find something productive to do.
I echo what diemos said. Be absolutely ruthless with your options. I know a lot of people are simply stopping their payments, and the banks are very reluctant to even send out foreclosure notices. Just this morning, a number of large banks announced that they are offering supposedly short moratoriums for people who are more than 90 days’ delinquent. Sounds like there’s an advantage to living rent-free for 3 months, huh?
Sorry for your situation James but it looks like you got in over your head. Why blame everyone else but yourself? One thing I will never understand is people buying property in the city when they can’t afford to buy. What is the big crime in renting? Why does everyone feel like they have to own something, no matter how financially unfit they are for home ownership? Something like 70% of this city rents.
Maybe my coffee still hasn’t kicked in, and I’m just grumpy, but I’m with 94114…condolences, but no sympathy for James.
Perhaps James should have taken a cue from the fact that professionals continued to tell him, essentially, that he couldn’t afford the places he was looking at.
Perhaps James should have started with a more modest property that he could afford the payments on more readily, or consider something outside of the city.
Perhaps James should have waited until he had 20% down and then some, in case something happened with his job.
Perhaps this seems too harsh, and for that I apologize. But I lost out to James (or someone like him) on house after house over the last 2-3 years, despite likely having 10-15% more to put down and a 2x or 3x income. It was very hard not to get swept up in the mania, but I am very proud that I didn’t. And I don’t have much sympathy for those who did.
Agreed, 94114.
While it’s a unfortunate story, things happen in life and one’s financial position should always be positioned to be able to address the unknowns- or at least be somewhat prepared. The most basic rules of financial planning indicate that one should have at least two months salary in savings or accessible investments- here’s a perfect example why.
For James’ case, certainly a financial advisor should have been consulted, considering it’s obvious that he didn’t / doesn’t have the ability to understand his financial situation. It would have been a little bit of money well spent.
FYI- I have nothing to do with the real estate market other than owning a house and being interested in what people are saying (perhaps kind of like James).
James, I think the majority of the people here are not actually in the RE business (other than as prospective buyers/sellers of homes). The RE business is definitely a shady business – your agent’s incentives are never aligned with your own incentives, for example, regardless of whether you are buying or selling. That being said, I would recommend you treat them exactly as they treated you – meet your legal obligations, and nothing more. If you eventually find that you truly cannot make the payments on your house and it’s underwater, walk away and let them deal with the mess. If the bank was so eager to get you into the property, then they’re getting exactly what they deserve. And, as Satchel says, at a minimum you should get a few months of rent-free living out of it.
I love you guys – don’t take any responsibility for what happened or what you got yourself into – just blame somebody else. It’s the easiest thing to do. Classic!
James, sorry about the stress you’re feeling. But your post omits some info. You say you are upside down on your property. That, in and of itself, is not the end of the world. Heck, just about everyone who bought a place in SF the last 2 years without a sizable downpayment (i.e. most buyers) could now be upside down. Can you pay the mortgage without too much strain? If so, then just enjoy your house — a home is a place to live, not an investment. I lost a chunk of change in the dot-com crash, but after pouting a bit I just moved on. If you are having trouble keeping your head above water financially, then you might consider giving the financial industry with whom you are so upset a dose of their own medicine. Just stop paying. You can amass a nice nest egg with no housing payment. You’ll get booted, but it will probably take 6 months and maybe much more. They might technically be able to come after you for any deficiency since you refinanced, but that is very unlikely and would cost more in legal fees than it’s worth. Then go rent a nice place with your savings and enjoy it.
So there are at least two options: (1) shrug it off and chalk it up to experience, or (2) don’t get mad, get even.
[movingback] – Not quite sure which posts you are referring to. I don’t think anyone here is suggesting that James not meet his legal obligations (i.e., turn over the house to the bank if the bank forecloses on him – no one is suggesting he commit fraud and burn the place down or anything ridiculous like that!). If he wants to vent at all the shady agents and bankers he dealt with, whatever, that’s fine – it’s not like it’s going to change the outcome one way or the other (just don’t fall for the same thing again!). But definitely stay legal. Nobody here is suggesting that his experience entitles him to engage in illegal activity.
@ anonm – well, Trip just suggested he stop paying mortgage and walk away – ‘don’t get mad, get even’. I think someone needs to also post the details of how you ruin your credit by defaulting on your mortgage and allowing your home to go into foreclosure. Not many landlords are going to let that one slip by when they take a look at your credit report – and painfully low credit score – when they are considering you as a potential tenant. Not to mention the long-term ramifications of completely trashing your credit.
The bottom line is simple – real estate is cyclical – it has always been up and down – you should never buy a property with the intention of getting rich quick – or feeling like you are being left out of the game in some way. Buy it if you know you can afford it over the long term and realize that over the course of time – as long as you pick and choose wisely – you will have a great place to live and eventually see your investment pay off. Those that jumped in the game without much consideration – or through the coercion of others – were somewhat foolish and many are hurting right now. But everyone needs to accept responsibility for their own actions as well. Know what you are getting yourself into. If it seems to good to be true, it probably is.
So if you can afford to make your mortgage payments and ride this out, I say do it. Find a better job if you have to – think of some viable options – talk to your lender. However, if you got in over your head to begin with, it’s really nobody’s fault but your own.
Perhaps situations such as yours will result in sensible lending standards again, although I do not hold out too much hope. No one – NO ONE – should be allowed to purchase a home if he dos not have 20% down. Scams like PMI and 2nd mortgages should be eliminated. If I had my way, 25-30% down should be required, and the distortive mortgage interest tax deduction should be eliminated. People might think that this would make it impossible to buy a house. Just the opposite. House prices would fall to sensibly affordable levels, and a lot of bankers, mortgage brokers and various mortgage bond traders would be out of jobs. Which would be a good thing for the country. Perhaps all those out of work people could find something productive to do.
I’m not so sure. In Canada, (where I’ve bought some properties) I believe they have only recently allowed LTV greater than 90%, the mortgage interest is NOT deductible, and almost all loans have 3-5 year terms, and the market is still crazy. IOW–even with a number of factors that SHOULD dampen the mania, it still took hold.
[movingback] – I think it’s pretty clear from his post that he wants to stay in the place as long as he can make the payments (if his only complaint is that it’s worth less than he bought it for, but he can still afford the payments, then yeah, that’s just dumb whining). If he can’t make the payments (after refinancing, etc.), then he turns the house over at foreclosure. How is that not taking responsibility? He’s giving them the asset that they agreed upon as collateral…it’s not like he’s burning it down or anything.
The bankers are big boys and girls: they placed their own bet on the housing market and the economy when they lent him the money. If they had wanted a risk-free investment, they would have bought Treasury bonds.
Yes, he will take a big hit on his credit score. But, depending on his situation, it could still be the best course of action.
I always find the discussions about credit rating display a sort of hidden contradiction, or cognitive dissonance at least. I for one do not think a bad credit rating is going to matter a bit in a few years’ time. I really think that the USG is going to “wipe away” bad credit events – or at least those events that are related to housing. At the very least, the lenders will push for a change in methodology for calculation of scores like FICO (it may be renamed, or an alternate measure developed, etc.). They are going to have to, in order to keep the credit game going, which is the main source of banking profits in an economy that does not produce much. after all.
Here is the dissonance. Inflation (price inflation, that is, although I’d argue that unrestrained credit inflation is just as pernicious) is a very bad thing for an economy. Sustained inflation leads to higher interest rates, of course, but more importantly, it leads to a wider variance when forecasting future required returns. Because a 10% move in future inflation makes a huge difference depending upon whether baseline forecast inflation is 2% or 20%, in high inflation environments lenders require more compensation for that risk, leading to higher required real interest rates. This of course leads to slower growth, less credit, etc. – all the things we think are good for an economy and the standard of living of the population. It is primarily for this reason that most 3rd world countries try to reduce inflation (they are not always successful), and why capital investments flow once inflation is “conquered”. One could easily look at the US in the 1970s and draw the same conclusion as to why investment and growth accelerated throughout the 1980s (and even 1990s) as inflation continued to fall on a secular basis.
Many people think the USG will inflate in order to bail out bad household investments – in effect, in order to inflate away the debt that households undertook and which can never be repaid. Given the hit to growth that we would have to take from higher inflation, wouldn’t it be simpler to wipe out the bad credit events? (In fact, countries like South Korea – as recently as 2002 or 2003 – if someone is Korean here, please help me, did just that, wiping out consumer credit card debt, and no one even seemed to notice….)