Tom in California has a $550,000 condo with a $4k payment a month.
Tom’s income drops, home value drops, 401k value drops.
Tom is not happy. Tom thinks about selling his Mercedes.
Tom stays up late at night thinking how can I save Tom’s A$$.
Tom devises a plan to legally work the system.
Tom stops paying his mortgage and property taxes.
Tom pockets $4k a month.
Tom’s lender doesn’t send out a default notice for 6 months because said lender is really overwhelmed with foreclosure notices, plus there has been a moratorium. Tom now has $24,000 under his mattress.
Tom’s credit has gone bad and Tom’s credit card limits have been cut down to their balances.
Tom is frustrated and spends some of his cash.
Tom now has $22,000.
Tom’s lender under California law has to wait 3 months for a Right of Redemption period before filing a 21 day notice to sell his property at auction.
Tom pockets another $12k from not paying his mortgage payment.
Tom now has $34,000.00.
Tom gets a notice on his door saying his home is going to auction. Tom calls lender to try for a loan modification under Obama’s new plan.
Lender postpones foreclosure for another month. Tom pockets $4k more ($38,000).
Lender offers Tom a reduced monthly payment starting 30 days later. Tom pockets $4k more. ($42,000)
Tom decides his condo is $100,000 underwater and doesn’t think he will recover his equity anytime soon because an REO next door has been on the market for 100+ days with no offers. Tom looks for a place to rent.
Tom finds a comparable place to live closer to work at $2k a month. Saving $2k a month.
Landlord doesn’t like Toms credit, so asks for 1st & last month’s rent plus a 2 month deposit. Tom now has $34,000 under his mattress.
Tom’s condo forecloses. Tom feels bad, but knows a lot of other people have foreclosed as well and is somewhat happy about his $34,000 under his mattress. Tom’s loan was a purchase money loan so the lender does nothing about his deficiency. Tom receives a 1099 from his lender but doesn’t have to pay thanks to the Mortgage Forgiveness Debt Relief Act (through 2012).
3 years pass by and Tom sees values continue to drop and stay low. Tom saves $72,000 by renting. (Interactive foreclosure calculator)
Tom notices a much bigger & upgraded condo with a killer view for sale for only $500,000.
Tom finds out that even though he had a foreclosure, after 3 years the FHA will do a new loan for him with only 3.5% down and he is now considered a first-time home buyer with eligibility for a nice tax credit (currently only good through 2009, but may be extended).
Tom lifts up his mattress and grabs his down payment of $17,500, which leaves him with $88,500.
Tom gets his rental deposit back of $4k and the first-time home buyer tax credit of $8k (see below).
Tom puts it with his $88,500 and it becomes $100,500.
Tom buys stock in a real estate ETF.
4.5 years later the foreclosure falls off his credit report.
Tom worked the system.
The law defines first-time homebuyer as a buyer who has not owned a principal residence during the three-year period prior to the purchase.
The FHA requires a minimum 3.5% down payment on loans backed by the agency, which means that buyers could put little or nothing down on homes up to $230,000. It is close to having nothing down, says Thomas Lawler, an independent housing economist.
A borrower whose previous residence or other real property was foreclosed on or has given a deed-in-lieu of foreclosure within the previous three years is generally not eligible for an insured mortgage. However, if the foreclosure of the borrower’s principal residence was the result of extenuating circumstances beyond the borrower’s control and the borrower has since established good credit, an exception may be granted.
My Thoughts
Are Tom and the banks/lenders that much different? YouWalkAway.com
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If it were me… once the lender offered me a modified payment and brought me current by wrapping the delinquent amount due onto the end of the loan… I’d take it. With $42,000 under my mattress and a modified mortgage I can now afford, why deal with the hassle of moving? It’s almost like a cash out refinance. If my credit has already been ruined why not save my money by not paying, then get it wrapped onto the end of my loan? I’m never going to pay it off anyway!
I read this, and I think to myself “Tom, you’re a smart man, well played sir!”
What I don’t understand is, why do so many people classify Tom as a “deadbeat”? Here’s a guy who was proactive, didn’t do anything illegal, and did what was financially best for himself & his family. What, he’s supposed to suffer, drain all his finances, beg borrow & steal to continue to keep up with the mortgage payment? If his lender did that, their shareholders would burn their building down, so why do we, the people, consider him a scum bag for doing what was necessary for his survival?
Have we really become that brainwashed?
Tom lost his security clearance because of the foreclosure and so Tom moved to Belize to became a scuba instructor. Tom is very happy… I met him while I was on my honeymoon.
As we have seen in the past 8 mo. when the banks fail we all feel it i.e. govt. bail out putting us, as a country, deeper into debt. It’s not that Tom is a dead beat, he’s unethical. Justifying Tom’s actions by saying it’s what the banks would do, doesn’t make it right. Remember what mom said ” two wrongs don’t make a right.” Just because you can work the system doesn’t mean you should. If what your are suggesting in Tom’s case is O.K. w/ you then you should never utter a word of disdain for the undeserving welfare, social security or medicare recipient who knows how to work the system, yet is draining it’s coffers. It’s the same thing. They both are leading to insolvency. Unethical behavior plus unethical behavior equals financial disaster. Unethical behavior corrected by ethical people making hard choices equals future prosperity.
Tom over bought (his mistake),
Tom either works his A$$ off to make good or decides to file for bankruptcy (personal responsibility),
Tom remembers not to make the same mistake, at least for 9 years (tough medicine),
Tom works his A$$ off and lives a good life
Tom dies knowing he’s an ethical man.
As pointed out, Tom’s actions may not be ethical, but why should Tom suffer when so many others that were contributers to the bubble profit and not face any consequences. Why must the “little guy” always take the fall?!?!? I don’t really want to bail out anyone with my tax money, but I’d rather bail out Tom than some arrogant butt-hole on Wall Street who claims we have to bail him out (and let him pay bonuses) or the system will collapse.
Why do we keep perpetuating the illusion that Tom actually makes $4,000 every month?
Remember this is a payment on inflated values (including taxes and isnurance) therefore part fo the payment is inflated as a direct result. If the $4,000 were TRUE market value then Tom: A. Probably would have not walked away and B. If he had, he could’ve rented the condo for…you guessed it $4,000 per month.
This reminds me of the classic faulty logic exercise: Dogs have tails. A cat has a tail. Therefore a cat is a dog.
The Government created Tom & his actions he is emulating the mood of the country PASS THE BUCK it’s not my fault WTF! HaHa
Why not work the system all the banks, investment companies, insurance companies, etc are working the system (that they created and screwed off) better than any individual or combined consumer could….
Tom dies knowing he’s an ethical man.
———-
Ethical, no such thing anymore.
Very well said. This should be nationwide required reading, it explains what is going on in an easy to grasp way.
Tom probably bought the $550k condo with zero down? Meaning he got to live in a nice condo and walks away with $100k for doing so?
The only way the working stiff/debt slave wins here is if prices fall way, WAY down to ultra affordable levels. If folks like Tom buy again too soon and keep us from hitting the bottom then Tom not only gets his $100k via we tax payers but also prevents us from gaining any benefit in this raping of the middle class.
CA and other bubble areas toast. It matters not whether a bubble house falls to $200k or $100k because the f@cked buyer will walk away if the house is underwater $200k or $300k, even $100k. SO let it fall. Foreclosures for the folks that bid housing up like tulips and lets get affordable housing for all (even the tulip folks).
Forgot some expenses and things that he did not take into account.
1) Moving expenses. Gonna cost about 4K for that.
2) Delinquent Property taxes go to a collection agency or reported to IRS. Future tax refunds are going to be intercepted until all paid off.
3) With his bad credit, the universal default provisions in his credit cards get activated. His interest rates zoom to 34%.
4) With his bad credit, he loses his job and his income drops like a rock. If he applies for a new job and the run his credit, game over, no hire.
He is forced into chapter 11 bankruptcy or chapter 7.
That pretty much kills any savings he’s had.
Nice playing the system.
Tom actually makes more than $4k a month. He is just saving 4k a month because he used to pay 4k every month to his lender for his mortgage payments and taxes.
Ok fair enough. Then the lender gave tom 2k for moving expenses. (cash for keys) Tom is single, so he just got his buddies to help him move. The lender had to bring the property taxes current when the house sold at auction. Property taxes generally follow the property. Tom isn’t a finance guy or someone who needs credit or a security clearance for his job.
I was shocked when Tom bought another condo for $500,000, even if a nicer place. It works well in the example, to prove that he could. Still, doesn’t Tom think he risks going through the same thing again, this time without the government programs for low-down mortgages, debt forgiveness, and tax credits? And end up with his wages garnished if he still has a job? Nice work for a single person, light on their feet, and shows proactive, independent thinking. More secure would be to rent for longer, pocket more cash, buy a smaller place outright, and use the cash to invest in local water, food and fuel security.
For JJ and others who compared this to welfare or social security fraud, that is so inappropriate, I don’t know where to start. In private contracts, the people who enter them can have whatever rule they like. It’s not fraud to walk and it’s not a crime. It’s a contract right and the damages in anti deficiency judgment states is the house — the house goes to the lender.
The richest among us do this, and corporations do this. A great example is Donald Trump who is fighting in court to avoid paying a personal $40 million guarantee to Deutsche Bank for the default of a company on a condo tower development in Chicago. Trump signed the guarantee as an assurance for the bank to issue the loan for the development project. He’s arguing he shouldn’t have to pay and is refusing to pay even though he has the money and he signed the promise.
Simon Property Group was in a joint venture with another firm to own and operate some mall that just went bankrupt and they aren’t legally required to guarantee the debt with their company’s income and assets. It’s the same as a homeowner. The company could honor its mall default, but it doesn’t have to and so it won’t. And if it did, it would probably be sued by shareholders because then SPG wouldn’t be maximizing shareholder value by minimizing costs and maximizing profits. As a corporation, executives and the board have a duty to minimize costs and maximize profit within the bounds of what is legal and without any regard to what is “morally” appropriate.
So when you hear people like Hank Paulson “remind” homeowners that they need to be responsible and pay their mortgages even if they are underwater, that’s obviously something he wouldn’t do as a CEO or something he would allow management to do as a shareholder. It would arguably be against the law.
And that’s how ridiculous this system is. It has logical business imperatives for rich people and corporations and they operate under razor sharp logical profit seeking imperatives. The public, on the other hand is encouraged to do what is “right” which involves making good on debts there is no legal liability for.
Also, as for the public/government liability for this, THE ONLY REASON THERE IS GOVERNMENT LIABILITY FOR FORECLOSURES IS BECAUSE THE CONGRESS IS PACKED WITH THIEVES WHO INSIST ON GIVING BANKS HUGE SUMS OF TAXPAYER MONEY. That’s hardly the fault of the homeowner who walks away. It is caused by a corrupt Congress that gets “friend of Angelo” below market rate bribes from Countrywide Bank. It’s Senators like Dodd who get more than $6 million in campaign contributions from the same banks who then hand them proposed laws and that the Senators then introduce as their own bills.
Banks are supposed to determine credit risk because they are worried about whether they will get the money back. The low down payments, no income verification, all the other nonsense, it’s exclusively because of government involvement in the process. It drives up home prices in a way that renders all home buyers debt slaves. Most Americans would probably trade the Bill of Rights for a lower 30 year fixed mortgage rate. The banks and government together have turned American into a nation of debtors that is very interest rate sensitive and extremely vulnerable.
The key is to remove all federal subsidies to housing so that home prices fall to a natural market level where people can afford them. That will be painful, but it is where this is going anyway. It will get there eventually. Either we do it through awful price inflation in everything but housing, or home prices have to drop further. You can suspend the drop for a little while, but you can’t stop it indefinitely without destroying the entire country. And eventually people will realize that what’s happened here is the government trying not to save petty homeowners, but the banks from the homeowners’ delinquency. And the cost of doing that is enormous and unsustainable.
People may look around in two years at the carnage, at what’s left, and question whether it was worth it to “save” housing by using taxpayer money to try to keep prices unsustainably high. As Americans had difficulty in understanding the consequences of unsustainably high personal debt, so they now appear to have difficulty understanding the consequences of unsustainably high national debt. The cost of “saving” housing will be heavy and severe and it will wreck everything else. In two years Americans will be sitting in their homes that fell maybe 5% in value instead of another 25%, but they will be unemployed, or employed, but have watched food and fuel costs triple resulting in the new measure of a “comfortable middle class” life being the ability to afford food and fuel, something that used to be the definition of subsistence living in the Third World. We’re racing, praying, hoping and burning everything down to try to keep home prices grossly overpriced compared to our incomes.
This is all madness. It will be revealed as madness when the bills come due. We’ll all be paying 70% taxes with ZERO social services for 20 years to pay off this orgy of debt to accomplish nothing. It’s like watching people set fire to their own community. It is at once hard to believe and tragic to watch.
I say rather YOU go try this fantasy scenario. I’ll pay my bills, retain my credit and good name. Is this what “they” want you to believe now? As the saying goes, “I have a bridge in Brooklyn for sale too, any takers?” because there IS a sucker born every minute.
All these people claiming that Tom is unethical are just hanging onto some perceived notion that there is a standard greater than the mortgage agreement that Tom signed.
He signed an agreement that said: I’ll pay you $4K/month and in exchange you will give me the money to buy my condo. If I don’t pay you, you can kick me out and take my condo. He’s doing EXACTLY what he agreed to do. Leaving when they ask him to. How is this in any way immoral or unethical?
I was in grad school at the time of the madness, no position to buy a house and no idea where I’d end up, but man I wish I had tried.
Trivia! What should be done?
A. Bail out the banks.
B. Bail out the Tom’s
C. Bail out both
D. Bail out neither
The correct answer is D. Unfortunately, our politicians have not and will not let the free market work. Life goes on after bankrupcy for both people and corporations. Instead of getting out of the way they want to “fix” everything by keeping homedebtors in debt and pushing our nation into even more debt. We need less debt. Who’s with me?
Gawd Blass Amurka !
Jeb Cheney 2012……….. LOL
Some blithering idiot mentioned rent it for $4k / month/. yeah right, that is fantasy world when much less expensive options exist. Mortgage payments do not always correlate into what you can rent your residence for. And especially when the job market is on the decline. It goes down!!
Uhhhh who in the hell is going to rent a condo for $4,000 / month.
Now what I don’t get is this. You are approved for a loan modification but your home is worth 40% to 50% less and the lender will not drip the value..A Month later you decide F, this I am short selling. Why does the lender accept the short sale for the 50% of value.
What kind of Freaking accounting is this that it is acceptable now. A new buyer gets it at 50% but you don’t get a writedown?
A History of Home Values (graph 1890 to 2006)
http://www.investingintelligently.com/wp-content/uploads/2006/08/a_history_of_home_values.png
The Yale economist Robert J. Shiller created an index of American housing prices going back to 1890. It is based on sales prices of standard existing houses, not new construction, to track the value of housing as an investment over time. It presents housing values in consistent terms over 116 years, factoring out the effects of inflation.
The 1890 benchmark is 100 on the chart. If a standard house sold in 1890 for $100,000 (inflation-adjusted to today’s dollars), an equivalent standard house would have sold for $66,000 in 1920 (66 on the index scale) and $199,000 in 2006 (199 on the index scale, or 99 percent higher than 1890).
Tom Is NO fantasy. My bud I played softball with, stopped making his house payment in early 1990’s. He had bought at the peak of that bubble, the place was worth half what he paid, the bank wouldnt re-negotiate the balance, so he stopped paying. Essentially lived rent/mortgage free for nearly 3 years. He moved to Alaska with a TON of cash!! TRUE Story!!
In response to Sean Olender (must be a good Irish banker).
To the Point of your “the richest among us do this” I still must disagree. Because they can and do does not make it appropriate. No matter the persons economic status. A contract should be honored until you are released from it not when you determine it’s time to quit. Personal integrity should still matter. I digress.
To the point of the balance of your comments, I agree. I could not have said it any better and I thank you for your well educated comments.
Your job was outsourced to a foreign country. Your spouse’s job was outsourced to a foreign country. Your employer does not want to pay your unemployment claim. You lost 75 percent of the value of 401K and IRA. You are over 50 years old. You lost about 50 percent of the value of your real estate holdings. You obtain Food Stamps and health insurance for your children. You now pay 1,000 dollars a month for health insurance for yourself and spouse. Your spouse has a complete mental breakdown because of the hundred phone calls from creditors that you can no longer pay. Bank executives get hundreds of millions in bonuses. Insurance executives get hundreds of millions in bonuses. These are multinational corporations that may be still laundering money for dishonest political officials and drug lords.
nice post, thx for sharing it
This sounds like a heck of a deal for me
Here is my deal had a nice house payments taxes insurance cost were about 1,000 month plus utilities ect
Got real sick big medical bills, filed bankruptcy kept the house then found out the the house was filed in banjruptcy so it became a norecourse loan. one thing lead to another I am letting the house go back havent made a payment on it in 2 years have it rented out and collecting the money and puting in the bank. When saxon mortgage and pinna fund figure out what has happend I will have around 20k in the bank by the way I bought a brand new house and the rent from the defunct property has help pay most of it off.hahaha that is cool for me to bad for them
Jay, that has NOTHING to do with survival and everything to do with abdicating one’s self from his obligation to pay for what he purchased.
No, a mortgage is backed by security which is the value of the house. I don’t even believe you should be penalized if you give the house back because the bank got the property back. The contract was honored fair & square. I’m not sure what the big deal is and if you think foreclosure bad or unethical, then you don’t understand business (or contracts) and I guarantee that you work for someone else and not yourself. Keep paying on your depreciating asset.
The problem is, the banks were greedy jerks who wouldn’t, and don’t help proactive people. They force and incent people to be late because they are unwilling to help you or modify your mortgage unless you are!
I had an option arm with a pre-payment penalty. I called the bank trying to the get the pre-pay waived because I saw values dropping and wanted to get the loan done before I was out of luck. WAMU refused to waive the prepay. By the time the prepay expired, values had dropped dramatically and i could no longer qualify to refi. Then I tried to get my loan adjusted…they finally did give me a lower rate, but they refuse to help on my 2nd mortgage. I have to be at least 60 days late and be willing to sit on hold for hours trying to speak to a human being. The bottom line is…the banks are getting bailouts…but they won’t share the sympathy or the wealth. You have to make a business decision not an emotional one when things are dire. It’s hard, I have always had spotless credit and i keep draining my savings because I’m having a moral dilema about walking away. So before anyone judges and criticizes people for walking away…don’t assume it’s an easy opportunist decision for everyone. Often it’s a painful last resort. I truly believe had the banks (who i believe knew they were in trouble already) been a bit more proactive in helping people with the mortgages vs. reacting and they would still have losses, but the crisis proportions could have possibly been averted.
The mortgage agreement stated that if you can’t make the payment – the bank will take it away from you.
Everyone is trying to do the right thing. But, it is very difficult to understand how the values of my house drop by 30% in two years. When the bank own apprasier valued it at much higher when the loan was taken out. Now I can’t even try to refin and do the right thing. My bank (Countrywide) doesn’t even want to talk to me till I am 90 days past due. I have two choice, use up my life saving and continue to make the payment (hope for the best) or do what Tom does……
sean olender. fantastic. the info. you put forward was so clear and so helpful. thankyou for taking the time to share such thorough research.
any other thoughts, you’ve got my attention. sincerely, pjs
WAY TO GO TOM!!!
This is exactly what we did and are short selling our house with a pocket of cash!!! The problem is the bank won’t even talk to you unless you stop making your payments. We tried working with them to keep making our payments but they wouldn’t even discuss it until we were a non performing asset. With ANY other investment people make (like their house) if it falls bad you cut it loose just like what Tom did. I am tired of people saying Tom or other home buyers over bought. We can afford our home with no problem but IT MAKES NO SENSE TO unless we are going to die in this home. We needed to move for work purposes and our only options are 1. don’t move for work (not an option) 2. rent it out (for ALOT less than monthly payment and still NEVER be able to sell it down the road b/c it will never be worth what we paid for it) 3. short sale 4. foreclose. Remember the bank wouldn’t even discuss until we stopped making our payments. People that are trying to do the responsible thing are being forced in to a corner without options. I don’t know about you, but I am not going to deplete my retirement and live in a house for the rest of my life because the economy tanked. As earlier posts say, you enter in to a loan and if you can’t pay you give the house back or better yet try to sell short so the bank doesn’t have to lose more money doing it themselves. Oh and by the way it took 13 months for our house to sell. Why??? Because we had 4 offers come and go b/c the bank didn’t have time to look at offers. So, the first offer was for 240k (on a 370k home) and 8 months later, 3 buyers later, the bank got 140k because they didn’t have time to look at the other offers and the market continued to drop. I say ROCK ON TOM!!!!! Smart man!!!
I have a question for all the nay sayers out there ——-
Tom buys a house that he can afford for 400k to provide the American Dream for his family. Two years later Toms home is worth 200k. Tom has been offered a promotion and must move his family to take it. This move will also put him closer to all of his family. Tom’s mortgage company doesn’t care that he can’t sell it. In fact, Tom’s mortgage company won’t even give him the time of day until he is behind on payments. Should Tom NOT take his promotion? Should Tom be stuck living in a house that will NEVER be worth what he paid for it and pass up any and every opportunity that comes his way? I think NOT!! Tom should do the responsible thing and try to work out a short sell so he can move forward. Tom is NOT a bad guy!!! Try putting yourself in his shoes. You could also relate this to someone who lost their job, health problems, etc. There are SEVERAL different categories of people trying to short sell or foreclose on their home. Some are deadbeats and shouldn’t have been given a loan in the first place. BUT, there are plenty of other people that could afford the home, deserved the loan, and are now in different circumstances.
Tony
I agree 100% with what you said. Circumstances change and its not people that got into trouble on their own that are looking at walking away. The banks helped by issuing loans with no verification or documentation if people could afford them. For people like me that could afford it got in trouble when more people that couldnt afford it defaulted and the housing prices started to drop. I bought my house 3 years ago we could afford it. Since then Ive had two childern (any parent will tell you they are expensive) we are now barely able to make the mortgage payments. Again the banks wont talk to us becuase we arent delinquent yet. My husband has a great job opportunity in another state. The only option we have left is to walk away. Short sell we thought was an option but banks are dragging their feet and the buyer walked away. Instead of losing all of our life savings trying to pay for a mortgage that is more than the house is worth, why wouldnt we walk away and pocket some money to help save for our kids futures and in 7 years our credit will be restored and we will still have savings and my husband would have a better job.
AGAIN I NOTE Not all people that are considering walking away (or walked away) are dead beats or got into a house they couldnt afford. Life changes and you have to change with it or drown in it.
I have read through all these comments so far. I bought at 565K four years ago in San Diego County at age 61 with the idea that by the time I turned 66 I would be able to sell and move into a smaller place on a small retirement. Note, please, that the bank who loaned me the money for an 80% mortgage + 10% home equity loan appraised and valued the house at this value. Since then I have paid off the home equity loan (more fool me!) and so have 20% of the house, but it is now valued – by the tax authorities – at only 330K.
Guess what. I have lost ALL of my investment (the 20%), but the bank will still have my house – not 80% of it, but all of it. IF we could sell at 330K, then isn’t the “fair” thing to do is give me 20% of the sale and the bank 80%? Actually, no. I did not contract for that, so the bank will get back 330K out of the some 460K or so left of the mortgage.
I lose everything, the bank loses 130K, which, incidentally it will get from the government, which is actually my money laundered through taxes. Wow, what a system!
Remember, it was the bank appraisal that valued the house – not me. I do realize that I had the option not to buy, but I was assured that real estate was a good investment and I have a good job and I can afford the house – at the moment.
Questions.
Should I stop paying my mortgage payments forthwith and pocket the money?
Should I try and persuade the bank to restructure the mortgage based on 80% and 20% of the 330K?
Once I move onto my retirement I will not be able to continue to live in this house anyway even with the (possible) reduced payment under such a restructure. The intention when I bought was to sell and go smaller so that I could retire on the smaller income.
This is a real life situation and you see, the decision will be made with a lot of heartache and regret.
One thing I will do is do due diligence on this web site and the “Youwalkaway” people and I will probably take advantage of their free consultation as advertised on this site.