DISTINCTION: WHAT IS YOUR EQUITY RECOVER TIME FRAME?
WHY ARE STRATEGIC DEFAULTS ANY DIFFERENT FOR YOU? 10 YEARS TO RECOVER LOST EQUITY IS MOTIVATION TO CONSIDER ALL OPTIONS. 60 YEARS IS SURELY A MOTIVATOR.
A family of three who bought a 3 bed home in Salinas Calif at the J curved market top in 2006, might have to wait 60 years to recover the lost equity. Or they could walk. Or short sale it and rent a similar house for a lot less and buy again in 5 to 7 years in most cases. Check out Brent White, a University of Arizona law professor. He’s the guy who is on NPR all the time saying logical things like this and the banks love to hate him. They don’t know how to keep the genie in the bottle when people are educated and thinking and talking like this!
Let’s localize to a typical example:
Many Chicago condos that I do analysis on week to week for clients are literally 10 years out of being “righted,” where the loan value is back to market value at a 4 percent appreciation! In other words, the condo is worth $220,000 and they owe $310,000 (they bought in 2006-2007) . That $80,000 difference will be made up in how long? The amount of $220,000 with 4% appreciation is $8,800 a year (roughly). And, that’s is if appreciation kicks in again next year. That’s ten years to hold. If you’re in a condo, can you wait that long to move to a house? If you have a growing family and need a larger home, what are you supposed to do? Hopefully the appreciation will recover quicker, but with the job forecast, this is looking like it’s a long shot for 2011, 2012 and 2013.
If a client calls me and needs mobility or has economic problems, a new distinction should arise for them, when do I get my equity back? I have people look at the long term picture. We think out 10 to 15 years. What are your other options? Renting? How will you buy again if you do a short sale and how long will it take?
Voluntary defaults are a new “problem,” but they are not going to go away. The housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible? 1 in 5 of he defaults are supposedly a strategic one (where owner could make the payments but has chosen not to).
So maybe you’re one of the 1 in 5 defaulters that is not paying because your home is upside down. If your property is upside down (i.e. you owe $300k but it only worth $220k and your assessment just went up by $40 a month) and your thinking why am I doing this, I just had a baby and need more space. I have a job prospect in another city and need to move. If that’s you, well, you have good company and intelligent company. It turns out that the rate of short sales among the rich is 50% higher than that of the middle and lower class (check out this recent New York Times article).
Now that you understand the issues, you’ll circle over the guilt of it. “What will others think of me.” Well, it turns out the banks are trying hard to demonize you if you are thinking of pursuing a strategic default.
Is strategic defaulting “ethical”? Every-one’s ethics are unique, but for one bank to do it, and call their customers names for doing it, doesn’t jive with me. Does it jive with you?
Here is just one of many examples. Businesses, in particular Wall Street banks. They make measurements on balance sheets and routinely walk away from properties. Morgan Stanley is a bank and the last time I looked they had done so. In fact they stopped making payments on three San Francisco office buildings, oh that’s not right, it was 5 FIVE buildings they stopped paying on! A Morgan Stanley fund bought these 5 buildings at the peak of the market and MORGAN STANLEY decided to STRATEGICALLY DEFAULT. Next time they call you immoral or unethical, call them the same right back. Stick’s and stones.. you know. Those banks who live in glass houses should throw… you know.
The other point is that the banks unload the mortgages they packaged and lend in as soon as they close on the loan. The relationship of small bank owner and local towns person doing a loan together through relationship is rare. Harry Potter (It’s a wonderful life) is gone, he’s gone global.
And what about when a private equity firm lays off hundreds of workers in a factory or moves jobs from Chicago to Mexico to save 5% on the bottom line? There is no “ethical” black eye put on the company. Why is there such a effort to bruise the strategic defaulter for doing what is in their best interest?
Phil Buoscio, Broker 312-953-6725