The Walk Off
Unfortunately this is not a reference to the dramatic end to a baseball game. It is what I think may be the next sad wave of occurrences in the housing market. It is when owners simply walk off from the home that is no longer affordable to them. They leave it empty, turn off the power and water and go on to a rental that is more in line with their current income level and lifestyle. It takes a while for their loan servicing company to figure this out and then the foreclosure process starts. What aids this prcess? The couple walked into the home for nothing. They put no money down and at most paid some earnest money. They only lose credit scores when they leave. Their monthly interest payment is nothing more than a very large rent payment.
Here is the scenario:
A hard working, law abiding couple with 2 kids buy a home back in the day. The day being defined as the market craze of late 2004 to early 2006. This couple pay for the home using an interest only conventional loan for 80% of the price and a Home Equity Line of Credit (HELOC) for the other 20% of the purchase price. This HELOC is an interest only, 3/1 Adjustable Rate Mortgage (ARM). The 3/1 means that the interest rate on that part of the money will reset in 3 years. And generally, this reset is to a higher rate.
The angle for this couple, and many others, was that the home would appreciate and they could refinance both loans into one loan at a better rate and have 20% equity in the home due purely to price appreciation. To put numbers to this, let's say they paid $400,000.00 for the home with $320,000.00 at 6.5% and then $80,000.00 on the HELOC at 8.5%. Since they are interest only, they have paid down zero amount of principal and are still suffering with a $3,000.00 mortgage payment.
The market stops going up and in fact goes down. The hope of a re-finance has disappeared and the looming rate increase begins to weigh on the couple. What to do? They both work. They have no extra money to do anything with the kids and the kids are not getting any younger. Instead of the dream of home ownership, they are living the nightmare of $3,000.00 a month for nothing.
They notice that a rent house is available close to their neighborhood, the kids could stay in the same school. The home is nicer than the one they have, in fact it is a new build bought by an investor and the rent is half the price.
They discuss their current life and both agree that things are not good. All work, no play and the kids are not being raised the way they were. They made a mistake and have to correct it. While outside their model of responsibility, the walk off is the only only option and they still have what little savings existed before this home because they financed everything. They have nothing invested in the home and the only emotions are negative because of the way the market has turned.
Their credit is decent so they apply to rent the home and are accepted. They use one months mortgage note to pay the deposits, rent a Rider truck and one weekend do the move. It will take three months before things become obvious to the loan servicing company and by that time they will have a new home and a new life. It will be years before they can buy again but that is not an issue right now. They may never be homeowners again but they will raise their kids and have a decent life.
The problem for the market is that this home will sit for three months with no power or water and quickly become distressed. This will hurt the other homeowners who are trying to do the right thing. If one or two other walk offs occur, the seed of a declining neighborhood has been planted. It is a weed and spreads fast.
Lets hope the walk off remains a baseball term.
Here is the scenario:
A hard working, law abiding couple with 2 kids buy a home back in the day. The day being defined as the market craze of late 2004 to early 2006. This couple pay for the home using an interest only conventional loan for 80% of the price and a Home Equity Line of Credit (HELOC) for the other 20% of the purchase price. This HELOC is an interest only, 3/1 Adjustable Rate Mortgage (ARM). The 3/1 means that the interest rate on that part of the money will reset in 3 years. And generally, this reset is to a higher rate.
The angle for this couple, and many others, was that the home would appreciate and they could refinance both loans into one loan at a better rate and have 20% equity in the home due purely to price appreciation. To put numbers to this, let's say they paid $400,000.00 for the home with $320,000.00 at 6.5% and then $80,000.00 on the HELOC at 8.5%. Since they are interest only, they have paid down zero amount of principal and are still suffering with a $3,000.00 mortgage payment.
The market stops going up and in fact goes down. The hope of a re-finance has disappeared and the looming rate increase begins to weigh on the couple. What to do? They both work. They have no extra money to do anything with the kids and the kids are not getting any younger. Instead of the dream of home ownership, they are living the nightmare of $3,000.00 a month for nothing.
They notice that a rent house is available close to their neighborhood, the kids could stay in the same school. The home is nicer than the one they have, in fact it is a new build bought by an investor and the rent is half the price.
They discuss their current life and both agree that things are not good. All work, no play and the kids are not being raised the way they were. They made a mistake and have to correct it. While outside their model of responsibility, the walk off is the only only option and they still have what little savings existed before this home because they financed everything. They have nothing invested in the home and the only emotions are negative because of the way the market has turned.
Their credit is decent so they apply to rent the home and are accepted. They use one months mortgage note to pay the deposits, rent a Rider truck and one weekend do the move. It will take three months before things become obvious to the loan servicing company and by that time they will have a new home and a new life. It will be years before they can buy again but that is not an issue right now. They may never be homeowners again but they will raise their kids and have a decent life.
The problem for the market is that this home will sit for three months with no power or water and quickly become distressed. This will hurt the other homeowners who are trying to do the right thing. If one or two other walk offs occur, the seed of a declining neighborhood has been planted. It is a weed and spreads fast.
Lets hope the walk off remains a baseball term.
posted by Terry at 2:37 PM
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