walking away.. what are the real risks??

Question

I've got a beautiful home in the san francisco east bay area which is of the hardest hit right now in declining property values. anyway, i bought this house with a friend 3 years ago and our intention was to stay for a few years and get out. now we're stuck and although we're not in default, we both want to get out from under this deal as soon as possible. we are currently in the middle of a short sale process, but have two lenders and the second is not happy about the thought that countrywide isn't gonna give them any money.    My question to you all is this... If the banks decline the short sale, my friend and i are thinking about just walking away. we're both braced for 7 years of bad luck and see it as our last but acceptable option... we're not all caught up in "loosing our home" emotions because we want out. What can happen to us if we do walk?? Legal and tax wise?? Where might i find some current reading on the laws. anyway if anyone has a thought... let me know, Thanks

Lee Marshall · Answer

Hey Dave thanks for your comment as well, very good insight for me. My agent said that wells was hinting that they wanted way more than 3K, but i agree with you that this first no is more a bluff.... I will persist. I do believe my agent knows what she's doing, and after having these conversations with you I feel like I have some way to gague that now. Thanks again.

Lee Marshall · Answer

Shari Posey, you are awesome!! you had me at hello....  haha. Thanks for the info on wells and the loan mod. I know patience is key here as well... we'll see how this goes. thanks again for the extremely valuable response.

Jon Holdman · Answer

I was looking at the data from the S&P Cash Shiller data.  The June 2008 data, latest available.  keep in mind that's an index, not a value.  The June 2003 value of 154.98 doesn't correlate to any specific price.  I can't figure out if this is adjusted for inflation or not.

Fully agree there are many, many local factors.  Even looking at this index for a single city doesn't tell you prices on a specific street.

Shari Posey · Answer

I'm not sure I read the chart right but it looks like their computations show the average price in LA in 2001 was about $110,000. If that's what the chart is indicating, it's wrong. I bought my first LA property in 2001 and it was a beater in a somewhat rough area for $125,000. There have been a number of sales in the neighborhood within the past few months for similar homes for around $200,000. (At the peak it would have been about $275,000) At $200,000 a buyer can get an FHA fixed loan that would enable them to have a monthly payment within $200 of market rent in the area. But, I may be reading the chart wrong.

Within the Los Angeles metropolitan area there are areas hit mildly, somewhat hard and very hard. The further inland you go, the more it was overbuilt.

Jon Holdman · Answer

Yes, I do honestly believe that's possible.  The long term trend for housing appreciation is inflation.  You only have to look at the inflation adjusted Case-Shiller data for the last 100+ years to see that's true.  There were a couple major changes about 1910 that lowered prices, then again after WWII that brought them up.  But never in the last 100+ years have we see anything like whats happened in the last eight.

Look at this thread.  here's an investor who owes $335K on a property that's now worth $190K.  Its a condo in FL.  I think FL's going to be harder hit than CA because you have a lot more business and industry in CA.  FL also got very overbuilt, with a lot of the properties behind hocked off on fairly naive investors who got caught up in the bubble.  I don't think its out of the question to see prices for those condos fall another 20% in the next couple of years.  This bailout does appear that its going to ease funding, but I'm not convinced its going to help the FL condo market much.  That would make her condo worth about $150K.  Now, figure inflation averages 4% going forward.  It takes 20 years at 4% appreciation to get from $150K to 335K.

So, OK, maybe I'm overstating just a bit to say "never in our lifetimes".  And most areas didn't bubble like FL, NV, or CA, and so won't see such dramatic shifts.  But, I seriously doubt we'll ever again see the sort of dramatic appreciation we saw from 2000 to 2006.

The Case-Shilller recent data shows a value of 273.94 for LA at the peak and 154.98 for June 2003.  That's a 43% drop off the peak.  It takes 15 years at 4% appreciation to make that back up.  Add on the 5-7 years you think its flat, and its 20 years before we see those prices again.

Dave P. · Answer

f you are serious about the short sale keep negotiating even after the second lender says no...they may eventually say yes.

That is great advice. "No" means one of two things: "No for now" or "I'm not allowed to say yes but my boss might be".

Countrywide will easily allow the second to receive $3,000. $3,000 is their reflexive answer when asked how much they will let the second have. Are you sure that your agent knows what they are doing?

*By the way, has anyone on this thread read "Crashproof" by Peter Schiff? If you have, it will shed some light on when "values" will return.

Shari Posey · Answer

Jon, you don't look that old! You honestly believe homes will take more than 30-plus years go up to 2006 prices? Our market seems to be holding at 2003 prices but I do think it will be 5-7 years to start moving up. Inflation alone will contribute enough to get the prices up and rents sure aren't going down.

Lee, your agent should have put a small payment to Wells Fargo into the net sheet for Countrywide's approval. Wells will expect $2000-5000 to accept the short sale. You will have to re-negotiate with Countrywide to accept less. Believe me, if Countrywide has already accepted your sales price and costs, they will take a few thousand less but it will just take more time--3 weeks is nothing in the life of a short sale transaction. I'm surprised you've heard anything from either of them. Keep plugging away but Wells will want something for sure.

If you want to keep the property and try a loan modification, talk to the loss mitigation department of Countrywide. I was at a party last night and a guy told me his daughter just got a loan mod from Countrywide and they REDUCED the balance owed and reduced her interest rate to a market-rate fixed loan. She was not behind in payments. It's worth a few phone calls.

Lee Marshall · Answer

Oh and by the way Krzy... that is a five string bass that i do solo instrumental stuff on. I have a few buddies that play Chapman.. what a cool instrument.

Lee Marshall · Answer

Yeah Jon, my place is about 200k in the hole. good to know i'll always be stuck!! Think i'll go drink some hemlock... just kidding, anyway.. 
in this situation where i'm not in default, and my mortgage doesn't adjust until 2010, do i have any leverage to try a loan mod to get out of the interest only aspect of my loan.. i'm getting the impression that these lenders will only deal if your in some stage of default.

Jon Holdman · Answer

No need.  Closing costs were rolled into the first two.  Yes, many, many people bought homes at the inflated bubble prices with absolutely no money out of pocket.  That's a huge factor in the current crisis.  Folks say "all these foreclosures, REOs and short sales are destorying my property values".  No, the values they thought were there were fiction, and prices are falling back to their real value.  But, for folks that are looking at being $200K, $300K or more in the hole on a property which will never again in our lifetimes be worth what it was at the peak, what choice do they have but to walk away?