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Rewarding the foolish ...

Posted by chispa (My Page) on
Sat, Nov 17, 12 at 1:06

The article left me speechless. Why are we giving loans to someone who foreclosed twice and cashed out their refinance? It is truly a crazy world when the irresponsible get rewarded and the rest of us have to work harder and pay more taxes to fund this.

Here is a link that might be useful: Easy loans after 2 foreclosures


Follow-Up Postings:

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RE: Rewarding the foolish ...

interesting article;
it makes it sound like FHA is throwing money at deadbeats, which isn't the case.

A buyer has to have discharged the bankruptcy (it used to be 1 year after discharge, not sure if it's still the same), re-established credit with a certain minimum score, & show sufficient income to pay the payment & other obligations.

Also, the buyer may have to write letters of explanation detailing what caused the bankruptcy, foreclosure, etc, & the steps he/she has taken to make sure it won't happen again.


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RE: Rewarding the foolish ...

His bankruptcy was 3 years ago. It's not like he just got out of bankruptcy.

I know 2 ppl who did short sales (1 from a divorce, 1 from a job relocation) and both want to be homeowners again.

Until recently, if you owned a home you could sell it, usually for enough to cover the balance of the mortgage. Both of the ppl I know had done work on their homes but weren't over the 80% LTV ratio ... Until the market fell out from under them. I don't think it makes any sense to punish them by saying, "you have to rent for 5 years or even more" because a routine life issue popped up as the housing bubble deflated.


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RE: Rewarding the foolish ...

The article states:
"The last time he owned a home, Maldonado refinanced four times and took on a second mortgage. He put a Cadillac and Mercedes-Benz C300W in the driveway and racked up about $45,000 in credit card bills and other debts. His debt-fueled lifestyle ended only when he was forced into bankruptcy."

Buying a mercedes isn't a life issue! He refinanced, took money out and lived beyond his means. Has this really become the new normal? You really think this person deserves a third chance? There is no penalty for their actions ... I don't think he'll have a problem defaulting on his new mortgage when the time comes.


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RE: Rewarding the foolish ...

Chispa, I am with you.

We live in a world of insanity. We downsized a year ago. We have credit scores around 800, had never missed a payment on anything and the new mortgage was $800 less, plus we paid off a car a month earlier. our debt to income ratio was very low, basically the new mortgage and a very small car payment. I've been at my job 12 years, my husband about 5. We put down 40%, and could have qualified for twice the mortgage comfortably. You'd think it would be easy to get a mortgage, right? It was completely insane. Up until the day of the closing they were asking for crazy stuff, multiple bank account statements, letters from the bank, all kinds of things. Our realtor indicated this was not uncommon.

Some people shouldn't own homes. I don't say that to be mean, but if you can't save for a reasonable down payment, you won't have money when the inevitable repair is needed, and you probably haven't managed your finances well, you have no cushion. Additionally lots of people who lost jobs in this economy can't move to a place with better employment prospects because they are tied to a home they shouldn't have purchased.

However, HUD is still doing the $100 down program so those buyers can put the homes right back on the market in a few months.


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RE: Rewarding the foolish ...

"Moral hazard" remains alive and well in the financing of houses.

" I don't think it makes any sense to punish them by saying, "you have to rent for 5 years or even more" because a routine life issue popped up as the housing bubble deflated. "

If they had not over leveraged themselves it would not have been a problem.

You need to look up 'moral hazard.'

They made poor decisions involving a lot of money.

It has taken me MANY years to accumulate the RE holdings I have.
Bit by bit, with a LOT of 'sweat equity' in every one.

Even after many years I still personally do many routine maintenance and repair tasks, and only hire out things that will just take me more time than I have available.

I had enough of a business to have multiple crews doing renovation work for many years.
I no longer employ anyone directly, even part time.

Regulation has wiped out about 20 decent jobs, let alone the ever rising taxes I pay.


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RE: Rewarding the foolish ...

If people can buy homes only once they've accumulated a huge downpayment, & if they are punished forever for having made bad decisions or for having been caught in an economic, health, or personal crisis, our building & mortgage industries are down the tubes, along with the myriad businesses & craftspersons they support.


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RE: Rewarding the foolish ...

"If people can buy homes only once they've accumulated a huge downpayment"

We did it that way for a very long time.

"if they are punished forever "

A few years of renting is hardly "forever."

You are free to sell without taking any compensation, and donate all the money you want to help the 'victim' of your choice.

The rest of use should not be forced to support others in 'the style they are accustomed' to (like an owner occupied SF house).


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RE: Rewarding the foolish ...

I think there is a happy medium. I would feel entirely differently about a bankruptcy due to medical emergency or natural disasters. I feel zero pity for someone who has made foolish lavish purchases.

I don't think 3 years is long enough to wait. You don't change habits in 3 years.

I wonder how some posters would feel if the man in the story owed them 100K but bought fancy cars and luxury items instead of paying them back, claimed bankruptcy and had the 100K debt discharged, then was able to purchase his dream house three years later. Would it be "fair" then?

Part of the reason for the bubble was easy money. Banks and the government both created that situation. Bailing out the banks and keeping easy money flowing won't help long term stability.


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RE: Rewarding the foolish ...

My point is this ...

People who have had to move quickly for a new job have USUALLY been able to sell their house at a discount and move on. But then people's houses in some parts of the country (like Florida or Phoenix or Las Vegas) dropped in value by 40%. Add in real estate fees and suddenly people with 30% equity were under water.

So, what would you have them do? Collect unemployment so they can keep paying the mortgage? Or do a short sale so they could take a new job in a different state?

What "moral hazard" did they engage in?

Just because you have been lucky enough to not face these choices, don't think you are somehow better. Or that all these people are bad with money. In some parts of the country values sank like a stone over a 2 year period, and in many cases jobless rates rose at the same time.

I know that not everyone had this situation, but you are painting with a very broad brush.


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RE: Rewarding the foolish ...

Engineering Chic, we aren't talking about honest people who face a financial crisis and neither is the LA Times story I linked. The issue is those that lived the high life by cashing out on the paper equity of their house and when things went bad they were able to have all their debts magically go POOF! and disappear. They are now being given more credit to play with.

Plenty of honest people continue to do the right thing and pay their debts. They aren't the problem. It's the rest of the people who gamed the system that I have an issue with ... they don't deserve our help, pity or taxpayer bailouts.


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RE: Rewarding the foolish ...

But on a financial history form, it is hard to separate the two ...

Did you go thru foreclosure or short sale in the last 5 years? Yes.
Do you meet income ratios for a new mortgage? Yes.
What is you current consumer debt load? ...

That's all I'm saying. My friends did NOT continue to pay their debts after their short sales (the banks wrote off their losses). So by some definitions they'd be deadbeats and lumped in the same bucket as people who cashed out equity with crazy 125% LTV loans and acted like little Bernie Madoffs.


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RE: Rewarding the foolish ...

Then the banks need to do more than look at a financial history form:

Shortly after buying their first Moreno Valley home in 1996, Maldonado and his wife began a years-long process of home refinancing to fund an expanding lifestyle, according to a review of the family's property and bankruptcy records . . .


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RE: Rewarding the foolish ...

"People who have had to move quickly for a new job have USUALLY been able to sell their house at a discount and move on. But then people's houses in some parts of the country (like Florida or Phoenix or Las Vegas) dropped in value by 40%. Add in real estate fees and suddenly people with 30% equity were under water. "

So you want the rest of us to guarantee their homes value?

Did you make a donation to them to help bail them out?

Why should the rest of us?

You bring money to the settlement table to pay for your loss, based on you bad judgement in overpaying in a booming market.

I have had to hold properties I intended to renovate and sell and rent them out for years when repair costs got out of hand and the market had a downturn.

There are no guarantees of profit or increase in value in RE (or even holding value).

It is(at best) a long term) investment

It is not anyone else' fault your friend made a poor choice, and the rest of us should not be required to pay for it.

The 'moral hazard' is in expecting (and forcing) others to bear the expense of peoples mistakes.

I like my rental places.

Even with an initial neutral cash flow someone else is paying all my investment expenses.
The tenants pay the Principal, Interest, Taxes, and Insurance.(PITI) on MY property, and some extra for maintenance (like the water heater, HVAC, a& all the other systems that wear out or require repair).

If you put 30% down and still ended up under water you chose VERY poorly.

I have enough bills to pay without shouldering theirs.


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RE: Rewarding the foolish ...

EngineerChick what makes you think I never was put in a bad real estate situation?

Back in the mid 80s my husband and I bought a condo in NJ for 95K we were in our early 20s and had scrimped and saved to put 15% down. We had decent jobs but weren't super high earners either. Within a year it was worth 25K, and the condo fees were around $500. To top it off interest rates were high then, around 9%, and we couldn't refinance because of the decreased value. Here's what we did, we lived on about half our income for about 6 years so we could save as much as possible for a house. We delayed having kids for a long time, and lived very carefully. We moved out of NJ because it was too expensive, and went to a less expensive state so we could start a family. When we moved out of state we rented the condo at a $650 loss every month. This was late 90s so that was a chunk of our income. It took about 14 years before the market recovered. Did it suck? Yep! We learned to do all our own home repair and lived frugally.

Here's the kicker, after 14 years the condo was worth $105K and we had to pay CAPITAL GAINS to Uncle Sam on the "gain".

So what I am saying is that real estate is an INVESTMENT. When we made money on other homes since then, we didn't expect to share the gain with the bank, so we didn't expect the bank to eat our loss.

This is exactly WHY some people shouldn't own homes. Our society is going bankrupt because no one wants to be responsible for their lives any more. If your friends had short sales it will be in their interest to rent for a while until they can regain financial stability. It should be reflected on their credit.

Most people who have homes that are underwater could reduce their lifestyle, rent their home in the first state and rent a smaller place where the new job is. Will it be hard? Yes, but that is part of life. Or, I should say, was part of life.

The man in the story has no business owning a home until he has proven he can reduce his lifestyle.


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RE: Rewarding the foolish ...

Amen Brickeye.

I'm not trying to paint anyone with a broad brush.....but every single person I know who has ended up in foreclosure made some very poor choices along the way.

Now, I'm just talking about MY personal life experiences here. And I don't know anyone who has lost their home due to medical expenses - despite knowing several people who have gone through serious medical crises. Some of those folks were just lucky enough to have good medical insurance, and I know one other person who did a bankruptcy (or, at least she says she did?) but somehow managed to keep her house.

Of course, even the "medical insurance" piece is somewhat in your control. (By that I mean, I chose to stay in a job I didn't particularly care for, because it had good health insurance. And then I got sick and was glad I did. I was eventually able to find a different job....but I stayed in the place longer than I would have liked to do so. )

I am sure there are hordes of good people who ended up in a bad situation, through no fault of their own. But it just seems, at least to me, that when I start looking carefully into these stories - most times (I'm saying MOST, not always!) people made some risky choices and now want someone else to bail them out.

I am charitable, to a fault - to animals and children. I am less inclined to bail out adults. The bar rises significantly for me there.


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RE: Rewarding the foolish ...

I don't think it makes any sense to punish them by saying, "you have to rent for 5 years or even more"

I think the point for me, and that some of the others are making here, is that owning a home is not a right. And renting isn't a "punishment." It's that sense of entitlement to things that we can't afford that is responsible for a lot of people getting into a bind in the first place.

The fact is that during the bubble there were masses of people paying ridiculous prices for properties that could not possibly be sustained into the future. And heavily leveraging themselves to obtain these properties because they believed that the values would keep going up and they could just sell whenever and make a huge profit. I'm not saying that every single person had this mentality. But it sure was prevalent.

So yes, when people make bad investment decisions and end up in foreclosure, they should not be jumping into a new investment until they have the wherewithal to afford it. And that wherewithal should include a sustained, solid credit history and a substantial down payment. Part of the calculation of whether you are qualified to own a house should be whether you can afford it during a downturn as well as during a hot market.


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RE: Rewarding the foolish ...

Well, I am happy that so many of you have been better able to weather financial storms without having to file for bankruptcy, short-sale, or be foreclosed on, I know people who faced those things because of really bad decisions and a heaping dose of "I want it now."

And I know people who have faced those things despite being financially prudent and well disciplined. Fortunately there is no debtor's prison in this country and our laws are written to allow people to rebuild their credit.

I have felt feelings like, "It's not fair!" when I read about principal forgiveness or mortgage rates that are lower than what I can get (with a flawless credit history and well over 20% equity). I understand that sentiment. But I also know that I'm not perfect, either, and if I did fall into a huge financial hole it would be easy to pick apart decisions I have made in the last 5 years to see where I spent more than perhaps I really needed to.

I don't deny that some people do appear to be gaming the system and aren't showing good decisions. But I believe that there are smart, honest, careful people who are also caught in this. And they did not go into home ownership with a cavalier attitude of, "Oh well, if values drop someone else will pay for it." To assign such motives to everyone is unfair and (IMHO) narrow minded.


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RE: Rewarding the foolish ...

EngineerChick,

I think what I and the other posters are saying is that yes, bankruptcy is a way out of a bad situation regardless of the circumstances, and perhaps the old 7 year waiting period is there for a reason. There is no free lunch, someone pays for everything, including debt forgiveness. Unless you'd feel comfortable with these people walking away from a loan from you, you shouldn't think it is okay and completely forgivable they should walk away from a loan from the bank. Bankruptcy is a fresh start, regardless of the reason, but there should be some consequences regardless of the reason.

I foresee the same thing happening with student loans, my son who is taking a demanding major, who picked a state school and works so he will have minimum debt will end up paying, through taxes, for his friends who went into huge debt at 60K/yr private schools and couldn't be bothered to work summers. There is no longer much incentive to make prudent choices, someone else will be forced to pick up the tab.


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RE: Rewarding the foolish ...

Is there the same outcry when Morgan Stanley strategically defaulted on $1.5B in mortgages for property in San Francisco? They posted a profit that year, they could have made the payments but they decided to cut their losses.

I believe there are consequences to bankruptcy, even if someone can buy a home again just 2-3 years later. Their credit score is hit pretty hard, which makes it hard to qualify for a new job in many cases for those 2-3 years. Even if you don't work in a bank or in finance, credit scores are used to evaluate candidates early on in the hiring process.

You have a harder time renting an apartment. Many larger properties with professional management will require a higher deposit or higher rent (if allowed by law) or just refuse to rent to you. You can go with a smaller landlord, of course, knowing that your neighbors might have bad credit for completely different reasons - like criminal convictions.

You have a harder time buying or leasing a car if you need one during those years and will pay higher interest rates and/or a higher purchase price. Any credit you have will come with very high annual rates and low, low limits. If you need to travel during that time you might be up a creek when it comes to renting a car (and I'm thinking about going to see a dying relative, not Disneyland).

And I am sure there are more I'm not even aware of. So, there are penalties. I think we are disagreeing about 2 things: the duration these should be in effect (2-3 years or 5-7) and whether or not its fair to frame everyone as deadbeats who are trying to take advantage of the system.

The second one is the one I really take issue with. Absolutely, some are deadbeats. I'd even bet that you could say that about half of them. But saying that everyone who has faced foreclosure or had a short sale "expected others to pay for their mistakes" assigns malicious intent where there is none (at least, for a lot of people it wasn't their intent, I won't deny that some may have entered the mortgage believing that the bank would pick up the slack).

It's clear that I'm not going to change my mind, though, and that several folks here won't change theirs. I have said my piece on this subject and will let you all discuss amongst yourselves now. This isn't a "goodbye cruel forum" letter, just acknowledging my choice to bow out as a participant in the discussion.


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RE: Rewarding the foolish ...

I foresee the same thing happening with student loans, my son who is taking a demanding major, who picked a state school and works so he will have minimum debt will end up paying, through taxes, for his friends who went into huge debt at 60K/yr private schools and couldn't be bothered to work summers. There is no longer much incentive to make prudent choices, someone else will be forced to pick up the tab.

Actually student loans aren't bankruptable. This is due in part to a few decades back, when doctors would run up huge SL debt to get through medical school, then (strategically) declare bankruptcy to discharge them all, getting a free lunch. That loophole was closed up, and hopefully will stay that way.


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new beginnings

'Well, I am happy that so many of you have been better able to weather financial storms without having to file for bankruptcy, short-sale, or be foreclosed on, I know people who faced those things because of really bad decisions and a heaping dose of "I want it now."
And I know people who have faced those things despite being financially prudent and well disciplined. Fortunately there is no debtor's prison in this country and our laws are written to allow people to rebuild their credit.'

well put.


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RE: Rewarding the foolish ...

"And I know people who have faced those things despite being financially prudent and well disciplined. "

Really doubtful.

The number of folks hit by lighting every year is VERY well known.

A whole lot of 'living beyond your means' and 'I want it NOW' with a decent dose of gaming the system.

'No docs' loans originated with large down payments.
When you walk in with 50%+ equity in cash, lenders dis not need to look that hard.

Extending the same privileges to 10% or 20% down customers is ASKING to get ripped off.

'Interest only loans' started in a similar way.
Purchasers had large performing investments, and did not want to liquidate them and tie money up in a house.

When you are making upwards of 15% on your money, paying down an 8% loan with that money is just foolish.

If your yield starts to fall it is time to move some funds around.

It is not a method to let you purchase a house you otherwise cannot afford, assuming it will increase in value and you will get out from under the debt before it crushes you.
Here is some BIG news.

RE does NOT always increase in value.
Items completely beyond your control can cause the value to actually DECREASE.

Those with a solid financial base weather the storm.
The others go looking to get someone else to pay for their losses.


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RE: Rewarding the foolish ...

I haven't heard of an interest only loan in years.

nor of a reverse amortization or any of the other products that were available in the 1980's.

& it doesn't matter how much "equity" you've put into a house, if the market plummets far enough, you're wiped out.


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RE: Rewarding the foolish ...

"& it doesn't matter how much "equity" you've put into a house, if the market plummets far enough, you're wiped out. "

All those 70%-80%-90% folks are really in trouble.

You only have a loss if you HAVE to sell in a down market.

You make a paper loss real at that point.


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RE: Rewarding the foolish ...

Here is the typical scenario I see on short sales:

- house bought 10 years ago for $500K
- during the real estate boom paper house value went to $1.2 mill and the "owners" refinanced and CASHED OUT.
- current house value is $900K

Had the homeowners and Banks not been foolish and greedy the homeowner would actually be making a nice profit if they had to sell today, BUT they CASHED OUT so they owe more than the house is worth.

You really feel they deserve our pity, help and bailouts? And what did they do with the $700K they cashed out ... very few spent it on home improvements.

Oh, these short sales tend to sell for less than the market value, so they affect other homeowners who didn't game the system.

The numbers might seem crazy, but this is CA!! The problem is that the scammers also get to use the Govt programs put in place to help the honest homeowners affected by the RE crash.


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RE: Rewarding the foolish ...

I don' t live in a million dollar market;
I live in a "normal people" market, ie, the homes here belong to people who work for somebody else, corporations or hospitals or the post office, 2-income families for the most part, with 2.whatever children.

They bought homes to raise their children, & they don't move unless they have to-
job craters, spouse gets hurt & income is cut in half, etc.

Nobody cashed out $700,000, & nobody sells unless they have to.

These are the vast numbers of people I see who go the short sale route or who lose their homes to foreclosure.

The fact that they run out of options doesn't mean that they're foolish, or irresponsible, or deserving of the ridicule, scorn, & contempt that blasts from some of these posts, & nor it does it mean that they deserve punishment.

Today might be a good day for those of you who are lucky enough to be able to "take a paper loss" & stay in your own safe home to get down on your knees & offer gratitude & thanks to whatever force in the universe you believe in.


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RE: Rewarding the foolish ...

Weedyacres the government is considering forgiving them. Basically if you racked up huge debt in a major that has little employment opportunity and an expensive private college, you pay less than if you studied a difficult subject like math and the hard sciences at the less glamorous state school and have a great job.

Here is a link that might be useful: Student loan forgiveness


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RE: Rewarding the foolish ...

Sylviatexas, I don't have scorn for those people, however, I really think they should have to wait seven years before buying again so they aren't saddled with another house they can't get out of for the same reasons. It would make some people stop and see if they have other options like renting out the house.


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RE: Rewarding the foolish ...

Sylvia, the numbers are not what is important, take off a zero if that works better for your market. The bottom line is that there was easy money given away, people are still gaming the system and there is no differentiation between the gamers and the honest folks. The foolish are rewarded (both homeowners and banks). The taxpayers have to cover these losses. There are still many real estate agents that are also abusing the short sale & foreclosure programs. There is no oversight or consequences. This is what bothers those of us who lived within our means, pay our taxes, save & scrimp for future purchases, etc.

The prices in my town are crazy, but believe me the people are very "normal", lots of 2 working parents who have to work to afford to keep kids in a top rated school town. Everyone I know works for a company, hospital, etc.


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