Go Ahead? Walk Away?

A homeowner called in response to one of my “We Buy Houses” advertisements. She was interested in selling but not “highly motivated,” to use the industry term. Her condo was worth maybe $37,000 in fully fixed-up condition. She and her husband had more than $75,000 in debt on the place, in a first and a second mortgage, secured at times when credit was much easier.

I regretted breaking the news to her that a short sale was the only way out. I outlined the process. Both lenders would have to agree to accept less than what they were owed. The owner of the second lien would have to agree to take “much less” than the $18,000 due. She and her husband didn’t like the idea of walking away from an obligation, nor the prospecting of becoming renters, not homeowners.

“You are already renters.” I didn’t say that exactly. But that was the essence of what I told her. If you’re paying to live in a place in which you’ll never build equity, aren’t you in fact renting? I say certainly. Holding the deed is a mere formality.

“I admire your integrity.” I did say that. She’d actually been overpaying on the second, hoping to eventually retire the debt. Should she continue doing so?

“I wouldn’t,” I replied. Should she devote the extra funds toward paying down her first mortgage? My answer was the same: “I wouldn’t.”

This report by a University of Arizona law professor, Brent T. White, identifies two reasons people keep paying on underwater mortgages. One reason is to avoid shame and guilt. Another is exaggerated anxiety over foreclosure’s perceived consequences.

This point from the report is most poignant: Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility.

In other words, the banks didn’t worry about honoring their moral obligations. His point is, “Why should you?”

Suspension of FHA Flip Rule is Good for Homebuyers Too

The Federal Housing Administration has long banned FHA borrowers from buying homes previously owned for less than 90 days. To potential homebuyers, that may not have seemed like much of problem. After all, there are plenty of homes available in the MLS.
But to the investors who buy distressed properties and fix them for a quick sale, the restriction has been a big roadblock. Now the blockage has been lifted.
The FHA just announced the waiver of 24 CFR 203.37a(b)(2). The temporary halt will take effect on February 1, 2010, and will be effective for one year unless otherwise extended or withdrawn by the FHA Commissioner.
Investors are elated, but homebuyers should be happy too. A new supply of cheaply bought, well repaired homes will come on the market. Many such bargains wouldn’t happen without removal of the 90-day capital-carrying burden imposed by the FHA.
Homebuyers should seek out bargains rather than let Realtors restrict the “inventory” to listed homes. Search for terms like “wholesale homes” in your area. Many such properties are unlisted—in effect For Sale By Owner. If a broker won’t approach FSBO sellers, search for “real estate lawyers” to make such purchases possible.