Above: your author's house, as photographed on July 30, 2006, the day before his family moved in. Take one last look - it's probably going to belong to the bank soon enough.
Interest works night and day in fair weather and in foul. It gnaws at a man's substance with invisible teeth.
- Henry Ward Beecher
Funny etymology for the word “dip” in the context in which I am using it: today's miscreant youth coined the term “dip” as a way to describe running from the po-po: to dip is to flee law enforcement. Eventually it took on wider meaning, as in simply “to leave” or “to walk away.” People my age used to say “split.”
I like this term. It's fresh and youthful, my 20 year old likes it, and I can foresee a lot of dipping happening. Right here. In my neighborhood. People left and right are dipping every day.
On their mortgages.
While this isn't the epidemic it's thought to be, it is increasingly common, and, it turns out,for good and bad reasons. What good reasons, you might ask? Isn't it a borrower's responsibility to pay, and isn't dipping on a mortgage an ethical issue?
Well, yes and no. It's an ethical issue if you can afford your mortgage and other responsibilities, one might say, but if you simply cannot do it it's just a simple little tap dance into bankruptcy. I mean, you signed the papers, you take the heat right? Still, I am finding boards and mortgage/financial help groups (here's an example) where incensed buyers, their homes worth 40% less than they were when bought, are crying “foul” t the bankers who shoved crap paper into their hands and said “sign it, you'll LOVE being a homeowner!” amid signs of a market that was destined to fail. “Fat-cat bankers can have my crappy house – I'm renting forever!” they say.
The consensus – ever growing – seems to be: “I feel absolutely NO remorse for handing my house back to a lender who sold garbage loans on homes they should have known would eventually be worth nothing, and
no, I don't care if they 'didn't know it was coming', because they were paid hundreds of millions of dollars to know – it's their fault.”
But what about the guy who made $37,000 a year as a school janitor, had a wife and 6 kids, and signed a contract for a $450,000 home in Reseda, California? Isn't it his fault? He obviously couldn't afford it...or could he? Or was he lured by predatory lenders? Or was he trying to bilk the system?
What about the house flipper in Detroit who had 7-8 mortgages out there on ratted-up $125,000 properties he intended to flip for $450,000? Was he taking advantage of a strong market that failed and left him in trouble, or was he just being greedy and taking advantage of the bank's insanely stupid mortgage equirements, then found himself caught out?
Ask the buyers and they'll tell you it was the banks' stupidity and greed. Ask the banks and they'll tell you it was the buyers' stupidity and greed. Either way, buyers are gagging on debt they can no longer afford to satisfy, and they have no options left but to dip, since bailouts seem to be intended as bonuses for failed executives, not simple, workaday scumbags like average homeowners.
Dipping. Seems there are some gray areas.
What's not a gray area: a fairly large subset of homeowners who were more cautious and careful buyers, who shopped in late 2005 and early 2006 for sensible homes at sensible prices, gained a fixed-rate, conforming loan well within their ability to pay, and began the process of home ownership in a home they could easily afford...only to have the real estate market AND the job market fail right under their feet, leaving them stuck with a mortgage for a house worth far less than they own and either unemployed or under-employed meaning: pay cut) and unable to pay that mortgage.
Now factor in the mixed bag of rules, regulations, and remedies available for buyers who have to dip on their mortgage: no two lenders are alike, and some try to be helpful by offering reduced rates and extended terms, but many lenders could care less about the buyer's plight and simply threaten, then force, foreclosure and out you go.
And so: sometimes dipping is – to put a fine point on it – the best business decision a homeowner can make.
It should be noted that dipping on a mortgage is NOT always that easy – you still have a valid contract with your mortgage lender, and walking out can leave you in touchy legal territory: the mortgage lender can come after you with guns blazing for the cash difference between what they make on an auction for your property and the remainder of your loan, plus fees, legal and otherwise. Last year that wasn't too bad an option, but right now, with some $400,000 homes in Las Vegas selling slowly at $185,000, that adds up to a pretty big lien.
My take? Hmm. Look at that description I wrote up above of the “careful buyer.” I was trying to describe myself.
Back in late 2005 when I bought the home I am in now, there was plenty of talk about a “housing bubble” that was “going to burst” some day. I knew it was coming. Indications were that a year or so after my purchase housing prices would begin to fall, there would be a period of adjustment, then prices would recover, although perhaps a little slowly. Meanwhile, the year or so of increase in price after I signed my contract would make up for some of that loss, especially since my house was a new build, and besides, we wouldn't have a mortgage payment for seven months, so out payments would start on a house worth a little more than we paid for it. Even with a minor “earnest money” down payment which left us technically 100% financed, I could easily see useable equity in my home in 2-3 years or so, and since I qualified for $350,000 more than I spent I wasn't house-poor. Best of all: the area I bought in had never seen a “bubble” like Detroit, Southern California, or Las Vegas, so there would probably be no significant drop in prices. No worries. Home ownership makes it worth it, and the risk wasn't that high.
Who told me this? My mortgage banker. My realtor. The builder. Everyone who was on the other side of the sales fence, who else? Besides, when we signed our paperwork in February of 2006, the news still hadn't changed, and non-bankers like me were assured all would be OK.
Ah, and here we are three and a half years later, living the Reagan Dream: awash in all that money trickling down from big business and especially the bankers, and every day is like opening another treasure chest filled with success and cash in my middle-class life. Since I bought my home it has plummeted 22% in value, and I was laid off and had to take a new job...earning 20% less than I was after 4 months of unemployment. Layoffs happen, but it was particularly ironic that I was working for a bank that bought a mortgage company with over $100MM in bad loans, so they got gobbled up by another bank with less problems who immediately set about cutting heads, including mine. That also meant the area I live in began to hemorrhage jobs, since the bank I worked for was the second largest employer in the region. Bonus: the CEO was paid $23MM in bonuses to fail in so spectacular a fashion. Trickle down, Ronnie said, trickle down...
Now I spend from savings accounts every month to make ends meet, and those savings are almost gone. The job market is slow and still low-paying, and I see no alternative in my immediate future: if my mortgage company opts not to help, I will dip. And I won't feel bad at all.
Before I sum up: to add insult to these injuries are reports – as numerous now as they were sparse when I signed my contract – that the second wave of foreclosures, an even bigger wave than the first, is yet to come, and the average half-million dollar home bought in 2007 and worth about $300K now will be worth $175K in 2011. Isn't that nice? I paid a heck of a lot less that half a million for my home, but why, I wonder, do I continue to drop that payment into a mortgage lender's pocket every month on a home that will be worth 50-60% or less than I paid for it in a few years? Why am I funding an obvious loser? I wonder if I should dip simply because I may not live long enough to see real equity in this place.
Saddest thing of all: I love this house. My wife and I picked it. We picked the tile, the carpets, the appliances, the siding, the color of shingles on the roof. I was here every day while they built it, on my lunch hour, walking through the sawdust and workers and taking thousand of pictures. This was my house. I do not relish the thoughts of the day we will walk away from it.
Your turn to weigh in – to dip or not to dip: is this a moral and ethical thing? Is it a simple business decision? Would you dip even if you could pay your mortgage?