Weigh In: The Dip

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?

STC =^oo^=


  1. I cannot fault sensible people such as yourself for doing things that need to be done in order to preserve some semblance of fiscal sanity in these times. I can, however, fault the big swinging dicks and mortgage bankers and everyone else in the very industry I'm going to college in order to break into. We (and I will count myself as part of the industry) failed our responsibility to the public, and the gods took notice.

    On the other hand, as someone who sat on the sidelines of the housing boom (I blogged as far back as 2004 that "you people are all insane and the moment we have another recession you're all fucked"), I'm looking at these plummeting home values and the likely permanent skittishness of Americans who have had the notion of homeownership-as-benefit permanently dispelled and thinking "y'know, I'm gonna be able to get a house dirt-cheap someday. Thanks recession!"

    I still say we line up all the mortgage bankers against the wall, shoot 'em, and distribute their assets to the sensible homeowners (the speculators and janitors in McMansions who drove prices up artificially can go live in a cardboard box.)

  2. I personally would prefer never to dip, but I know plenty of good, moral, hardworking, upright people who had no other option. People who bought homes well within the guidelines of what they could afford - which was usually 40-60% of what the banks offered to lend them.

    Our house is still worth more than what we paid in 1998. We got a 100% financed VA loan, it was 2-3 years before we had it down to what we bought the house for. However, it was still a LOT less than renting would have cost, even for a much smaller place. And ours is small to begin with.

    If I lost my job, we'd probably dip and move to a more impoverished town where our meager savings would last longer. With no kids in school, that's much easier. If we won the lottery, we'd be tempted to dip, just because our lender (who bought our loan 3 years in) sucks big time, and has mismanaged our account at least until it got swallowed by a bigger bank recently. After all, who'd care about a credit rating if you had a few million in savings?

  3. Yepper, suck city right there. :-( I fall in the group of people who borrowed barely 60% of what I was offered. So far (knock on wood), our house has lost only about 10% of its value. Would it sell at that price right now if we needed to sell it? Not likley. But, overall, we're okay, and it'd *probably* sell for 80-85% of what we paid, so, after taxes, we'd be alright. Not happy. But okay. Well, kinda. I mean, I did just recently have to move out of my house, away from my family (who are still there), in order to follow work. Which sucks. Big time. But, it is what it is.

    As for dipping, I have a slightly different take, but ultimately agree with you guys. For me, I'd rather just quit paying, or paying what I can, but still live in the house until I'm kicked out. Here's why: if I did that, if I paid what I could toward the mortgage and do what I could do (without dipping much into savings--only within what I could bring home), I'd feel like I'd done everything on my end that I could do to hold up my end of the deal (the moral/ethical end of things).

    At the same time, if there was no work here (or we couldn't have me live out of town to pursue work), I'd try to sell the house and pay what I could during that time. But would it sell? How quickly? In the end, there'd come a breaking point where I wouldn't be able to pay (and, as I said, I'm couldn't accept spending much of my savings to stay). The breaking point's different for us all. But, If I can't pay, I can't pay. That's when I'd expect the bank to come and kick me out. Then, the house is on them. I would have done all I could do.

    In other words, I believe that everyone in the process has a responsibility to do what they can, but, there's comes a point where the home owner has done what they can and the bank is then responsible. And the banks have to accept that they take risks when loaning, too, just like a home owner takes a risk when he buys, even when they loan to very responsible buyers. And when a home loses 20, 30, 40% of its value, that's not just on the home owner. That's on the bank, too! Why should the home owner be the only one who accepts the risk of devaluation? If a bank loans money, it should be just as responsible for loaning responsibly as a home owner is for accepting a loan responsibly. Right? Or is their job only to loan money, but not to vet the possibility of that loan being repaid? No, they're responsible, too.

    As for the trickle down discussion, what I don't understand (and admittedly, this is a Jon Stewart idea), is why didn't the money for the government bail out of these banks go to home owners (at least on paper)? The money could have been used to pay these mortgages that the banks own. That way, the banks would have gotten the money just like they did, but the mortgages would have been paid, too, which would have relieved the home owners as well. I've yet to hear an acceptable answer as to why we didn't do it that way. We propped up the banks, but left the home owners fucked? What's up with that?

  4. "In other words, I believe that everyone in the process has a responsibility to do what they can, but, there's comes a point where the home owner has done what they can and the bank is then responsible."

    Ah, Keith - this is the basis of The Dip. I do not own this home: they do, and they took a certain amount of risk alongside me when we all signed up. As this house is worth so little, I cannot safely escape: we're out $60,000 on a reasonable sale, and that's a price I cannot pay.

    So when I dip, they do too, but in the end they get a bailout. Not me. Fuck that.

    And we fully intend to live in this house until they throw us out. I have made a total of $75,000 in payments for a return of $4,500-$5,000 in total principal payments. That's the deal I made, and that's the way it works, but the mechanics of The Dip mean I am riding out the payments I made in lieu of those I will not make, and when the bank has had enough they can evict. In the end, we expect to be here until roughly next June or July.

    As for the bailout: vote for Obama, vote for McCain: each was campaigned on the wings of money received in contributions. I like my boy Bambam, but he is, in the end, a fucking greasebag politician (the lesser evil, in my book) who took the bailout plan from the previous administration and enacted it wholesale as he was paid to do by the donors who put him in office. You and I did not give him that campaign money, and thus we are fucked.

    I imagine Ronald Reagan laughing his ass off right now about his pet, the Trickle Down Theory of Economics. "Don't worry, you middle class and poor people - the wealthy folks this money trickles down from will always be there to take care of you! They aren't wealthy because they are greedy. They are wealthy because they are generous, and want you to be rich, too!" It was an putrid and incredibly stupid idea then, and it's bearing bitter fruit now, isn't it?

  5. I don't understand why you can't get a bailout yourself. What about Obama's rescue plan?

    As for dipping, I assume you've looked into what you are going to do about renting. Isn't it hard to rent with something like that on your credit rating? Other than that, I have to say I'd go with it and just do it if it were the only option. I knew someone who went bankrupt after defaulting on her car and credit card loans, and less than seven years later her credit was good enough for her to buy a house. You will recover from this, and you'll do it without all the financial help the banks are getting.

  6. OH Schuyler, I'm so sorry about your house....

    Yes, I agree, the bankers etc who played around with the housing market should be punished, but instead they were given even more dough to play around with. I understand the lenders also took mortgage insurance betting that the homeowners wouldn't be able to pay the mortgage, and so the lenders could make even more money. I understand this sort of gambling was made illegal in 1917 and that law was repelled in 1999 (the legislators didn't read the small print, but house owners were supposed to read 300 pages documents!). The whole thing boggles my mind, but I do know it's so very unfair!

    Remember Maynard Keynes? Instead of the "trickle down" nonsense, he advocated the pump. Prime the economy from the bottom up and the wealth will rise while most everyone will be prosperous enough... and it worked till the eighties when all administrations regardless of paty had a field day gradually demolishing the regulations put in place to avoid a repeat of the Great Depression.

    You know that 75,000 you made in payments is repeated so many times it makes a trend. Given the bail out the banks got on top of it, these mortagage payments are syphoned out of the wealth the middle class had accumulated. It's pretty complicated and I'm no economist or statistician but I've read that in this way billions have been syphoned out of the middle class... we've been had several times over.

    I too voted for Obama and even contributed to his campaign, but as the old say goes "the more things change, the more they remain the same..."

    Sorry again about your house. I only read your post after I read the other ones. It must be so hard to lose a house that both you and your wife love and have made into a home... luckily you have a good sense of humor which is a primary survival tool...

  7. Schuyler, I think you have the talent to write a book a bit like Portnoy's Complaint but very different about the foibles and tragedies ordinary people have to face in our absurd economy and political system (you know, advertisers selling total nonsense along with politicians to the rest of us who have to work and don't have time to take courses in sociology and media studies, not to mention corruption practices. You could start with exploring the sort of thing that has actually trickled down on us (shit, or course, but you could put it so much more eloquently!)

    It would be a best seller because it would speak to so many people...

    (just a bit of advice from your Jewish mother!)

  8. Perhaps it helps to hear how the (modern) banker would approach the question of whether to dip:
    (1) first, find out exactly what your legal obligations are under the contract and the laws of your state. This doesn't mean reading the bold print/big letters that say you have to pay $xxx/month, it means knowing what will happen with your obligation if you either:
    (a) mail the keys to the mortgage lender
    (b) stop making (full) payments on the loan
    (c) sell the house below the value of the mortgage
    (d) some combination of all the above

    (2) Do a cost/benefit analysis of each possible course of action to get the expected $ value of each outcome, ignoring emotional intangibles. Also, some evidence suggests there won't be much of a problem from the credit check when you go to rent as dipping has become more common/viewed as not the potential renter's fault.

    (3) take the action that has the best expected outcome

    In other words, the banking approach involves no emotion, no morality, just a decision to pursue the best $ outcome based on whatever the rules of the game say.

    Why should you play differently? Why should you feel differently about it?

    Now, my suggestion to all the people who are upset about the banks/bailout/etc: start a credit union. Then, if the "bank" rips you off, you have the comfort that you are stealing from yourself.

    My credentials, btw: long time professional markets trader/formerly consultant to big banks on how to manage credit risk (ha!) And yes, as a customer and a taxpayer, I also hate the banks . . . but I don't especially blame them for the current economic situation. That soup had a lot of cooks.