Some of my readers are already familiar with Seattle Billy. For those that missed those posts, here is all you need to know.
- Bought a condo conversation at the absolute top of the Seattle real estate market.
- He used an exotic loan to buy the place.
- He was laid off 3 months ago.
- He can’t find a job or interview.
- He is directing all his unemployment benefits into mortgage payments.
- He desperately wants to refinance his bloated mortgage.
- Still doesn’t understand he overpaid and still believes his condo was a good investment.
Now let me introduce you to Mr. Microsoft. Mr. Microsoft is a friend of mine that if you haven’t guessed – works at Microsoft. Back in December, I put him contact with the Geldpress for an interview. Why was Mr. Microsoft interviewed for the post Seattle Housing – Microsoft Layoffs and Mortgage Walk Aways? Because he decided to stop paying his mortgage.
Let me give you an overview of Mr. Microsoft.
- Bought a condo conversation at the absolute top of the Seattle real estate market.
- Still fully employed in a high paying job.
- Recognizes he overpaid and it was a poor investment.
Who is right and who is wrong? And are there shades of gray? When I covered Seattle Billy’s status, “Ed” commented:
It sounds like hes not smart enough to know that hes not that smart. So much for a lack of wisdom. The old saying ignorance is bliss will prove fatal in his case.
Tell him to cut his losses and walk out of the condo, live in a van and take showers at the YMCA until he finds a job. Keep a cell phone and stay under the radar from creditors.
Sounds like sound advice to me. The bank assumed way too much risk loaning a marginally employable individual with no money down hundreds of thousands of dollars to buy his old apartment.
What about Mr. Microsoft? Commenter Mike L. said this:
He is going to intentionally not pay his mortgage for 6 months. Should he not be held responsible for the deal he signed? Could he have taken in a boarder?
He should also be taxed on the amount of mortgage that he will not be paying since its pretty much a gift from the tax payers.
He has no integrity if he lives there for 6 months free. Hes a thief, plain and simple.
Seattle Billy is unwilling to admit he made an awful business decision and has decided to keep his word, even to his own detriment. Mr. Microsoft knows he made a poor business decision. He put his emotions aside and did extensive legal and data research. He decided to not honor his agreement and walk away.
For many of us, our gut tells us that Seattle Billy is the honorable one doing the right thing. But we also know the banks that wrote these crazy loans are getting bailed out by the billions. They share a large part of the responsibility. As I said in the post The Lack of Trust in the New World Economy:
Every day we are hearing stories of people and corporations walking away from their obligations. Not only are they not being punished or shunned, they are being rewarded. We are waking up to a world where the people paying their bills are the suckers.
Since buying a home is a business decision, I looked into how businesses are responding to the economic downturn. I talked with an executive at a cash-rich national retailer. They have decided to renegotiate all their mall leases this year. They want a lower lease and they may decide to close stores if they don’t get concessions. They signed a lease, have the money and yet they still want a lower payment. It is purely a business decision.
What would I do if I had an exotic mortgage loan (2005-2007 vintage) and I was in the same situation as Seattle Billy and Mr. Microsoft?
- Collect data on what the fair market value comparable housing units. I actually know a lady that is afraid to see what condos are selling for in her building. She thinks if she doesn’t know then somehow her net worth is higher. This is childish. Get data. Get data trends. If you live in a multi-unit building, find out how stable the HOA is.
- Contact your mortgage company and ask for a principal reduction. Armed with data, you can tell them what the fair value should be and where it will be in 6 months. You do not want to refinance a bloated mortgage at a “good rate”. You want the principal dropped and let them know you are prepared to walk.
Would I walk? It depends. It definitely doesn’t cost anything to reach out to your mortgage company. If a few phone calls can get 50K or 150K knocked off your mortgage, then it is worth a try. Arm yourself with data and then try and broker a compromise. This acknowledges both parties made errors on the original agreement and you are trying to find a fair solution.
What if the mortgage company doesn’t want to renegotiate? Run the numbers. Find out what comparable rents are. Figure out what you think you can save a month in the rental market. Calculate how long it will take to make up the lost value in your home. At this point, math will tell you the right answer. This is a business decision.
What do I think will happen to Seattle Billy and Mr. Microsoft? Seattle Billy will eventually lose his condo and file for bankruptcy. Mr. Microsoft will most likely contact his mortgage company in a few months and get a serious principal reduction. If the mortgage company acts too late, Mr. Microsoft will slip into the rental market for several years while hoarding mounds of cash. Then at some point he will pounce on some distressed property that he’ll get for pennies on the dollar.
Mr. Microsoft versus Seattle Billy. Your thoughts?
Feb 6, 2009 — 10:46 am
Frankly, I’m surprised by your position on this. And your examples just don’t wash. Is the cash-rich national retailer defaulting on it’s agreements? No. They have every right to renegotiate, and to legally terminate their agreements if they don’t like the new terms. But if they just walked away, they would get sued, and they would lose, as they should.
Walking away from an obligation is wrong. You even seem to know that, since your plan of attack involves negotiation, not default. I mean, are you trying to tell me that Mr. Microsoft is a complete moron, and was hoodwinked into buying his condo? Did he do as you suggest and try to work things out with the bank? It doesn’t sound like it. He’s an opportunist, plain and simple, and it’s wrong.
And sure the banks are getting bailed out, and that’s wrong. But IMHO that is irrelevant.
And you keep saying that this is a business decision. That’s a cop out. If you ran a business, and broke contracts whenever you felt that you didn’t negotiate well, you’d end up in jail. What about the businesses that bought gasoline futures as a hedge against rising fuel prices. Now that crude prices have plummeted, should those businesses just walk away from those contract and call it a business decision? It just doesn’t work that way.
Feb 6, 2009 — 10:51 am
Mr. Microsoft’s credit history will be affected by the way he is operating. If he continues down his current path and with new regulations along with fearful lenders, he’ll be lucky if ever gets any credit extended to him ever again so I disagree with your prediction about him. I do agree with your plan of action and the prediction on Seattle Billy.
I do have to say that I think that these two are extreme cases though, they will never be able to even consider a balanced plan of action. As my dad always says “if they had that ability, they would not be in the mess they are in to begin with!” 🙂
Feb 6, 2009 — 11:16 am
Regarding Mr. Microsoft: My position is both parties are wrong. They should try and work together to find a solution. The bank that wrote the mortgage based off the assumption that asset prices would continue to rise at double digit annual increases is just as wrong. Mr. Microsoft agreed to pay too much.
The bank walked away from their obligations when they went and asked for billions in bailouts. I believe that is highly relevant. They failed their lenders by putting them in loans they couldn’t service, they failed their share holders and now they are failing all Americans.
Feb 6, 2009 — 11:22 am
Mr. M$ knows his credit will be damaged. He also knows the credit for millions that are foreclosured upon will be damaged as well. He wants to emerge in a strong cash position when home prices return to pre-leveraged values.
Even with his high salary, he couldn’t make his loan whole and move without years of savings. He has calculated it makes better sense for him to take the hit now.
Feb 6, 2009 — 11:42 am
That’s the kind of thinking that got him into trouble in the first place..he’s a moron 🙂
IMO and at first glance, he’s using 2 flawed basic assumptions for his “analysis”:
1. He’ll keep this “high salary” till home prices return to pre-leveraged values (btw, what happens if the bank forecloses and he has to find somewhere to live?).
2. He knows what lending rules will look like at that point.
Feb 6, 2009 — 11:53 am
1- It is Seattle Billy that believes he will eventually get a job at the same pay rate so he can continue to pay his bloated mortgage. That is the false assumption. Mr. M$ is making no future salary assumptions. He is going defensive.
2- There are millions of vacant homes in this country. I think it is a safe bet that home prices will plummet and those millions that got foreclosed upon will be welcomed back as home buyers at some future date. Worst case scenario is there is a glut of rental property.
From an analysis basis, Mr. M$ has done an impressive amount of homework. His flaw is ethics. Seattle Billy has done no homework, but has strong ethics.
Feb 6, 2009 — 11:57 am
Oh, I forgot an important #3 on my list above:
3. He’s smart enough to keep any “mounds of cash” that he’s hoarded, in a safe location (like his mattress and not the stock market 😉 ). History says probably not.
My prediction for Mr. Microsoft: same as yours for Seattle Billy 🙂
Feb 6, 2009 — 12:19 pm
3 – I know both and I disagree. Despite the ethics, Mr M$ has done something most bad investors don’t do. He admitted his error. He acknowledged he was wrong. He didn’t place the blame on anyone but himself. Seattle Billy blames the “bad news” media, the economy and his former employer.
Feb 6, 2009 — 12:49 pm
And not paying his mortgage while still living in the condo is placing the blame on himself and admitting his error? What a crock!
Selling the condo and taking the hit while paying off the mortgage or negotiating with the bank = taking the blame and responsibility for the error. There’s a big difference between talk and action, MAS. He needs to grow up and be accountable for the stupid choices that he has made (and IMO, he will continue to make).
Feb 6, 2009 — 12:52 pm
Mr. Microsoft has no honor. When he figured out he was underwater he needs to have figured out that what he needs to do is a negotiate a short sale with his lender. If they don’t take it immediately, he needs to work at that.
As a person who has screwed up royally financially, I know it was personally damaging to my psyche to lack integrity in my affairs. Mr. Microsoft simply lacks a conscience in his financial affairs. If he gets bailed out, he’s taking your and my money MAS.
That shit ain’t right.
Feb 6, 2009 — 1:05 pm
There was a lack of conscience on both sides. I hope he does work with his lender to find a compromise. In fact I hope A LOT of those in 20o5-2007 exotic loans do the same thing. The sooner home prices stabilize, the better. Prices can’t stabilize when banks and lenders are being either dishonest or ignorant about fair market value.
Feb 6, 2009 — 1:07 pm
BTW, can we please not call him Mr. Microsoft anymore? As a proud employee of the company, I would prefer not to have the name associated with this poor excuse for a human being. Most of us are ethical grown-ups and the company would never condone this type of behavior.
Feb 6, 2009 — 1:14 pm
Geldpress named him. It would be kind of hard to rename him at this point.
Feb 6, 2009 — 2:05 pm
Mr. Microsoft’s decision is purely a business one. The bank made a deal with him where it’s more economically viable for him to break it and face the consequences than to fulfill his contractual obligations. The bank now has to face the consequences of Mr. Microsoft breaking the deal–if that’s bad for them, then they should not have made the deal in the first place.
Feb 7, 2009 — 9:04 am
This is my last comment on the subject because this jerk makes me see red and is not worth the additional time and energy. I think his “flaws” is more than not having ethics, his focus is on getting rich quick (potentially impulse control issues):
Exhibit A – Signed up for an overpriced condo and mortgage that he could not reasonably afford (let alone deal with a HOA dues increase) without money down, cash to move and a back-up plan, probably thinking he could flip it in a short period of time and get rich quick in a booming real estate market.
Exhibit B – The first scheme failed so he stays in the condo and tries to get rich quick again by not paying the mortgage or any rent while destroying his credit history.
What next? An eviction? Possible layoff? Cannot find anyone to rent him a place because of bad credit? How about a trip to Vegas to bet on a “sure thing” with his savings so that he can accumulate more mounds of cash?
My prediction on him (like yours on Seattle Billy) stands at angry, bitter and penniless though it may take him longer to get there.
Feb 7, 2009 — 9:23 am
Mr. M$ is an extreme case. Most people are somewhere between him and Billy. And there A LOT of those people out there. The number of people foreclosed upon or that walked away is staggering. And that number is growing.
Since the numbers are so large, my disgust is more with the industry itself. The appraisers, real estate brokers, mortgage writers and banks. They allowed rampant fraud to persist to get their commissions. First time home buyers trusted their guidance and were betrayed.
Two wrongs don’t make a right. Both Mr. M$ and Billy got taken advantage of and they were complicit. Although I don’t endorse walking away, I also can’t condemn someone that decides they don’t want to serve a 30 year punishment for a single mistake on their part.
I know that might sound awful, but millions of Americans were lied to by professionals in suits telling them their home value would go up and they would get low refinance rates. If it were just a few, I wouldn’t be so sympathetic, but the numbers are just too large.
Feb 7, 2009 — 12:00 pm
Joe said “If he gets bailed out, he’s taking your and my money MAS.”
Actually it should be between Mr. MSFT and the shareholders and bondholders of the bank. The only reason WE are taking the hit is because Congress/Paulson were stupid enough to hand the Banks taxpayer money with no strings attached.
Before $1 was handed out all the larger banks should have been triaged and thrown into one of 3 buckets:
1) Will fail regardless of what we do.
2) Will survive without our help.
3) Will survive only with our help.
They could have determined the size of the problem and choosen the most effective distribution of resources. #1 and some #3 could have been zeroed and nationalized (to resell later).
Instead our fearless leaders threw $350B at the wall and hoped some of it would stick. Sick.
Finally, if you don’t think Mr. Microsoft should act in his own best interest in a capitalist system, then you are not really a capitalist. I’m just making an observation here, not a judgment.
Feb 7, 2009 — 12:09 pm
The ability to triage required Mr. Paulson and Mr. Bernanke to each grow a pair and force the banks to generate REAL financial statements (i.e. Mark to Market, no off balance sheet SIVs, etc.).
Without this transparency we are left with the next best thing …alot of wasted taxpayer money and the stock market as the final arbiter (versus the FDIC, Treasury, etc.).
Feb 7, 2009 — 10:07 pm
I figured I should respond to some of the more egregious claims. It’s pure speculation thinking I bought it so I could flip it for a quick buck. I originally purpose the property to live in it for the long term. I actually lived in a one bedroom apartment in Kirkland biking 15 miles every day to work to save up enough money for a deposit and paying for closing costs.
When I went to qualify for the loan I was instructed to set my W-4 tax deduction to 10 for the purposes of qualifying for the loan. I was under pressure from my parents, particularly my mom who was a real estate agent. She was saying I needed to hurry up and purchase and get approved for the loan, because they were already starting to tighten loans standards. I made the mistake of caving into pressure from everyone saying buy buy buy. I wanted to continue living in a one bedroom in a SFH in kirkland for 585 / month including utilities. I wasn’t going to purchase a car, I was maxing out my 401(k) and my IRA.
Let me clear up some of the math about whether or not I can afford the current mortgage. With 10 exemptions if I spend no money on entertainment and gas, I would be breaking even for the month. The bank has added 2500 / year flood insurance policy after mailing me saying they would not. The HOA raised the fees by over $100 dollars a month. If I hadn’t stopped paying my mortgage and set my 401(k) to 50% contribution for the months of november and december I would be looking a tax bill of $3000 right now. As it is, I’m having to open a regular IRA account and fully fund it with 5K in order to break even on taxes this year. That means that I was approved for a loan, which would have left with a 3K tax bill after all salaries and bonuses I receive that I could not afford. In the process of qualifying for the loan they used my 401(k), Roth IRA, and my hiring stock award to qualify me for being able to afford the loan and I barely squeezed through.
My stock award has been reduced by well over 50% in value by the time I received the first vesting my Roth IRA was in Legg Mason Value Trust, which completely got wiped to Bill Miller’s bad decisions.
Thus when faced the rampant greed and fraud throughout all levels of this system I had two choices. Continue paying my mortgage that I could not afford slipping into more debt every month, maxing out my cards, and getting foreclosed on when I get smacked with the tax bill.
That leaves me with the options of foreclosure or short sale. For those that think that short sales are better… do your research. Banks hate doing short sales unless they absolutely have to. Even more than foreclosures. If you have PMI on your loan and you get foreclosed upon… the PMI covers the first 20% of losses the bank incurs. Furthermore, the banks are currently playing a waiting game. 70% of foreclosed homes are not actually being listed on the market to avoid being marked to market and depressing the market even further and causing banks capitalization to be called into question when they’re forced to take losses on their balance sheets.
Next, I have applied for a workout from the banks. Now to do a little bit more research… most bailouts end up getting foreclosed on anyway, because the payments don’t get lowered. In order for principal amounts to be all the investors on the loan have to agree to the write down. Good luck with that! So if I continue paying my mortgage and apply for a short sale and the banks ever gets around to approving it, I get royally screwed. It’s my fault I’m in this situation in the first place, but in a country where the rich game the system, don’t pay their taxes, and an entire industry engages in rampant fraud that threatens the stability of the entire world I don’t feel too bad about going into foreclosure. The bank most likely will not approve the short sale for someone who has PMI on their loan. Furthermore, people act like foreclosure is some even unacceptable act. Foreclosure is the legally specified remedy for reneging on a contractual obligation. Oh and there’s plenty of cash rich retailers reneging on their contractual obligations and breaking leases at malls across all of America. JP Morgan Chase just broke a bunch of WAMU leases in Seattle. Why do you think commercial real estate is headed so quickly towards the pathetic state that residential real estate is in.
I have continued paying my COA fees and all my other bills. If the bank offers me a workout I can afford, I will take it. If they refuses and initiate the foreclosure process (which they have not yet) I will attempt a short sale. If I can find a suitable short sale I will take it and take the 2 year instead of 7 year ding on my credit.
Just making sure all the facts are nice clear.
Feb 7, 2009 — 10:37 pm
re:Since the numbers are so large, my disgust is more with the industry itself. The appraisers, real estate brokers, mortgage writers and banks. They allowed rampant fraud to persist to get their commissions. First time home buyers trusted their guidance and were betrayed.
This is the key underlying factor IMO. These sub-prime loans should have never been made to begin with. But it extends deeper then that, at least to the level of Greenspan. When the U.S. goverment allowed itself to be hijacked by a bunch of Wall Street crooks then the rules change. All moral obligations go out the window. The loaner no longer becomes a slave to the lendee even though they try to by trashing your credit rating. In a ponzi scheme such as this one, you simply do what’s best for yourself period.
I like Mr. M’s take on this issue, he sounds like he wouldn’t give the sweat off his nards to a mortgage broker dying of thirst in the desert. Nor would I.
Feb 8, 2009 — 12:10 am
Ultimately I would consider Aristotle …would you pardon, pity or punish. The three choices imply:
– The action was a result of ignorance.
– The action was a result of bad luck.
– The action was a result of intentional wrong-doing.
I don’t think in any case yet mentioned there was intentional wrong-doing. Bankers should frigging know better because it is their job, but Mr. Microsoft is presumably a software professional (not a banker).
I think he is perfectly ok with walking away from this loan …legally, morally and financially …if it is in his best interest.