What Do Wedding Invitations, Arson, and Moonwalking have to do with Housing? Apparently, they are the new Tactics in Reworking Mortgages.

We have many important dates in history. In 384 BC Plato returns to Athens and founds a school of philosophy. In 1969 Neil Armstrong is the first person to set foot on the moon. And in 2008 we witness wedding invitations as a ploy to get people to pay their mortgages. Yes, we are rewriting economic history in ways that only a Beavis and Butthead episode could explain. We’ve had a lot of negative information coming out regarding housing and we need to share some love with lenders, banks, and all those folks that made 2/28 mortgages become something more than a date in February. I think the public is catching wind of this housing love momentum and is returning the favor. In today’s article, we will talk about wedding invitations, warm bonfires, and giving someone a spare key to join you in enjoying your maximum leveraged piece of real estate.

I Do…Commit to 30 Years of Overpriced Housing

Weddings are a time of happiness when two people decide to make a lifetime (or in California at least a seven year) commitment to one another. Wine is flowing, friends and family dance, and plans for the future get started. Many times these plans involve buying a piece of real estate. After all, if you don’t own a home you don’t love your spouse – this is common wisdom in all circles. With the current housing decline, many are faced with the prospect of not being able to pay for their resetting mortgages. Lenders have a hard time understanding how losing a job and not having income will hinder you from making your mortgage payment. They give polite calls, send out friendly reminders, yet many are still unwilling to negotiate with them. So welcome the new tactic. Remember how happy you were on your wedding day? Take a look at this interesting article by the Washington Post:

“Mortgage lenders hunting for delinquent homeowners who have dodged their phone calls and letters are employing aggressive new methods to track them down, potentially making every knock on the door or fancy envelope seem like part of the pursuit. Even wedding invitations are suspect.

…Wells Fargo estimated that it had no contact with about 30 percent of delinquent homeowners who went into foreclosure in 2006. Last year, it began testing envelopes in bold or unusual colors or resembling wedding invitations.

Last month, it began experimenting with offering $250 gift cards to delinquent borrowers who had been unreachable, said Joe Ohayon, a Wells Fargo vice president.”

It would appear that lenders are now making up for the lack of diligence they did when making loans. When lenders gave out a $720,000 mortgage to a person making $14,000 a year, how was it foreseeable to see any potential problems? There shouldn’t be any surprise that 30 percent of delinquent homeowners who went into foreclosure in 2006 have had no contact with Wells Fargo. In fact, lenders are going to put the fear of God into your non-paying heart that when you go out to your local dive bar, the person serving you your liquor of choice may also be giving you a notice to fork over the last few months of mortgage payments. From a play out of the White House playbook, some lenders are now sending $250 gift cards to delinquent borrowers. We all know that when you are $10,000 behind on your 700 square foot Real Home of Genius, $250 will go a long way just like the $600 Wal-Mart vouchers we are getting in May. Now these folks have $850 to pay for their incredibly absurd mortgage payment.

Playing with consumer behavior and psychology, the new tactic is heading toward offering the olive branch to delinquent borrowers. Apparently screaming into a phone and harassing people has a negative conditioning response on the human soul especially when the initial promise was that real estate always went up and the payment was fixed. However, many homeowners have their own solution to the problem. Lenders may get an invitation to a weekend bonfire.

Burning Down the House

The problem with many lenders is the assumption that people want to stay in these financial albatrosses. In fact, when looking at properties throughout the country in new subdivisions many deed/trust holders are actually Wall Street banks that I can assure you never stepped foot in these areas. Last time I checked, I haven’t seen many suits strolling along the inner cities of Los Angeles yet much of the toxic financing found its way here. What many of these so-called financial engineers miscalculated is that some homeowners were just as greedy as they were. And in a case of tit-for-tat, some of these homeowners are employing strategies that were once only in the domain of the uber-wealthy. Many are simply ignoring to pay for their mortgage. In a more brazen tactic, some are deciding to exercise the ultimate Hail Mary and set their home ablaze as reported by ABC News:

“Recession fears along with nationwide housing foreclosures have pushed some homeowners to take drastic and illegal measures.

Looking to cash in on their insurance rather than face foreclosure, some people have committed arson to avoid losing their homes.

Michigan authorities believe 38-year-old Sheryl Christman was one of those people, when she set her home ablaze Sept. 1. Christman was just three days short of foreclosure.

“It didn’t look like a typical fire. It didn’t look like something that caught on fire. It almost looked ignited,” one neighbor said.”

Christman, who faces up to 20 years in prison, pleaded no contest in her case and has yet to be sentenced.

“I don’t know if she thought she was going to get the insurance money or what,” said Tonya Miller, of Nova Star Mortgage Co. “But she won’t. … It will go to the mortgage company.”

My guess is we won’t see too many of these situations since most people in mega-jumbo mortgages simply do not have enough emotional connection to a home and will simply walk away. The stigma of foreclosure is fading away quickly and you will not carry a Scarlet Letter. In fact, in a few years those without a foreclosure on their record will seem as a minority. If you have any doubt about this, can you envision a person in a $350,000 California home with a $550,000 mortgage still paying away in 2010? Exactly. By then we may be upgraded to Target vouchers of $1,000.

The bigger irony in the above piece, and frankly from many mainstream media outlets, is they are asking the mortgage lenders and Wall Street firms for comments on what is occurring. If you aren’t aware, if the above company is affiliated to NovaStar Financial it is now trading in the penny stocks:

NovaStar

So riddle me this Batman, what happens in the above case if the mortgage company is no longer around once the legal investigation clears up? Let us go even further, say the insurance company is unable to pay, then what? Now you can see how deep this rabbit hole really goes. Let us not rain on this parade with details, now we will bust a move to the new dance that is hitting the nation, the moon walking away dance.

Moon walking Away from the Mortgage

There is a new phenomenon sweeping the nation. This isn’t the Macarena or Livin La Vida Loca, but it is just as catchy. It is called “walking away” and folks are practicing it throughout the United States. It is a rather easy dance. All you need to do is the below:

Housing Moonwalk

1. First, you put your right foot into an insane stuntman mortgage with terms reserved for those at San Quentin.

2. Next, you toss your partner pretending everything is okay and your payments will never reset while your home will continue to appreciate 25 percent per year.

3. This is the part of the dance that gets complicated. Your payment resets and your home isn’t worth as much as you paid for it. At this juncture, you are left assuming the life of a debt slave with an asset that will not break even for a decade and keep you on a diet of cat food and Cup-o-Noodles, or you proceed to do the next hot move, the moon walk.

4. In this next step you distance yourself from your home. No Project Lifeline. No Hope Now Alliance. These are old dances like the fox trot. What you do is bust a move and act like 007 and disappear from your lender.

5. When you get those wedding invitations you’ll pretend they are from your hated cousin Matilda and simply ignore them.

6. You may get tempted to do the turn and burn move here but this isn’t the way you want to go unless you want to go to jail (in which case you will soon be released given the Governors proposed cost cutting measures to balance the now $16 billion budget shortfall). At this juncture, accept the fact that you’ll have bad credit but everyone that is bad to the bone and moon walking has bad credit.

There are now places willing to show you how to moonwalk away from your home for a modest fee. Like learning to Tango without all the body contact. What is happening at a deeper level is a generational and societal psychology shift regarding housing. What occurred over the past decade is the commoditizing of housing and the growing desire of the McMansion life. 32 ounces of soda aren’t enough so you need 64 ounces. 42 inch televisions aren’t enough so you go to 74. Why drive a pickup truck when you can drive a tank? The simple logical extension is why live in a 1,500 square foot home when you can live in a 3,000 square foot home with a heli-pad and three-car garage?  Why go broke on $10,000 of credit card debt when you can go out in fashion with $500,000 of mortgage debt? The desire to stay in this McMansion or overpriced box will now be a hindrance from all the other conspicuous consumption. How can one live in a mansion and eat rice and beans to balance the check book? The bottom line is many will not elect to fight for their home and will simply walk away. I discussed this point in greater detail after a 60 Minute piece showed a couple not only willing to walk, but glad to do it. All they were doing is exercising their right, just like the lenders exercised their right to lend them hundreds of thousands of dollars.  What more did these lenders expect?

I think where people take exception is when we have an incredible budget shortfall and responsible tax payers are asked to bailout these speculators; that is Wall Street, lenders, agents, brokers, appraisers, and yes, buyers.  Call it what it is.  The media plays up stories of folks in Ohio or Michigan with $100,000 mortgages and struggles to pay the bill because of job losses.  I can really understand these cases here and sympathize.  The disconnect occurs when wannabe flippers bought $500,000 homes thinking they were going to flip them for $600,000 because they added platinum counter tops and gold toilets.

Wedding invitations are nice, but no thanks many will say. Vouchers are great but we already have more than enough stuff from China that we rarely use. At this critical juncture, many people are simply saying adios to their mortgages. 2008 will go down as the year wedding invitations were tossed into bonfires and folks all around the country started dancing the housing moonwalk.

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27 Responses to “What Do Wedding Invitations, Arson, and Moonwalking have to do with Housing? Apparently, they are the new Tactics in Reworking Mortgages.”

  • I think this is my favorite post yet.

  • As Monk would say “lol out loud”

  • “The disconnect occurs when wannabe flippers bought $500,000 homes thinking they were going to flip them for $600,000 because they added platinum counter tops and gold toilets.”

    Naw, they expected $100k returns because they added some shrubbery, painted the master bedroom, and added some Pergo to the foyer.

  • Brilliant! Here in Orange County, we are starting to see an exodus. No jobs, time to moonwalk elsewhere and pay rent.

  • That was a Rockin post

  • ““I don’t know if she thought she was going to get the insurance money or what,” said Tonya Miller, of Nova Star Mortgage Co. “But she won’t. … It will go to the mortgage company.”

    WELL MAYBE NOT. Homeowners’ policies are issued in the name of the ‘owner’ who is the beneficiary of the policy with the mortgage company named as an additional beneficiary. 99.999999% of all homeowner’s policies clearly state that arson by A beneficiary, voids the policy and the property is not covered.

    So as far as the mortgage company goes, it is ‘sorry charlie” but you are not going to get one dime from the insurer wince the co-beneficiary burned the place down. Now the mortgage holder will have title to a piece of land with charred ruins and not one thin dime. Even if the owner had been current on payments and the fire was not arson, the money would not go solely to the mortgage holder as the name of the owner is also on the check. Either the mortgage company agrees to let the owner rebuild or nobody gets the money. (Conversely, the owner can not just take the check and walk away from the ruined house without handing over enough to cover the lost value of the house to the mortgage holder.)

  • hilarious, had me laughing out loud at my desk! I totally agree with most of it too. I’m in the mortgage business, loan processor since 1986, income is 1/3 of what it was 2 years ago, etc. no longer can pay my bills, mortgage, cashed out my retirement, annuity and used up all my savings trying to “ride this out”. I think going BK will be my only option at this point, don’t even know if i will have a job by the end of this year. Funny thing is, people who find out you are thinking of going BK all say, charge up your cards before you file. Kinda funny cause the article states people have all kinds of stuff from China they don’t even use, i agree, i have like 25k unused credit on my cards and i can’t think of one thing i need, so everyone telling me to charge them up, i just say, but i don’t need anything.

  • A street without a For Sale sign is becoming a rarer sight than Big Foot.

  • Careergirl

    You can by ME something prior to BK. Always open to sponsorship, I’d like some go-fast goodies for my racecar!! If your game, I’ll give you list of part numbers.

  • If it cheers anyone up, Calculated Risk noted that the bulk of “walking away” stories come from the lenders, not the borrowers themselves. CR suggested that lenders might easily misinterpret silence from a struggling borrower as “walking away.”

  • CareerGirl

    Just go buy giftcards with your CC and sell them on Ebay. Max it out. Almost like cash!!!!

  • Everybody clap your hands!

  • you guys are bad!!!! I have everyone telling me things to buy…..too funny! I think if i maxed out any of my cards I’d have the credit card companies challenging my BK saying I had never charged like that in the 5 to10 years i’ve had the cards. So sorry, can’t buy you guys stuff!! Ha ha ha

  • Hello, name’s Shane, have read Dr. HB’s stuff, before, but really wanted to express how much I liked this article–very funny and informative!

    Being a typical blue-collar wage earner living in Ventura (coastal city about 60 miles north of L.A. and 30 miles south of Santa Barbara) I watched–in disbelief and dismay the last 6-7 years–as the price for a decent house doubled and then tripled, with even small condos getting too ridiculous to consider (1+1, no garage, hoa dues, less desirable locations, 800 s.f.-type places) buying. My wife and I were able to resist the mania, and all the “experts” (as well as many non-expert friends/families/co-workers/etc) advice to “buy now, cause the median home will go for $1 mil, in a few years, prices never go down, yadda-yadda-yadda”; I’ve seen prices for middle-class type homes (and condos have gotten KILLED) drop MUCH further than the 9-10% declines that I’ve seen stated in the local “mainstream” news/realty publications I read: places that were selling for $600-650K, 18-24 months ago, are now getting down in the high $300K-mid $400K range–easily a 25-40% decline, and I’ve seen some condos halved in price from the highs (and STILL overvalued, imo). While nothing approaching the insanity personafied by the “real homes of genius” series, still a pretty ridiculous run-up, even for a nice berg like Ventura.

    Now, though, for several reasons, we are seriously looking around at whats out there. I, personally, am in a bit of a quandry as to whether the timing is right, yet. We make a little over $100K/year, have enough of a down payment to put 20% down on anything up to $400K (though I’d prefer staying in the mid-$300K’s), have fico scores in the high 700’s, no debt to speak of (no car payments, either), and pretty secure jobs which we plan on being at for the next 20 years, probably (unless we hit the lotto!)–doing the “numbers”, a theoretical mortgage payment (not including property taxes/insurance) would equal about what the houses we’re looking at would rent out for. I’ve seen a decent number of “turn-key” places mixed in with the thrashed repos out there–at comparable price.

    Is it still too early to seriously consider buying? Will home prices drop enough, from where they’re at now, to justify waiting another few years? Should we just low-ball sellers (most places we’ve seen are bank-repo’d or short-sells) and stick to our offering price, w/the expectation prices will decline to the extent that said offers end up being accepted? After being priced out of my own city, for the better part of a decade, my trigger-finger is getting a little itchy.

    Any guidance from knowledgeable posters or the Doctor, himself, would be appreciated.

  • AnnScott – absolutely agree on your insurance analysis. On insurance policies, an Additional Insured (lender) only has vicarious coverage through the interest of the Named Insured (homeowner). In order to overcome the voided policy issue due to the – ie. Intentional Acts, or Fraud or Material Misrepresentation or Non-Disclosure – of the Named Insured, the lender should be a Named Insured by endorsement and the policy should have a Separation of Insureds conditions, so that the voiding action of one Named Insured do not jeopardize the interest of the other Named Insured. I’ve been in an obscure specialty of commercial insurance underwriting and broking for 13 years and about 1 lawyer out of 100 has caught on to this.

  • Shane, I’m in almost the identical situation, only in Los Angeles. I’m very interested in seeing the replies you get to your post.

  • Did the lenders stop to think that maybe some of those “no doc” loans went to “undocumented immigrants” with no intention of sticking around when things went sour? As in my job went south, my loan went south, so I am heading (back) south where I came from. Or maybe this person with the same SSN or TIN as 999 other people named Gonzales wasn’t really named Gonzales, and no one really knows who the hell he/she/it really is, where they really came from, or where they went to.

    Just like the S&L debacle, this one leaves you and I the taxpayers footing the bill. Another massive transfer of wealth to the oligarchs and their political cronies. Just another 3rd world economic basket case with masses of underemployed permanent debtor class “citizens” scratching out a living.

    Oh, and look at the wonderful choices our two-tailed single party system is giving us to “vote” for. Don’t you feel better? Tweedledum and Tweedledee will lead us out of a crisis and into a better (or is it bitter?) tomorrow.

  • Shane and Li,
    Everyone insists that past housing bubbles have not had a V at the bottom of the crash… that instead the market flat lines for a few years before it starts to crawl upward. The Doc may know better.

    Seems like until the ARM resets have worked out of the system (late 2009?) and stop depressing prices. Until the purchase price is 10x annual rent. Until the purchase price is in the ballpark of something a median salary for that zip could afford without loan fraud…. Let’s see what else? That inventories are closer to 6 months. Gosh there are lots of things. But anyway, until many of those things are true, an area won’t be at the bottom yet.

    Basically, I don’t think you need to feel like you have to have an itchy trigger finger to get it right. A false bottom, caused by some other economic event may throw you off if you jump too fast.

    Go to zillow.com, type in your city, and in the little pop-up, click “city info” you will get a handy chart of what prices have been doing. You know that feeling when you are sitting in the front of the roller coaster but the tail of the coaster is still holding the thing back on the other side of the peak?

  • to Shane:
    wait until the graphs of the doctor for short sellers start to bottom out, although that may still take a while. And buy a home with some self-suffiency because the energy crisis is already starting to have its effects and is like the financial crises still in the early stages. The worst has still to come yet.

  • Wedding invitations and gift cards? Kinda like how law enforcement uses free sports ticket giveaways to lure people wanted on warrants to one room so they can scoop them all up in one sweep.

    Clever.

  • re: Rent vs. Own –

    Click the link on the Doc’s blog recommendations to Irvine Housing Blog, and scan about a month ago for a blog IHB wrote about the RVO question on the math involved.

    One metric of RVO is determining the answer to this questions: does rent plus opportunity cost equal or exceed ownership costs? If so, than buying is a reasonable option. That is, does a house in the neighborhood you want to live in, rent for equal or more than what you’d pay for PITI AND what interest you’d earn on the down payment (less the tax benefit of ownership)? Any competent loan officer (good luck on that), tax preparer (it’s now tax time so maybe wait til after 15 April), or financial adviser should be able to quickly do a decent rough estimate to get the answer to that question. So for example, if rents are $2000 per month, and interest on $80k down payment on a $400k house is 1.5% = $100 per month opportunity cost. A $320k loan at 6% PITI is about $2250 per month (7% of the loan balance / 12, no condo dues), marginal tax benefit is about $240 per month (15% of the total annual interest paid / 12). So $2250 – $240 + $100 = $2110 ownership cost excluding maintenance. Still better to rent. Once rents increase to $2500 then it’s time to start considering buying, since maintenance costs (usually NOT factored in by realtors) should be calculated at at least 1.5% of sales prices per annum. Real back of the envelope, but you see the point. The more common way to calculate this is multiplier times rent. In much of the country it’s 160 – that is, $2,000 x 160 = $320k price. On the coast, maybe it’s 200 to 250, or $400k to $500k. Or maybe it’s not that high…

    Another metric is multiplier times annual income. 2.5 to 3 is common in most of the country. You might push that up to 3.5 or even 4.5 on the coast depending on the neighborhood. Even at 4.5, if you earn $100k, that makes house price $450k. At 3.5 it’s $350k price.

    It appears there is still some room below before it makes economic sense to purchase. That’s completely different from emotional or family reasons to purchase – but when you include those in, be careful not to exceed the high range of the multipliers.

  • I can’t imagine having a mortgage at anywhere near those multpiliers. It would stress me out. I think 1.5 would be my personal limit. Funny, in 1996 we got turned down for a 1.8 times loan pre-approval. Guess that explains why the bank that financed us is doing well to this day.

    But something to add to your numbers. You have to be making enough money to pay enough taxes to even get full $240 the tax benefi, many people buying at the edge of affordability can’t count that and don’t realize it. And our repair costs are closer to 5% of our price, but that’s part of the era the house was built in, the incompetence of former owners, and the low starting price too.

    For us, owning is a control thing. Having fixed expenses and the freedom to take a sawsall or a paintbrush to something at will.

    And to Thunderpreacher, I’m hearing your sermon. Despite everyone naysaying any move into new real estate right now, I’m working on an earth-sheltered house. 1/10 the energy to keep it hot/cool. Bike-able location for work and shopping. We are so there.

  • Bravo!!! Im really enjoying the cynical side of the good doctor, more like this please! HAHAHA!

  • Emmi, ThunderPreacher, Exit,

    Thanks for you input and info. We are definitely in no big hurry to rush out and buy, but were hoping that this might be our year. Thunder, I hear you on the economy/energy (and inflation) front! I think the vast majority of Americans are gonna be in for a very rude awakening, in the near future. I’ve been warning people I know to invest accordingly, to change their mindsets/lifestyles, and views on governance–to little avail. A couple of things make me wonder about where real estate will go:

    1. What effect will high (God-forbid HYPER) inflation have on prices? Doesn’t housing have a pretty solid history of tracking inflation?
    2. Will some of the $100’s of billions in foreign holdings of USDollars end up being used to buy property in America? With the USD in a major down-trend, how attractive does real estate, here, look to foreigners?

  • Loyal Reader

    Speaking of moonwalking away, check this out:

    Wall Street Journal: Jose Canseco: Walking Away from His Mortgage ‘Not Difficult Emotionally’

    http://blogs.wsj.com/developments/2008/05/01/jose-canseco-walking-away-from-his-mortgage-not-difficult-emotionally/?mod=WSJBlog

    Granted Canseco made some bad personal choices in his life but it speaks to how some of the famous people we think of as being ‘rich’ or ‘financially secure’ may very well not be and may be more like the middle and working classes than we realize.

  • Dudes…….

    been reading all the entries, hey want to know something?here in Australia it ain’t much better, all the main banks here have lost billions on the subrpime crap, and so far four big hedge funds have gone under, the average loss is about $1 Billion AUS , so far, in one main city ( Sydney) has over 4 million people not big by US standards, but big enough, in some suburbs home owners are being served with repo notices of about 37 each week( thats in 1 suburb alone ) so far 300,000 home owners( wrong word there) insert wage slaves. are on the edge to go over into the abyss of foreclosure, ok its a average but if you say average it out at say 4 people per house thats about 1 million people, not a small number in any ones terms, here the loan rate is at near 10 %, and the average loan 400 k , the average wage is supposedly$ 60,000 a year, but I dont earn that, ( I am not paying a house off yet) .
    but it makes me laugh when I see people thinking the sub prime fiasco is over, here the reserve bank is predicting massive walkouts from homes and people are worried about jobs. the only real way is for the system to come down and people to get back to a real way of healthy eating and living togther such as learning and applying permaculture, I suspect though this wont happen easily, most sheeple wont give up their gas guzzling ways here, oh by the way fuel here is $1.62 per litre for diesel and $1.65 for unleadede fuel.

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