Mortgage default

[cidley69]

We bought a house at pretty much the peak of the market, June 2007. The house is worth about $50k less now (at least) and still dropping with no end in site.

What happens if we default on the mortgage? To do this is it the same as declaring bankrupcty?

Is there a point when the house value drops so far down that it would make more sense financially to default than to be paying for a house with such huge negative equity?

[Kloubek]

First, don't fret too much. The value of your house WILL go back up - it just might take a while.

My understanding is that after a certain amount of defaulted payments, they have the right to reposess the house. If you keep defaulting, this will happen quicker than you think. In this case, you can kiss your credit goodbye. No, it is not the same as going bankrupt, but you might as well.

Just try to keep up the payments, and keep your credit intact. The house WILL regain value one day.

[JordanLotoski]

Hang tight the market will come around in the next few years.

[cmyden]

http://img85.imageshack.us/img85/4922/calgaryinflationadjustede7.png

Unless of course 2007 = 1982


In which case you'll see a return on your investment by the year 2032.

So hang tight.

Just kidding, this time it's different.

[AZ REALTY]

Originally posted by cidley69
What happens if we default on the mortgage? To do this is it the same as declaring bankrupcty?

If you stop making your monthly mortgage payments for approximately three consecutive months your lender will mail you a foreclosure notice stating the auction date for your house at the court house. If you let your house go through foreclosure your lender will report your missed monthly payments and the foreclosure on your credit report. However, the impact to your credit report is not nearly as bad as a bankruptcy.

[ExtraSlow]

If you can still afford the payments, don't worry about what the home is "worth." Just keep making the payments.

[benyl]

Why did you buy a house you can't afford?

[civic_rida]

Cause there was a realitor saying now is the time to buy if you dont buy now you wont ever be able to afford a house.

[mazdavirgin]

Originally posted by benyl
Why did you buy a house you can't afford?

Anyone who bought a house in the last year with 0 down or 5% for 35 or 40 years bought a house they could not afford...

[Stunt66]

Originally posted by civic_rida
Cause there was a realitor saying now is the time to buy if you dont buy now you wont ever be able to afford a house.

:werd: OP just be glad your house is only worth 50k less, I know theres people out there that would only hope to be out 50k right now

[s2k_boi]

You should also consider if it's CMHC insured or not. Even if you default and foreclose they can still come after you for the difference. CMHC will pay the bank whatever is outstanding on the mortgage and after it sells (if there is a difference / amount owning, your still legally liable).

But as everyone says, hang it there. Eventually it will come around.

[max_boost]

Originally posted by benyl
Why did you buy a house you can't afford?

I don't think that's it.

I think the OP doesn't like the fact that he's paying for something that is constantly going down in value.

I would concentrate more on your monthly cash flow than worrying about how much your house is worth. If you can pay it, then stay in it. Consider it expensive rent. Just have to be patient! That is unless things get a lot worse, your house is worth 30% less, you lose your job, your RRSP's are drained, then I would consider defaulting.

Oh wait, 1/5 Americans are going through that right now.

[max_boost]

You know what though, I have a couple tenants who sold their homes in the past year because they were worried that home values would continue to drop. Well looks like they made the right call, for now at least. :dunno:

[sputnik]

Originally posted by max_boost
You know what though, I have a couple tenants who sold their homes in the past year because they were worried that home values would continue to drop. Well looks like they made the right call, for now at least. :dunno:

What did they do with the money from the sale of their house?

Invest it in the stock market? LOL.

Not to mention that they probably would have lost a chunk in capital gains to begin with.

Seems like doing something like that would have been barely a wash.

[cmyden]

What did they do with the money from the sale of their house?

Invest it in the stock market? LOL.

Not to mention that they probably would have lost a chunk in capital gains to begin with.

Seems like doing something like that would have been barely a wash.

Uh, depends when they bought....

If they had an 'average' home and sold it at the peak in July 07, they would have made 506k.

Fast forward 18 months, and that same home on the market right now would be lucky to fetch 413k (if you can find a buyer).

That's a drop of nearly 90 grand. Of course, transacation costs (ie: paying the realtor) would eat up $20 grand of that, so you're left with about $70 grand.

Divide that by 18 months, and that's approximately $4,000/month.

How much is rent costing them?

Not to mention the property taxes, and all the other costs of home ownership.

And there's no capital gains on the sale of your home. I'm assuming this was their own homes that they sold, not a second home?

[AZ REALTY]

Originally posted by sputnik
Not to mention that they probably would have lost a chunk in capital gains to begin with.
Seems like doing something like that would have been barely a wash.

They shouldn't have paid any capital gains on the sale of their home if the home was their primary residence and qualified under their capital gains exemption. Selling your home in the boom to maximize your profit potential and renting until the market bottoms is a smart investment strategy in real estate.

[Jeremiah]

Originally posted by mazdavirgin


Anyone who bought a house in the last year with 0 down or 5% for 35 or 40 years bought a house they could not afford...

I bought with only 5% Down on an Open 40 Year Mortgage and I am well within my means, Im paying the same for my mortgage as I was for rent but now i own a property that is larger and in a better location. I would have done fixed for 5 years, but its only a condo and I hope to purchase a house within the next 2 years.

The market is soft as fuck, theres no denying that I wish i would have waited it out another year and got into a new house for only $80k more, but what can you do?

I certainly wouldn't suggest defaulting!

[civic_rida]

Kind of off topic. Are rental properties considered capitail gains? Is there any way around this?

[mazdavirgin]

Originally posted by sputnik


What did they do with the money from the sale of their house?

Invest it in the stock market? LOL.

Not to mention that they probably would have lost a chunk in capital gains to begin with.

Seems like doing something like that would have been barely a wash.

All of that money in a GIC even with abysmally low interest rates is still outperforming real estate by a long shot... Oh and you can get a pretty damn good GIC with ~500k.

[Skyline_Addict]

Yes. Think of your house as a long term investment (as that's what it should be). The value of your house only matters right now if you are:

a) selling it
b) planning to draw more equity on it
c) refinance your mortgage

Think of it like an RRSP. The value of the RRSP really only matters at the time you are required to draw from it. As mentioned, if you can afford to keep making your payments, then do so. The market value of your home isn't a factor that will affect your ability to make your payments unless you are trying to do one of the above.

[sputnik]

Originally posted by mazdavirgin


All of that money in a GIC even with abysmally low interest rates is still outperforming real estate by a long shot... Oh and you can get a pretty damn good GIC with ~500k.

As long as they did that and not buy mutual funds.

Remember the old "I would rather rent and invest the difference" argument that used to go on here?

Where are the renters/investment gurus now?

The stock market falls 40% and real estate in Calgary is down ~15% on average.

[mazdavirgin]

Originally posted by sputnik
The stock market falls 40% and real estate in Calgary is down ~15% on average.

I am willing to bet the market will recover a long time before the housing prices recover... The house prices are just starting to decline and if the current price of oil holds it will keep declining for quite some time. The markets on the other hand usually start to recover quite some time before the recession is over. I think 15% is just the beginning... People are losing their jobs, inventory is not moving, lots of investment purchases, people who have been holding off listing for the better markets in the summer, tightening of lending practices, and the crashing price of oil. I don't see real estate going anywhere but down with the current supply and job insecurity.

[Jim Rome99]

I would stop payments on your house now if you are at all worried about losing your job in the next few years. No point in dumping funds into a losing investment. You'll just be putting off the inevitable.

Let me put it this way:

You buy a house for 100k
One year later the house is worth only 20k


Why would you continue to pay a 100k mortgage when you could just walk away and buy the same house for only 20k?

People in Canada tend to be very worried about going bankrupt, etc. It happens and it is a perfectly fine and legal thing to do. The bank is the one who gave the loan out, not you. They made a bad investment, not you. Let them eat it, they make lots of money off simple people like me by charging us enormous amounts for service fees. Let them learn.

[rage2]

Originally posted by civic_rida
Kind of off topic. Are rental properties considered capitail gains? Is there any way around this?
Yes to the first question, no to the 2nd question... unless jail is acceptable.

[max_boost]

(sputnik)
^^

No capital gains on primary residence and you know that. As for what they are doing with the cash, probably putting it under their bed for now. Their rational was to wait for things to stabilize. They really believed the real estate market was going to tank further.

Yeah if you were to sell today, TSX down 40% and home prices down 15%. Both aren't looking good. Your house might be worth $400K but how many renters have a $400K portfolio? LOL

Anyway, for those who think this is the bottom, I'm not so sure. I still see another 10-15% correction in home prices and another 20% correction on the stock markets before things stabilize. By stabilize I mean it'll be moving sideways for awhile but what do I know! I'm just a speculator! LOL

[max_boost]

Originally posted by mazdavirgin


I am willing to bet the market will recover a long time before the housing prices recover... The house prices are just starting to decline and if the current price of oil holds it will keep declining for quite some time. The markets on the other hand usually start to recover quite some time before the recession is over. I think 15% is just the beginning... People are losing their jobs, inventory is not moving, lots of investment purchases, people who have been holding off listing for the better markets in the summer, tightening of lending practices, and the crashing price of oil. I don't see real estate going anywhere but down with the current supply and job insecurity.

Yep.

History has show that the markets ALWAYS rallies before the economy turns for the better.

But seriously, it's pretty easy to follow the markets. If you wait for another pullback on the TSX to the high 7000's or low 8000's and throw some money into an index that tracks the S&P/TSX60, wait 5 years, I can guarantee you will make money. Hell if the TSX recovers to the 14,000 area, that's 75% return! :eek:

That is unless we enter into a fucking depression, then all bets are off! Then it might take a couple decades! :rofl:

[kenny]

Originally posted by Jim Rome99
I would stop payments on your house now if you are at all worried about losing your job in the next few years. No point in dumping funds into a losing investment. You'll just be putting off the inevitable.

Let me put it this way:

You buy a house for 100k
One year later the house is worth only 20k

Why would you continue to pay a 100k mortgage when you could just walk away and buy the same house for only 20k?


How do you expect to purchase a house later on after you just "walked away" from a previous mortgage. Good luck getting a mortgage once your credit is trash. You could I guess wait for your credit file to be wiped clean after 7 years but what if house prices go back up again?

[Jim Rome99]

Originally posted by kenny


How do you expect to purchase a house later on after you just "walked away" from a previous mortgage. Good luck getting a mortgage once your credit is trash. You could I guess wait for your credit file to be wiped clean after 7 years but what if house prices go back up again?

Man, you have a lot to learn about how banks work. They are so greedy - if they think they can make money off you, they'll give you a loan. Why do you think all of these used car places advertise "no credit, bad credit, no problem!" If they can make a loan and make money off you, they will. I have a friend who has declared bankruptcy twice and walked away from home ownership on two seperate occasions. He just got a 15k bank loan for a new vehicle a couple of months ago for 10% interest. I realize there is a huge difference between a 15k risk and a 500k risk, but he would have no problem getting another mortgage. Banks are too greedy for their own good, combined with lack of government regulation this is how we got into this economic mess.

[AZ REALTY]

Originally posted by kenny


How do you expect to purchase a house later on after you just "walked away" from a previous mortgage. Good luck getting a mortgage once your credit is trash. You could I guess wait for your credit file to be wiped clean after 7 years but what if house prices go back up again?

A foreclosure affects your credit report for roughly 36 months before a lender will offer a mortgage option to you with a competitive interest rate. It's not nearly as bad as a bankrupty which is roughly 7 years.

[max_boost]

Then I guess you just have to work the math to see if it's worth it to default then right?

I mean if I am upside down $100K+ on my house, I'm getting laid off etc. I would probably say fuck it too!

Get your wife or uncle or dad to buy your next house for you and lock in at a lower rate. Yeah I know, working the system to your advantage etc. :nut: :dunno:

[AZ REALTY]

Originally posted by max_boost
Then I guess you just have to work the math to see if it's worth it to default then right?

I mean if I am upside down $100K+ on my house, I'm getting laid off etc. I would probably say fuck it too!

Get your wife or uncle or dad to buy your next house for you and lock in at a lower rate. Yeah I know, working the system to your advantage etc. :nut: :dunno:

This is exactly what a lot of Americans are doing right now. Getting themselves into a new home at today's prices and once they've taken possession, they dump their negetive equity house through foreclosure and take the hit on their credit report. As long as they don't mind doing a little credit repair in the range of 200-300 Fico points over the next 3 years, they're fine.

[autosm]

For a negative opinion click here.


http://www.greaterfool.ca/

[KRyn]

Burn it to the ground and claim insurance?

[JordanLotoski]

^^^ yeah and youll have a new home....Jail

[bignerd]

Depends too, if you had an insured mortgage with GE, or CMHC, which everyone does who put down less than 20%.... and they foreclose on your home you are walking away from, next time they will not insure your mortgage-you will have to have a hefty, hefty downpayment to buy again for a bank to touch you-the insurers won't get stung twice and they keep their records a lot longer than the three years on your credit bureau.

Sure the bank might lend to you twice, if you are insured or make a big enough investment in the second home so you will either a) not walk away or b) leave the bank in a fairly good position with the equity in your home if you do leave...

[AZ REALTY]

Originally posted by autosm
For a negative opinion click here.


http://www.greaterfool.ca/


Or is he just realistic?

[autosm]

^hard to say but its looking more and more like he is correct

Even if he is half right we are in trouble

[roopi]

Originally posted by rage2

Yes to the first question, no to the 2nd question... unless jail is acceptable.

From all the Revenue Canada related posts I've read from you over the years is it safe to assume you've been audited? :D

[kenny]

Originally posted by Jim Rome99


Man, you have a lot to learn about how banks work. They are so greedy - if they think they can make money off you, they'll give you a loan. Why do you think all of these used car places advertise "no credit, bad credit, no problem!" If they can make a loan and make money off you, they will. I have a friend who has declared bankruptcy twice and walked away from home ownership on two seperate occasions. He just got a 15k bank loan for a new vehicle a couple of months ago for 10% interest. I realize there is a huge difference between a 15k risk and a 500k risk, but he would have no problem getting another mortgage. Banks are too greedy for their own good, combined with lack of government regulation this is how we got into this economic mess.

Oh I know banks were giving out mortgages like free samples at Costco but what I'm saying is by the time the banks will give you another mortgage house prices MAY have gone back up. Of course everyone's mileage may vary but I was pointing out that its not as easy as dumping a mortgage and applying for a new one the following week.

You mention that your friend just got a $15k loan for a new vehicle, but look at the interest rate the bank is charging! 10%? LOL.

Like Max said, gotta calculate it out to see if its worth it to walk away. For people that aren't insanely underwater, its probably not worth it.

[mazdavirgin]

Originally posted by kenny
Like Max said, gotta calculate it out to see if its worth it to walk away. For people that aren't insanely underwater, its probably not worth it.

How underwater is acceptable? People with 40 year or 35 year mortgages will pay their home ~3-4 times over. They are also now stuck with negative equity which isn't going to increase anytime soon. Recall that people who bought at the peak in the early 80's had to wait 15 years for their homes to come back to the price they paid(inflation adjusted)... Real estate does *not* always go up. It is like any other market cyclical and yes you can end up in a position where you would be better off walking. Anyone with little down and a long amortization period will have paid hardly anything into the principle. It is all interest and with housing prices down ~10% and still going down when do you call it quits on a losing proposition?

[AZ REALTY]

What will be interesting to see over the next year or so in Calgary, as real estate values continue to drop, are the options lenders will offer their clients in negative equity situations. The lenders aren't going to want to take back all of these non-performing mortgages in a declining market, deal with evicting the homeowners, cleaning up the property to re-list, finding an agent to list the property on MLS, and then having to negotiate sales contracts with potential end buyers. This costs money and certainly requires plenty of labor on the banks part. Does anyone know if any lenders are accepting short sales in lieu of foreclosure yet?

[barmanjay]

I haven't heard of the lenders/banks taking short selling as of yet,.. but I suspect that maybe come mid summer they'll be looking at it more seriously, if foreclosures become a serious threat to them.

[cidley69]

How underwater is acceptable? People with 40 year or 35 year mortgages will pay their home ~3-4 times over. They are also now stuck with negative equity which isn't going to increase anytime soon. Recall that people who bought at the peak in the early 80's had to wait 15 years for their homes to come back to the price they paid(inflation adjusted)... Real estate does *not* always go up. It is like any other market cyclical and yes you can end up in a position where you would be better off walking. Anyone with little down and a long amortization period will have paid hardly anything into the principle. It is all interest and with housing prices down ~10% and still going down when do you call it quits on a losing proposition?





That is the sentiment I was getting at mazdavirgin. How far upside down is acceptable. Paying the banks 400K for something that's worth 350k might be alright, nut how low does it have to get before it no longer makes sense.

If the mortgage is 400 k and the value drops to 200k, would it still be the most prudent thing to stay with it?


Thanks everyone for the input on the topic!

[sputnik]

Originally posted by cidley69
That is the sentiment I was getting at mazdavirgin. How far upside down is acceptable. Paying the banks 400K for something that's worth 350k might be alright, nut how low does it have to get before it no longer makes sense.

If the mortgage is 400 k and the value drops to 200k, would it still be the most prudent thing to stay with it?

Thanks everyone for the input on the topic!

I would look at it from a perspective of how much interest are you paying monthly versus how much it would cost to rent the same house/condo.

[khtm]

Originally posted by mazdavirgin


Anyone who bought a house in the last year with 0 down or 5% for 35 or 40 years bought a house they could not afford...
I don't understand that logic at all.

People that put between 5% and 25% down are retarded, IMO, as it's not difficult to find a return on investments that yields >5% interest. (ignoring investments in the last 8 months, of course ;))

So unless you're covering the CMHC premium, what's the point? Just to build up equity so you feel good?

[in*10*se]

Originally posted by khtm

I don't understand that logic at all.

People that put between 5% and 25% down are retarded, IMO, as it's not difficult to find a return on investments that yields >5% interest. (ignoring investments in the last 8 months, of course ;))

So unless you're covering the CMHC premium, what's the point? Just to build up equity so you feel good?

:facepalm:

the point is to

a. avoid CMHC fees which add like 5% on the purchase price (realtors please correct me on the rate) but CMHC fees aren't cheap.
b. raise equity
c. use equity to invest to raise additional capital and use the interest on the equity used as a tax write off.

so really... its not retarded at all.

[khtm]

Originally posted by in*10*se


:facepalm:

the point is to

a. avoid CMHC fees which add like 5% on the purchase price (realtors please correct me on the rate) but CMHC fees aren't cheap.
b. raise equity
c. use equity to invest to raise additional capital and use the interest on the equity used as a tax write off.

so really... its not retarded at all.
Did you read my post?
I said between 5% and 25% is retarded, because unless you pay 25% you still have to pay the CMHC premium. Get it?

I think it's great if people can avoid CMHC altogether and pay 25% or greater, but if you can't then I think it's retarded to pay anything more than 5%.

I also commented on (b). You do make a valid point with (c) however.

[G]

CMHC Fees uses a sliding scale


http://www.urbanvillagerealty.ca/CMHCCalculator.aspx



Originally posted by khtm

Did you read my post?
I said between 5% and 25% is retarded, because unless you pay 25% you still have to pay the CMHC premium. Get it?

I think it's great if people can avoid CMHC altogether and pay 25% or greater, but if you can't then I think it's retarded to pay anything more than 5%.

I also commented on (b). You do make a valid point with (c) however.

[khtm]

:facepalm:
I know.
That's why I said "avoid CMHC altogether". The difference in the range is only 2.4%.

[blownz]

Originally posted by khtm
:facepalm:
I know.
That's why I said "avoid CMHC altogether". The difference in the range is only 2.4%.

"only"?

2.4% of 300k is $7200. I would hardly call that insignificant to most people. Especially to the ones that don't have the 20% down in the first place.