I believe there is a new wave of property defaults coming to add even more pressure on the banks. This is probably the last new wave of defaults before the market finds a bottom. This next wave is being led by the property taxes in a way that you might never have considered.
In Florida where I live, the counties are required to send out annual notices of proposed property taxes in July so that you can challenge them prior to your November payment (if paid by mortgage deduction, up to April for other payers). This happens in most states but the month differs. These tax notifications are finally starting to reflect true market value of properties after years of declines.
I have a family member that is upside down on their house because of past indiscretions where they used equity lines and refinancing to extract cash out of their property as it increased in value during the real estate bubble. They took a house they bought for around $50K 20 years ago and increased the mortgage to over $160K today. If they sold their house today they would be lucky to get $45K to $50K. They no longer have any equity lines of credit and refinancing is clearly not an option when you owe almost 4 times the value of the asset. They were content on making their mortgage payment during most of the bust but now they are having second thoughts. Why now?
The reason they are thinking of either short selling their property or stopping payments and waiting over a year for a foreclosure is what came in a little white envelope. The envelope was from their county tax collector advising them the good news that their property tax is going to decrease again this year because the price has now declined to $44K. In fact with all their exemptions they will be paying little or no property tax. So what is so bad about that?
They are happy about not having to pay much property tax. What is making them upset is the reality of the hopeless situation they are in. They are in their mid-40’s with very little to show for it. They owe more on a house than it is worth by almost a factor of 4. They realize that might take 20 years or longer for them just too breakeven. With an already a poor credit history they would be fools to not default. They are in an almost impossible situation. Default is the answer. Their wake-up call came via the US post they got from their local government telling them the good news. I doubt they will be the only ones.
A bonus by defaulting
I have a friend that has a positive default situation. He got in over his head with some large commercial deals that drove him to seek bankruptcy. He also owned a personal residence with almost $450K worth of mortgages ($300K 1st and $150K second). For over 2 years he did not make a single payment on all of his properties, including his home. When the creditors got close to foreclosing he filed for bankruptcy on advice from his lawyers. The bankruptcy proceedings took almost 1 year to get to a final result. The one big thing holding him up from exiting bankruptcy was that his home mortgage holder, Thornburg, also went through bankruptcy and a lot of their original documents are scattered around different document storage locations and no one is quite sure where his original note is. Since this was delaying the bankruptcy the judge allowed him to stay in his home until the note holder can find his note. The judge also cancelled his second mortgage in the proceedings.
The creditors for Thornburg have not been sure what to do. That is until last week. Recognizing they do not have a note, they decided they needed to get him on a note. They offered multiple different solutions until they finally came up with the following.
They offered to writedown the value of the mortgage to $200K from $300K (house is now worth around $189K), give him a new mortgage with a 40 year amortization, 4.125% interest rate, no PMI, ballooning in 24 years, no money down, with no prepay penalties. This is for a guy that just exited bankruptcy less than 6 months ago. This is a smoking hot deal. He thought he might need to rent a place once they found his note. He was thinking of spending $1,500 for rent. With the new arrangement his mortgage payment went from approximately $2,600 per month (1st, 2nd, taxes and Insurance) to $1,200 per month now- cheaper than renting. He would be a fool to turn this down. The only thing he is giving up is possibility that they may never find the original note and he would have gotten the property free and clear eventually. This is a real possibility but realistically, probably extremely remote (1 in 1,000,000 at least).
Marginal Mortgage Payments taking the economy into recession
Today in lots of locations around the country where the housing market has busted there are large percentages of the population that are living in their current properties for free. They are in various stages of foreclosure and are awaiting the final judgement day when they are eventually evicted from their “home”. These consumers are using the money they would normally have used on a mortgage payment to pay down credit cards, save, but most is going to purchase everyday items. Imagine if you were given a 40% raise, what you would do with it. For these people not having to pay a mortgage or rent is like having at least a 40% pay raise. I believe that this freed up source of funds is what helped support the meager growth in the economy we have seen over the last couple of years.
Eventually they will be foreclosed on and kicked out of their homes. These people will then have to find other accommodations to live in thus giving them at least a 20% pay cut (assuming they try and rent a lower priced location). This will give them less to spend on everything. This will drain money out of our already weakened economy. And it is coming.
Conclusion
Situations like these and demographics (more on this in a later post) will likely cause the US to go in and out of recession for the next decade. We are on our way to following the Japanese and having multiple lost decades. This is what a depression is. It will not end until the debt that has accumulated is paid off, dismissed, or defaulted on. If we choose to deal with our situation like Germany did in the 1990’s and 2000’s we could possibly be free sometime around 2020. If we keep adding debt and not address the situation like Japan has, 20 years from now we will still be asking “when will this end?”.
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