While news reports may have you believe that subprime loans held by the poor or people with bad credit histories are the primary reason for the recent rise in foreclosures, that is not the full story. The Mortgage Bankers Association released a study that indicates the major driver of defaults in Florida, Nevada, California and Arizona -- the leaders in the race to be the top foreclosure states [subscription] -- are owners who don't live in their properties. In other words, investors are driving the market in those locations, according to a story in the Wall Street Journal today.
The Journal tells the story of two real estate investors, one in Las Vegas, Nevada, and the other in Del Ray, Florida, who both bought multiple homes as real estate investments hoping to flip them quickly for a profit. Now that the bubble has burst, they can't flip the properties and they can't rent them for enough money to cover the mortgage payments.
The Nevada investor is a 40-year-old real estate agent who bought 16 homes hoping that by flipping them he could fund his retirement nest egg. Now he has a total of $45,000 in mortgage payments per month and can't afford them, so he stopped making payments on them and walked away. His credit score dropped from 730 to 400. The Florida investor hasn't walked away from his properties yet, but is planning to do so. He is a 53-year-old air-conditioner contractor who bought four units in a Florida condominium with the hopes of flipping them. His monthly mortgage payments total $4,000.
Unfortunately for real estate investors, the price of walking away will be huge. They'll have difficulty getting loans for at least seven years after foreclosure because the foreclosures will remain on their credit histories for that long. If they file for bankruptcy, that will remain on their credit histories for 10 years.
Their tax hit could be high as well. Any portion of the loan that is forgiven might be taxed as current income. In addition, depending on the loan documents, the lending institution might be able to go after other assets owned by the defaulters in order to collect any shortfall.
While there are certain types of trusts that can be set up to protect other assets, these trusts must be in place before the creditors start calling. One California lawyer quoted in the story, Jay Adkisson, says he's getting 30 calls a week from real estate investors seeking to protect their assets, according to the Journal. He told the Journal, "There's just an absolute flood of people seeking asset protection, and it's all after the fact. It's like buying auto insurance after the car wreck."
While I can support federal help for low-income people who got caught up in loan scams and mortgages schemes they didn't really understand, I certainly can't support the idea of helping investors who got greedy and made a huge mistake and now must pay the consequences.
Lita Epstein is the author of more than 20 books including, "The 250 Questions You Should Ask to Avoid Foreclosure."
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Reader Comments (Page 1 of 1)
10-18-2007 @ 11:45AM
jatwrite said...
Tax dollars should not be used to bail out bad loans, whether for residents or investors. I read before I sign; why can't others? Why must taxpayers foot the bill for irresponsibility by the few? If we bail them out this time, they will expect it next time, and so bad practices will continue -- with unending consequences for taxpayers.
10-18-2007 @ 1:45PM
Michael Limberg said...
A $5 calculator would have been all that was needed to prevent this mess. I do not remember the people who thought their house was worth twice what they paided for it a few years ago offering to share that value with me?
OUR Government who can't stop illegals from bossing them around, should not be helping people who do not invest wisely. If they do, I want to get into that line. This is a personal mess, not an government involvement mess. Fix your own bad investment decision people......
11-01-2007 @ 11:18AM
wildbill said...
While the late comers are going to take a beating there is something that is being neglected. There is a large group that made a huge profit in the flipping frenzy. Since not one actually lived in these properties there will be capital gain taxes due. This area has not been high on the IRS list due to the changes that Clinton put in place on the taxable amount for a principal residence. These were not residences, do not qualify as tax shelters and the IRS will be sending bills. It may take a while, but there is too much here to be ignored. Surpise!!!
11-01-2007 @ 11:44AM
Karen said...
Boo hoo, that's what happens when you try to get paid for doing nothing! These greedy people have made housing unaffordable for far too many people. There should be a law against owning multiple homes until everyone can afford one!
11-01-2007 @ 12:33PM
R Allan said...
I love it when people get burnt by their get rich quick schemes. Didn't anyone learn from the dot com stock market?
11-02-2007 @ 11:55AM
W. White said...
I've rarely seen such uninformed comments including, unfortunately, Ms Lita Epstein. The two examples from the MBA study were NOT greedy - they were willing to take a chance. It was a chance designed by the mortgage industry and approved by our government including the IRS...get it? - not illegal. Guilty of some bad decisions, yes but doesn't the industry share some blame as well?
Above all, the most idiotic idea promoted by Ms Epstein's article is that "Investors" may be the cause behind our massive foreclosure rate...absolutely, without question - untrue. By far, the majority of foreclosures are due to the underwriting standards of, guess who - FHA. Subprime Lenders represent a very small portion of total mortgage loans originated in this country. Imagine investing YOUR money in a mortgage for someone who has NO downpayment, is purchasing a house at 106% of the original listing price and was chapter 7 bankrupt 13 months ago. Would you put up your money for that loan? The saddest part of the truth of this matter is that --- YOU DID, and didn't even know it. hmmm