Bay Areans Invest in "Arm Pit" Locations

Many Bay Areans like to describe CA areas outside of the Bay Area as "arm pits" and so very beneath us that they serve as "obvious" justification for our lofty prices and ingrained snobbery. (That and other such derogatory terms can be found in the comment sections of earlier posts to this blog when the housing bubble was still hotly disputed by local housing bulls.)

It is rather odd, then, that so many Bay Area RE "geniuses" saw fit to buy investment properties in "arm pit central", aka Sacramento, and contrary to our claimed opposition to the loss of prime agricultural land to development:

Many real estate agents estimate that about 40 percent of the 10,000 single-family houses for sale in Sacramento County are empty...

"There are so many new homes here and so many investors from the Bay Area," McDonald says. "When we pull up the owner's names, nine times out of 10 they live in the Bay Area."

So these investments aren't selling. They sit vacant and their lawns are brown and choked with weeds, the pools clogged with algae and breeding pits for West Nile virus. Because no one lives there, when and if the investment sells, there is no move-up buyer, so that move-up chain breaks. If it doesn't sell but the Bay Area "genius" has to sell it, they walk away (since it was probably a no-money-down sort of thing anyway). Their credit is now crap and they might have to sell their primary residence as that investment loan might be a non-owner occupied recourse loan.

Speaking of which, remember this post and this article?

But in California, refinanced loans, second trust deeds and home equity lines of credit are generally considered recourse loans. In these cases, a lender can file suit and go after almost any of the borrower's assets once they obtain a court judgment.

"They can literally go after everything you have," Hall says.

There are a few limited exceptions. Retirement accounts are excluded, and declaring bankruptcy could protect some homeowners.

In the past, lenders have been reluctant to go after borrowers personally because it takes time and can involve costly litigation, but Hall says things might be different this time, especially if a borrower has substantial assets.

Too bad it is so much harder now to get bankruptcy protection.

The New Californian Socioeconomic Class of the Future?

So you are one of the gazillions of Californians who REFIed, HELOCed, etc. and so you are drowning in debt but hey, it's "all good" because you can still make the payments as long as that job holds out, or your significant other's job holds out, you stay healthy, no family emergency arises, etc., etc., etc. So you think to yourself in the unlikely event that if worse comes to worse you get foreclosed on you can just hand over the keys and walk away. Right? Isn't that what folks did in the past? Isn't this such a great country where you can take on tons of debt and not worry about having to really pay it back? (Damn! Where's my credit card?) Well, think again. Here in California we may be looking at a future where there is a new socioeconomic class: the indentured housing-debt serf.

Homeowners behind in their mortgage payments after hocking the house to pay for a major remodel or a new boat or car may be in for a rude awakening. If they previously refinanced and their lender decides to foreclose, they may not only lose their house, but the bank also may be able to go after their other financial assets including stocks, savings and their paycheck.

A foreclosure may mean a big tax bill from the IRS and state Franchise Tax Board for any shortfall between what the bank gets for the sale of the owner’s home and the value of the loan. ‘This is going to become a hot topic,’ predicts Bradford L. Hall, managing director of Hall & Co., CPAs in Irvine.”

Some homeowners with little of their own money in their homes may think they will do what strapped homeowners in the ’90s did: turn over the keys to their lender if things get really bad and walk away.

But Hall and other financial experts warn that things may be different this time because so many people have refinanced. The difference is the recourse loan. In California, refinanced loans, second trust deeds and home equity lines of credit are generally considered recourse loans. In these cases, a lender can file suit and go after almost any of the borrower’s assets once they obtain a court judgment. ‘They can literally go after everything you have,’ Hall says.