These loans were made for walking

The New York Times has an article about walking away from upside-down mortgages. Here are some interesting parts -

When Raymond Zulueta went into default on his mortgage last year, he did what a lot of people do. He worried....he owed more than the house was worth, and his mortgage payments, even on an interest-only loan, had shot up to $2,600, more than he could afford.

...Then in January he learned about a new company in San Diego called You Walk Away that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure.

Last week he moved into a three-bedroom rental home for $1,200 a month, less than half the cost of his mortgage. The old house is now the lender’s problem. “They took the negativity out of my life,” Mr. Zulueta said of You Walk Away. “I was stressing over nothing.”

You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure have changed, economists and housing experts say.

Last year the median down payment on home purchases was 9 percent, down from 20 percent in 1989, ... Twenty-nine percent of buyers put no money down. For first-time home buyers, the median was 2 percent. And many borrowed more than the price of the home in order to cover closing costs.

...The same sorts of loans that drove the real estate boom now change the nature of foreclosure, giving borrowers incentives to walk away...“There’s a whole lot of people who would’ve been stuck as renters without these exotic loan products,” Professor Sinai said. “Now it’s like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren’t any worse off than renting, and you got a chance to do extremely well. If it’s heads I win, tails the bank loses, it’s worth the gamble.”

In the boom market, homeowners took their winnings, withdrawing $800 billion in equity from their homes in 2005 alone, according to RGE Monitor, an online financial research firm.

...But new types of loans like interest-only mortgages and cash-out refinance loans mean buyers do not pay down their mortgages. And adjustable rate mortgages, which accounted for 39 percent of mortgages written in 2006, expose owners to rent-like rises in their housing costs.

The value of homeownership, then, has increasingly shifted to the home’s likelihood to rise in value, like any other investment. And when investments go bad, people tend to walk away.

...Christian Menegatti, lead analyst at RGE Monitor, said the firm predicted more homeowners would walk away from their homes if prices continued to drop, regardless of their financial circumstances. If home prices drop an additional 10 percent, Mr. Menegatti said, 20 million households will owe more than the value of their homes.

“Will everyone walk out?” he said. “No. But there’s been a cultural shift. Buying a house used to be like entering a marriage, a commitment for life. Now, if you see something better, you go back into the dating market.”

When homeowners see houses identical to their own selling for much less than they owe, Mr. Menegatti said, “I wouldn’t be surprised to see five or six million homeowners walk away.”

The company You Walk Away sounds pretty good. I am sure there will be numerous others sprouting up all over the country. Here are some things they promise on their website -

• Your lender WILL NOT be able to call you in attempt to collect!
• Your lender WILL NOT be able to collect any deficiency or loss they may receive by you walking away!
• You WILL be able to stay in your home for up to 8 months or more without having to pay anything to your lender!
• You CAN have the foreclosure REMOVED from your credit!

I really can't blame anyone for not doing this. Why bother with a short sale when you can do this. As more people who use these options come forward this will be even more prevalent.

Is his head in the clouds or buried in the sand?

Interesting article today at CNBC - Paulson Slams Mortgage Relief Plans. Our Treasury Secretary said

... he expected it to continue to grow this year, although he noted problems in the housing market continue to pose the biggest downside risk.

He fingered subprime mortgages as the catalyst for turmoil in the capital markets, which he compared to "a dry forest out there waiting for a match."

Oh, I forgot the problem was just that small group of subprime borrowers.

Paulson also had strong words of discouragement for homeowners who may be mulling whether to simply walk away from a home that has slipped in value.

He said homeowners who could afford their mortgage should honor their obligations and that the Bush administration had no interest in bailing out housing speculators.

Yes, lecturing home owners and bagholders like 8-year-olds is really going to work. People did not have to invest anything - so most are doing better walking away than staying underwater. But a guess a stern lecture will change their minds and see the folly of their ways... Who is interested in helping the speculators?

Plans for sweeping federal programs that would aid troubled mortgage borrowers would bring unfair relief to speculators and reward investors who made bad bets, U.S. Treasury Secretary Henry Paulson said Thursday.

I notice most of the fault discussed in this article is of the home-buyers. We can't aid the troubled mortgage borrowers - but who is he planning to help? The banks and the investment companies is my guess.

HELOC Heaven in Roxbury NJ

Another fine example of someone taking out every penny of their home. But don't worry - it's only empty because they have already bought a newer - much more expensive home. Here are the details - commentary to follow.




Features:

• 5 Bedrooms, 2.5 Baths
• Beautiful Hardwood Floors
• Formal Living Room and Dining Room
• Brick Wood Burning Fireplace in Family Room
• Granite Counters & Back Splash in Kitchen
• Finished Lower Level

Remarks:
Welcome to this Gorgeous Colonial with Distinctive Finishes, Crown Moldings, Glazed Maple Cabinetry, Granite Counter tops and Back splash in the Kitchen. Picture Frame Molding and Medallion Ceiling in the Formal Dining Room. Beautiful hardwood floors throughout the home, and Marble Tile in the Foyer and Kitchen. Eat-in-Kitchen open to the Family Room offers Stainless Steel appliances, Pantry and sliders to a very large deck. There is a large Finished Basement and much more!!!


All this for the asking price of $589,900. Here is the purchase history -

• The property was Purchased in Oct. 2005 for $597,000
• The first Mortgage was in Nov. 2005 with a $478,000 ARM
• Just refinanced with a second Mortgage in Jan 2008 for $92,000
• Currently for sale at $589,900
  

So if the sell the house for the full asking price the owner stands to lose approx. $42,500 in 2-1/2 years with $35,394 going to the realtor if there is the standard 6% fee. In total they have financed $570,000 of the house. What is surprising is that they originally put $119,000 into this purchase - but I suspect that the money was form a roll-over of another property and not savings. This does not look like a starter home.

Since the owner has already moved on without moving this house I would not be surprised if they either went underwater keeping up both mortgages or allowed this one to eventually foreclose. Some times I wonder why people keep sinking more money into a property wanting to sell it for a certain price rather just letting it go cheap ASAP. There are alot of other costs in carrying a property - especially one that is still on the market - than just mortgage payments. They also have to pay taxes and utilities and up-keep on the property. All of this adds up. While when they purchased in 2005 the turn around was very fast - the market is much slower now and those carrying costs can really add up.

I would not be surprised if the owners were eventually featured on the show Please Buy My House. I think there has only been one episode so far - there will probably be more. With all of the people who are on TV proudly talking about letting the house foreclose - there will be another group documenting the struggle of actually selling a property in the down market.

Banks going under.

This article from the Wall Street Journal titled FDIC to Add Staff as Bank Failures Loom has been generating alot of buzz today. Yet another consequences of the carelessness of the Great Housing Bubble - joining mortgages brokers -

"Regulators are bracing for well over 100 bank failures in the next 12 to 24 months, with concentrations in Rust Belt states like Michigan and Ohio, and the states that are suffering severe housing-market problems like California, Florida, and Georgia," said Jaret Seiberg, Washington policy analyst for financial-services firm Stanford Group.

The article is making the problem sound a bit contained to the areas that are already getting hit very hard - but just like the original limitations of the housing bust to only sub-primes this could easily become alot bigger than the first expectations.

Upgrade This!

Interesting article about people upgrading their homes prior to sale - called Eleventh Hour Upgrade. The sellers stories in the article vary greatly. The Manhattan woman purchased her place almost 30 years ago with her only upgrade being a kitchen 13 years ago. If she wants to get top dollar and get the largest buyer pool she will need to do some upgrading - which is why she did it. Another California woman points out that better to have the place looking clean and new rather than have the most expensive appliances and pergraniteel. In Ohio, one man put $23,000 into upgrading his nine-year-old home. After he sold his home and the realtor takes their share he netted a whopping $5,500 from his original $700,000 investment - but he was just happy that his house sold.

From the article -

No matter what the upgrade, homeowners aren't likely to recoup all the money spent when they sell. According to Remodeling magazine's annual Cost Versus Value Survey, the overall return for remodeling projects is on the decline, falling to an average of 70 percent in 2007 from 86.7 percent at the market peak in 2005.

For a project using midrange products, the best returns come from putting on a new deck, replacing the siding and sprucing up the kitchen; the lowest returns come from remodeling a home office, adding a sunroom or putting in a backup power generator.

Some of the big upgrading investment during the bubble were helped out by the mere fact that house prices were going up by double digit percentages every year. Even a so-so upgrade done slow enough would generate a large return for the flipper or homeowner. Also during the Great Housing Bubble there were enough flippers and speculators buying up property at high asking prices looking for an even greater return after minimal work - just watch one of the Flip this House shows to see this in action.

Where are the new buyers?

Another great post today over at Irvine Housing Blog. This one tackles the "credit crunch" and 100% financing for home purchases. I would like to focus on the 100% financing issues - especially for the first time home buyers. Contrary to the Great Housing Bubble myth, there is only a finite number of first time home buyers. As stated so eloquently from Irvine Renter -

Besides stopping people from saving for downpayments, 100% financing harmed the market by depleting the buyer pool. In a normal real estate market, first-time buyers are saving their money waiting until they can make their first purchase. There is usually a steady stream of first-time buyers that enters the market each year as they saved enough for their downpayment. When 100% financing eliminated the downpayment requirement, it also eliminated any need to wait. Those who ordinarily would have bought 2-5 years in the future were able to buy immediately. This emptied the queue. This might not have been a problem if 100% financing would have been made available to everyone forever; however, once downpayments came back those who would have been saving were already homeowners, so there were few new buyers available, and any potential new buyers had to start over saving for their downpayment. What was worse was those late buyers who were “borrowed” from the future buyer pool overpaid and many lost their homes. This eliminated them from the buyer pool due to poor credit for several years. Everyone who thought 100% financing was a dream come true found it to be a nightmare instead.

This is especially true of those who bought using negative amortization - teaser rates and liar loans. They also have the least interest in staying in their homes or paying the banks back. Many of these people lived in place they could not afford - and with teaser rates "owning" became significantly cheaper than renting.

Some of these people really were going to save up and become future purchases - they were seeing housing rates soar. A house they could afford one year was unattainable the next - they felt if they did not jump in they would be completely left out. Many others were just taking advantage of an excellent opportunity - live in a great property for no money down with a small monthly fee. Even if they lived in the property for just for a year they were living a lifestyle that was out of reach in a normal reality.

And everyone was doing well while these people were living their ultimate lifestyle. Realtors fees were high. Mortgage brokers making great commissions. Banks turning bad mortgages into fancy CDO's and SIV's and generating great profits. In addition to all of the supporting industries making money hand over fist - appraisers, inspectors, state real estate taxes, etc. Why would anyone want to stop and question the party?

But as Irvine noted - "Everyone who thought 100% financing was a dream come true found it to be a nightmare instead." That includes banks, mortgage brokers, realtors, etc. as well as the home "owners."

Housing Crisis - Just what are the banks doing?

Here is an interesting article from CNBC - Pimco's Gross on Mortgages.

The Federal Reserve's aggressive interest-rate cuts have failed to push mortgage rates lower and thus have done little to help the battered U.S. housing market, said Bill Gross, chief investment officer at Pimco, the world's largest bond fund.

The Federal Reserve is basically giving away money to banks and yet the mortgages rates have not changed - so the banks are getting a larger piece of the pie. But remember this is helping the consumers - not the start of a bail-out for the banks. Let's look at this -

Gross said Fannie 30-year mortgage rate stands at 5-3/4 percent, which is the same level as in September when the Fed began lowering rates dramatically.

Lending to banks have been drastically lowered but that is not transferring to the consumer. Great job!!! And this is just the beginning...

On a national basis, home prices are down roughly 7-8 percent but Gross still expects a 20 percent decline in total.

Just a nice way to wake up on a pleasant Monday morning.

Enjoy that HELOC before its gone

Interesting article in the Washington Post called Homeowners Losing Equity Lines. The author discusses the issues of banks shutting down HELOC's due to lowering house values. Here is one key section -

Last year, 34 percent of borrowers said they used their home equity lines to pay off other debt and 29 percent used them for home renovation, according to a survey of lenders by BenchMark Consulting International. Another 31 percent used them to pay for other things, such as medical bills, weddings or vacations.

I wonder how much of that debt and "other things" involved everyday living that should come out of income not the value of your house or your potential future. Aside from medical bills and possibly renovation - especially emergency renovation due to furnace breaking down or other known but unexpected or unplanned event - all of this debt can be avoided. If you can't afford to go to Hawaii on your everyday salary don't go! If you can't afford a $100,000 wedding than don't have one!

Another interesting part of the article is the case of the Corazzi family. They took at a $95,000 home equity line in Oct. due to fears about her job. Her pay was changed in Dec. from salary to commission and now she has only received 1 paycheck. We are told how the family need's their home equity to pay for preschool. With $45,000 left in the line they were told that their credit line was closed due to the declining value of their home. So in 2-1/2 months they spent $50,000 on pre-school?!? (Note to self - set up a preschool for the Corazzi family.) And was her salary over $200,000? That's alot for living in a $560,000 home. They thought in Oct. they her job was in jeopardy so instead of changing lifestyles they borrowed against the house. Also, she worked in the mortgage industry and did not notice that home prices were falling?!? This is a clear case of people using their house as a second income - a high paying second income.

The Waters Keep Rising.

Here is an interesting article from the New York Times, Rescues for Homeowners in Debt Weighed. Here are some interesting excerpts -

Prodded in part by some of the nation’s biggest banks, the Bush administration and Congress are considering costly new proposals for the government to rescue hundreds of thousands of homeowners whose mortgages are higher than the value of their houses.

Not since the Depression has a larger share of Americans owed more on their homes than they are worth. With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater. That is more than double the percentage just a year ago, according to a new estimate of the damage by Moody’s Economy.com.

More than 10% of homeowners are drowning in debt - I wonder what the percentage is that is not yet aware...

Administration officials say they still oppose any taxpayer bailout for either people who borrowed more than they could afford or banks that made foolish loans during the height of the speculative bubble in housing.

I wonder how many this would be - and also the people who refinanced or HELOCed there way underwater. All those people who could originally afford their houses or bought before the bubble and were able to enjoy it. All those people who are now using the equity to pay off the house. From Wednesday's post -

During the boom, rapid price appreciation meant borrowers built up home equity quickly. That minimized defaults, since owners could draw from that equity to pay their bills - including their mortgages - through home equity loans.

All the people are using their houses to keep up their houses and lifestyles. While not all of these people are drowning yet those numbers will increase.

Another issue to consider in this is that people who are underwater on their house and will either have to pay out at closing or if they are lucky have a short-sale will be out of the housing market for some time.

Somebody buy me

We have another home profile of 100% financing and the house selling for a loss. This house is located in Dover, NJ.



This large colonial has three bedrooms, two bathrooms, a large eat in kitchen, a formal dining room, a fireplace, hardwood floors throughout, and that is just the start.

Fireplace Full Basement Hardwood Floors Lot: 47 x 100 New Fixtures Public Water & Sewer Taxes: $4,496 Two Bathrooms Walk In Closet

Formal Dining Room Great Location Large Yard & Garage Master Bedroom Pristine Condition Spacious Front Porch Three Plus Bedrooms Very Well Maintained Walk Up Attic

The house actually looks pretty cute and the taxes are not that bad. So lets look at the history

• Purchased Oct. 2005 for $348,500
• Mortgage 1 Oct. 2005 for $278,800 ARM with ARGENT MORTGAGE CO LLC
• Mortgage 2 Oct 2005 for $69,700 with ARGENT MORTGAGE CO LLC
• Currently For Sale at $329,000

From the numbers we can see that Argent Mortgage bought the house for the owners/residents. The current asking price is $19,500 loss after almost 2-1/2 eyars - not that bad as some but after the standard 6% realtor fees of $19,740, a total of $39,240 will be lost.

And just who will lose these funds - assuming that Argent did not sell the mortgage - huge assumption? Well Argent was the first mortgage company that did this type of lending that NJ HELOC Heaven has profiled that has not went under - it was bought up by CITI!?!

When Banks Make Bad Choices

For years home prices did not increase substantially - the late '80's through the mid '90's was an example of this. However during the great bubble there were significant increases every year. I guess that helped people get into HELOC heaven. Here is a little excerpt from CNN's article Subprime Loans Failing Pre-Resets -

What's more, many borrowers started out with low- or no-down payment loans, which left them with almost no equity in their home.

During the boom, rapid price appreciation meant borrowers built up home equity quickly. That minimized defaults, since owners could draw from that equity to pay their bills - including their mortgages - through home equity loans.

What times they were - borrowing off your home to pay off your home. I can understand doing this in an emergency - such as health issues or career problems/transitions. What I can't understand doing this on a daily basis for every day living. Do people not realize they are in over their head.

Also what were the banks and mortgage companies thinking. there should have been some institutional memory that would discourage allowing people to perpetually have no or negative equity on their homes. While no one knew when the bubble would pop - all of the banking/finance/mortgage professions should have known that prices would not rise forever. Even if the bubble did not pop it would not continue rising at such a rapid pace. Once that happened people would fall behind and would be renting their homes from the bank.

And in case you were wondering if they banks did not realize what was coming -

By late 2006, lenders knew that the housing market was heading south. Foreclosure filings took off during the third quarter that year, up 43 percent from 12 months earlier, according to RealtyTrac, the online marketer of foreclosure properties. And home prices began to drop.

But instead of cutting back on risky loans, lenders kept lending. Why?

"Because investors continued to buy the loans," said Doug Duncan, chief economist of the Mortgage Bankers Association.

...Of course that's a bet that went bad. And it's likely to get worse as resets for ARMs issued in 2006 and 2007 kick in this year.

So it was not just the home buyers playing the system - the whole mortgage industry was in on it too.

Are Housing Prices in Free Fall...Yet?

Here is a very interesting blog post from Roubini. Here are some key graphs -

I will argue that the most important first-order risk for financial markets derives from the likelihood that 10 million to 15 million households may walk away from their homes if – as likely - home prices fall another 10% in 2008 and further in 2009. ... Indeed, this will end up to likely to be the worst housing recession in US history – not just in the last 50 years – and home prices may likely eventually fall by 30%, .... By now prices declines of the order of 20% are predicted by Goldman Sachs, Robert Shiller, MarketWatch chief economist Irwin Kellner and others; while Paul Krugman has suggested even a figure of 30%; and, according to Bob Shiller, in some markets home prices may fall by 40 to 50%.

So let us consider the implications for the household sector of price declines of the order of 20 to 30%. The math is simple as I will flesh out in this note: 10 to 15 million households will end up in negative equity territory and will be likely to default on their homes and walk away from them. Then, the losses for the financial system from this massive defaults will be of the order of $1 trillion to $2 trillion, a multiple of the $200 to $400 billion of losses currently estimated for mortgage related securities.

Wow - and we think it is bad now.

So who is this Roubini - here is the background -

Nouriel Roubini is an associate professor of economics and international business at the Stern School of Business, New York University.

Over Improvements

Calculated Risk has a great post about over improvements on homes. It discusses the over-inflated prices flippers were getting for upgrades during the boom. How much added value will a buyer pay for granite counter-tops and stainless steel appliances? Especially during a downturn. Also if you have to put real money - actual savings - are these upgrades going to have the same value? When the house is 100% financed from the bank it is much easier to want or demand all these upgrades. However when you have to put in your own real money the bells and whistles of these over-improvements are not as important.

Decision One - Bad Choice

Here is another example of a mortgage company that financed the entire purchase of a house. This episode takes place in Morristown, NJ.

DESCRIPTION

FEATURED LISTING

11 Rooms
4 Bedrooms
2 Fullbaths

1 Car Width, Blacktop
Level Lot
2 Units, Forced Hot Air
Public Water
Gas-Natural

Taxes $9,142


Here is the financial history -

• Purchased Oct. 2006 for $600,000
• First Mortgage Oct. 2006 for $480000 ARM with Decision One Mortgage
• Second Mortgage Oct. 2006 for $120,000 with Decision One Mortgage
• Currently for Sale at $465,000

So within 15 months of purchase the mortgage company is losing $135,000 on the mortgage and approximately $28,000 in Realtor fees. The owner did not take a financial hit - probably just a hit to their credit rating. But that $163,000 has to come from somewhere...

Of course Decision One Mortgage shut it's doors last Sept.

Every one of the companies that I have found the funded 100% of the properties have closed down - First Magnus, WMC and now Decision One. All also took a huge hit on the selling price.

Housing Bubble Glossary Favorites

Yet another great post from Irvine Housing Blog. This one is called Housing Bubble Glossary. Although he took it from another source I think his modifications make it better than the original.

Here are some of my favorite terms:

• Bagholder – A homeowner unable or unwilling to sell a property that is declining in value.
• Flip – a Property purchased to resell quickly for a profit. Flippers are derided for bidding up house prices and preventing normal families from purchasing houses for reasonable prices while often adding no value to the property.
• Floplord – A speculator who cannot sell his flip for either the wishing-price (greed,) or enough to cover the existing mortgage (need,) so finds himself in the position of becoming an unintentional landlord.
• Homedebtor – A homeowner who is overextended with a mortgage they cannot afford often due to their own desires for more home or more spending money.
• Jingle Mail – Term coined by early bubble prognosticator Bill Fleckenstein, referring to homeowners who have “mailed in the keys because they can’t make the payments and no longer have any equity in their homes.”
• Knife Catcher – A buyer during the decline attempting to time the bottom and catch a price reversal. Since prices generally decline for long periods in a real estate slump, there are many buyers who buy too early and pay too much thus causing financial injury.
• Liar Loans – Also known as stated-income loans. A type of loan used when a borrower could not qualify for a loan based on their real income.
• Loanowner or Loanership – Terms used to convey the reality of home ownership for overextended homedebtors who are in essence renting from the lender. A related expression is “Equity is fantasy and debt is real.”
• MEW – Mortgage Equity Withdrawal – Any form of increased property debt. This can result from direct cash borrowing through refinancing or home equity lines of credit (HELOC,) or it can result from loan terms with negative amortization. MEW fueled a great deal of consumer spending during the housing bubble.
• Serial Refinancer – A Homedebtor relying on mortgage refinancing to maintain artificially low debt service payments or fuel a lifestyle of consumption.
• Suicide loan – Also known as Option ARM or Negative Amortization loan. A type of loan where the principal grows with each payment.

Here is the link to the original.

I should have some more MEWs, Flips and serials refinancers to post this week.

HELOC Stories

Found this article about the Top 5 Most Ridiculous Mortgage Borrowers Stories of 2007 . My favorite story was number 5 on the list -

Jeffrey and Vanessa Hahn bought a $475,000 house in 2004 using an adjustable rate mortgage and took out a significant home equity loan not long afterwards. In September of 2006, the interest rate on the main mortgage reset, causing the payment on their main mortgage to increase from $2,200 per month to $3,700 per month.

In March of 2007, the couple got a cash-out refinance to the tune of $570,000 even though the required monthly payments equaled their monthly take-home pay. Needless to say, they never made a payment on the loan and lost their home to foreclosure.

When the San Francisco Chronicle profiled the Hahns, Jeffrey said he was 'shocked' by the number of hate comments that were generated.

'I just don't get how these people can judge me like this and think we completely took advantage of the system. The system took advantage of us,' Hahn was quoted as saying.

For some reason the number 1 story had the least info involved. Sounded like it was just a tirade against some blogger. Story 2 has been making the rounds for some time - about the strawberry picker making $15,000 per year purchasing a $750,000 house. The third story had the heart-tugging background of a recent widow felling taken advantage of by her mortgage company but it turned out she had financed seven times over the years. Story 4 was about a grandparents who bought their house for $97,000 in 1977 and took over $600,000 out in equity and could not make the payments anymore on their social security.

HELOC Heaven - Montville Version

Well I finally found someone that took advantage of their HELOC - this will probably not lead to a short sale - but it is a great example of someone using the house as a second (or third) income.

This house is located in Montville, NJ.



Judging from the kitchen picture the money was not spent on the property...

Also no renovations listed in the description -

Great opportunity to move into Montvile, NJ. Rated by Money Magazine as one of the Best Places to Live. Large EIK, Extra Large LR, Large Fenced in Level Yard with Shed and Tree House, 3 BR, Loft/office, Full Floored attic and Full Basement

So here is the financial data -

• Purchased Sept 2001 - $187,500
• Mortgage Oct 2001 - $150,000
• HELOC May 2004 $20,000
• HELOC July 2005 - $100,000
• HELOC August 2005 - $193000
• HELOC May 2007 - $220,000
• For Sale Feb 2008 - 397,000
  

If they get their full asking price with a standard 6% commission - they stand to lose $34,320 during the great housing bubble. This owner could have made over $185,000 on this investment during the run-up. Wow - that's huge amount on such a modest house. But they chose to HELOC it away.

Remember they must have been able to save at one time - they managed $37,500 for the down payment. But since saving was so 90's, they had to use the house as a second income and made an extra $36,600 per year. I hope they had a good time.

Dover Townhouse

Here is another example of a bank fully financing the purchase of a house. The case takes place in Dover, NJ -

PROPERTY DETAILS

• Foreclosure	• 1 bathrooms
• 3 bedrooms

Here is the background -

• Purchased Oct. 2005 - $240,000
• Mortgage Oct. 2005 - $192,000 - ARM with Balloon from WMC Mortgage Corp.
• Mortgage Oct. 2005 - $48,000 - 15 Year from WMC Mortgage Corp.
• For Sale on Craigslist for $225000 Townhouse , but For Sale at UbidhomesNJ for 219,000

Another fully financed house selling at a loss. So what did I find out about WMC - lots of info from last spring about downsizing and layoffs. From Oct. 2007 - at TruthaboutMortgage.com -

It’s been reported that WMC Mortgage the wholesale residential subprime and Alt-A Mortgage unit of GE Money, laid off the majority of its staff yesterday.

Tomorrow I will be checking out this Truthaboutmortgage website. Aside from finding these heavily HELOCed houses - it is interesting to see that the parallel with the mortgage companies that loaned the funds are now out of business.

Here Comes Trouble

At least everyone will be drowning together...

Americans Selling Homes See Prices Go Below Mortgage

By the end of this year as many as 15 million U.S. households may owe more on their mortgages than their homes are worth, according to an estimate from Jan Hatzius, chief U.S. economist of New York-based Goldman Sachs Group Inc. That may fuel an increase in foreclosures, erode prices, and increase mortgage bond losses, he said in a Feb. 1 report.

...Thirty-nine percent of people who purchased a home two years ago already owe more than they can sell it for, according to a Feb. 12 report from Zillow.com, a real estate data service. Only 3.2 percent who bought five years ago are in that situation, the report said.

This excerpt is from Bloomberg does not separate the two different reasons people are under - so bought at the high and put little or no money down. Any drop in price makes an upside down mortgage. Some people did this on purpose when buying recently using an option mortgage and generating negative amortization. The other group bought when the market was lower and than HELOCed the hell out of their property.

Reminder - Don't take her advice

I just came across this article from MSNBC called Don't Rush to Pay Off that Mortgage - and the author, Liz Pulliam Weston, writes

The person who's set on paying off a mortgage in as few years as possible, even if that means skipping vacations and the occasional dinner out with the spouse, is just as out of balance as the person living on credit cards.

Boy the banks must love her - but her comparison is crazy.

Last year she probably advised that home prices never go down...

More Drownings

Two personal stories in one New York Times article explaining how more and more people are drowning in the debt spurred during the housing bubble.

The first is someone who took all of their equity -

Mr. Doyle, 52, is now worried that he will have to file for bankruptcy, because he cannot afford to make the higher variable payments on his mortgage, and he cannot sell his home for more than his $740,000 mortgage.

“The whole plan was to get out” before his rate reset, he said. “Now I am caught. I can’t sell my house. I’m having a hard time refinancing. I’ve avoided bankruptcy for months trying to pull this out of my savings.”

In refinancing their home in 2004, Mr. Doyle and his wife were doing what millions of other homeowners did in the last decade — tapping into the rising value of their homes for home improvements, paying off credit card debt, college tuition and for other spending.

The Doyles took advantage of the housing boom by refinancing their home nearly every year since they bought it in 1995 for $275,000. Until their most recent loan they never had a problem making their payments. They invested much of the money in shares of companies that subsequently went bankrupt.

This family is trying to make it sound like the problem was college tuition - but they have been refinancing steadily over the years. They could owe very little on their house - but the ATM/second income that the equity provided was just too strong of a lure. Paying off credit card debt (which most of the time is dinner's out and other useless junk that is long gone when the bill is payed) and other spending??? That is not home improvement or college - good debt but just spending for spending - bad debt.

The second story is more of a sad one - not so much being careless (well a little with signing the papers and buying the house) but also buying at a bad time in the market.

Home prices in the North Las Vegas neighborhood of Brenda Harris, a technology analyst at a casino company, have fallen 20 percent to 30 percent. The builder who sold her a new three-bedroom home on Pink Flamingos Place for about $392,000 in 2006 is now listing similar properties for $314,000. A larger house a block down from Ms. Harris was recently listed online for $310,000.

But Ms. Harris does not want to leave her home. She estimates that she has spent close to $40,000 on her property, about half for a down payment and much of the rest on a deck and landscaping.

“I’m not behind in my payments, but I’m trying to prevent getting behind,” Ms. Harris said. “I don’t want to ruin my credit.”

In addition to the declining value of her home, Ms. Harris, 53, will soon be hit with a sharply higher house payment. She has an option adjustable-rate mortgage, a loan that allows borrowers to pay less than the interest and principal due every month. The unpaid interest gets added to the principal balance. She is making the minimum monthly payments due on her loan, about $2,400.

But she knows she will not be able to pay the $3,400 needed to cover her interest and principal, which she will be required to pay once her loan balance reaches 115 percent of her starting balance. And under the terms of her loan, which was made by Countrywide Financial, she would have to pay a prepayment penalty of about $40,000 if she chose to refinance or sell her home before May 2009.

Just bought the house and already in negative equity. She tried - put some down-payment down even just $20,000 is alot more than many did during the bubble -that is basically gone.

More Band-Aids Please

This article discusses alot some of the band-aids that the government is trying to put on the problem. I just can't see how upping the Jumbo mortgages from $417,000 to $729,250 is going to play in Peoria. These fixes are obviously for the two coasts and Florida. While in NJ that is an affordable home - above starters in most towns it is not that significant. It is definitely not the even close to the best houses or the best areas.

A Couple Good Reads

Here are a couple good posts to read -

Irvine Housing does a good job discussing Liar Loans - usually called Stated Income - No Documents loans. Once they were unusual but during the bubble they became very common-place. When you read articles about how people qualified for really high loans - like the one in the story from yesterday - these liar loans are usually involved. Just state what you make - no need to prove anything - and you can easily get 500K overnight. Boy it is really great to see all of these great business practices during the bubble. I guess Enron became a business model for a lot of the mortgage market - no one cares about business as long as they are making money.

Calculated Risk has an older post from Jan. but it is a must read - the bottom half of this post deals with the potential rise in negative equity levels as the housing market falls. Check out this graph - that is pretty scary - especially all of those people who are so close to the edge and do not know it yet.

Flip That House Warning

Great New Warning at the beginning of Flip That House -TLC Show at 8pm EST

The following program features real people taking risks with real money. Flip at your own risk.

The first minute they warn about flipping problems in a down market.

I will try to get a screen shot up - don't know how to do it yet. This will be a classic!

First Magnus Financial Took a Huge hit with this one

Here is a good story. This is is a no money down story based in Rockaway, NJ - 4 bed, 3 bath with an attached 2 car garage. From the pictures it looks pretty nice.

• Purchased Jan 2006 - $530,000
• Mortgage Jan 2006 - $106,000 - First Magnus Financial/Mortage Electronic Registration Systems Inc.
  
• Mortgage Jan 2006 - $424,000 - Interest Only ARM First Magnus Financial/Mortage Electronic Registration Systems Inc.
• Sold Nov 2007 - $460,000

This appears to be a pre-foreclosure sale - through a realtor. So dropping the 6% realtors fees First Magnus lost approx $98,000. So we decided to google First Magnus and of course they went Bankrupt. From their cached website:

First Magnus is No Longer Funding any Mortgage Loans

In light of the collapse of the secondary mortgage market, First Magnus will not fund any future mortgage loans, and is no longer accepting any mortgage loan applications or funding any mortgage loans previously originated and not yet funded. We explored all options before taking this action but were left with no viable alternative.

First Magnus values the relationships we have formed with all of our broker partners over the years and appreciate the trust you have shown in us. We are saddened that we will no longer have the opportunity to work with you.

We may not be financial wizards but we are not surprised. This was a horrible business practice. It only lasted while pricing were going up so people thought it could not lose. Look at the numbers - this mortgage in the example above went to foreclosure in less than 2 years. Even paying a higher interest rate their would be no way the bank could recoup a portion of the money they lost. They did not require any down payment - 100% funding with an Interest only ARM. Probably even calling this house a pre-foreclosure is a bit of a stretch since they were renting from the bank.

First Example - Madison NJ Townhouse

This first example is not an example of excess. It is a somewhat sad example since the owner will lose the 60K they used to purchase the house if they get their full asking price. Hopefullyle they can negotiate with the bank for a short sale rather than having to lose even more money. The current asking price is a negotiable $585,000 - and since its not FOSB we can assume the standard 6% realtor's fees. Since it is negotiable right in the listing it stands to reason that the owner is not in good shape.

This bright 2100 sq. ft. Condominium with beautiful hardwood floors boasts an inviting living room with gas burning fireplace, formal dining room, and eat-in-kitchen. The second floor has three bedrooms, laundry room, master bath and main bath.

So here is the breakdown:

• The townhouse was purchased November 2002 for $460,000
• Original Mortgage was in November 2002 for $400,000
• The owner put an impressive $60,000 down for an approx. 13% down payment
• In March 2005 the owner took out a Home Equity Loan for $150,000 - and the sellers do not list any renovations.
• Listed for sale currently at a negotiable $585,000
  

The owners could have made approx $90,000 after closing expenses - but now will be lucky if they break even. Since the original mortgage was not an ARM they probably have a couple thousand dollars more to play with - but not much more.

Equity Issues

I'm a bit under the weather today - so bear with this post. There were alot of important things -

Irvine Housing illustrated how people took so much out of their houses that even with the boom they are not really making out that great. I found numerous instances of this in New Jersey - I will post some of them up this week. These are people who pulled so much out of their homes that while they are not necessarily in a short sale position but are making significantly less than if they had not continued the refinancing spiral. It is one thing to refinance to a significantly lower rate but another to pull large amount of equity out.

From Irvine

So how did this seller manager her mortgage?

• The property was purchased in December 1997 for $163,000. There was a first mortgage for $156,000 and a $7,000 downpayment.
• 12/15/2000 the property was refinanced for $190,000.
• 12/5/2001 another refinance for $194,500. Christmas shopping money?
• 1/10/2003 a refinance for $232,000. Pay off Christmas shopping debts?
• 11/28/2005 a refinance for $381,000. Remodel?
• 1/3/2007 a refinance for $418,000 with an Option ARM.

Ten years and a steadily increasing loan balance on the property. Now if they sell for asking price (which seems high at $381/SF) they stand to walk away with less than $100,000 in cash from a property that went up almost $400,000 in price. Does this seem like good financial planning to you?

As I document my findings you will see that alot of these people took out ARM or balloon mortgages.

On a side note - my last house we were debating adding a level or upgrade to a larger house. It was a desirable neighborhood but on a somewhat busy road. After watching for a while I found that all of the starter homes sold very quickly. However the larger trade-up houses on my street languished for months.

Then there is this article from the New York Times

For the 34 million households who took money out of their homes over the last four years by refinancing or borrowing against their equity — roughly one-third of the nation — the savings rate was running at a negative 13 percent in the middle of 2006, according to Moody’s Economy.com. That means they were borrowing heavily against their assets to finance their day-to-day lives.

By late last year, the savings rate for this group had improved, but just to negative 7 percent and mostly because tightened standards made loans harder to get.

“For them, that game is over,” said Mark Zandi, chief economist at Economy.com. “They have been spending well beyond their incomes, and now they are seeing the limits of credit.” (emphasis added)

Subprime and Alt-A Mortgage Conditions

Just came across some really interesting regional spreadsheets available here -

Subprime and Alt-A Mortgage Conditons


First with the Alt-A's

191 NJ zipcodes have over 10% of the Alt-A houses in forclosure.

I have not figured out how to import some tables yet - but the Alt-A foreclosures are definitely hitting all of the towns. Of course numerous zip codes in Newark and Paterson, but also Alpine, Rumson, and Avelon all have over 20% of Alt-A's in foreclosure.

Irvine Inspiration

Here is a sample from the Irvine Housing Blog of what I would love to find in the NJ area:

So lets walk through the mortgage history of this property and see just how bad HELOC abuse can get…

* 7-20-2001 The house was purchased for $397,000 with a first mortgage of $317,600 and a downpayment of $79,400.
* 11-07-2001 HELOC for $48,000 taking out over half of downpayment.
* 8-26-2002 Refinance for $360,000.
* 11-26-2002 HELOC for $29,000
* 11-26-2002 HELOC for $71,000
* 6-18-2003 HELOC for $56,000
* 6-18-2003 HELOC for $100,000
* 6-1-2004 Refinance for 517,500 –probably paid off HELOCs at this point.
* 10-22-1004 HELOC for 89,900.
* 4-21-2005 Refinance first mortgage of $624,000
* 4-21-2005 Refinance second mortgage of $156,000. Total debt of $780,000 at this point.
* 9-12-2006 Refinance first mortgage of $948,750.
* 9-12-2006 Refinance second mortgage of $189,750. Total debt of $1,138,500. No HELOCs

So there you have it. This homeowner went to the housing ATM 8 times over a 5 year period and pulled out $820,900.

This is the fascinating example of the excess of the last decade.