Tuesday, February 5, 2008

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)

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