Monday, March 31, 2008

Clueless Insiders

Over at CNN Money there is a story of subprime insiders who seemed to believe all of their hype. In an article titled Subprime vets saw their industries, finances vanish in flash. The story of love and heartbreak in the subprime industry. The center of the love story are Kent and Mysti Cope who fell in love at New Century Financial the former No. 2 subprime lender - prior implosion. She was in charge of the e-commerce customer service. He worked in the subprime industry since the 1990's. They were well-connected, well compensated and thought they knew their industry very well.

"We're still both in shock that it could go from something so good to so bad so quick," said Kent, 59. "New Century in 60 days went from top of the heap to out of business."

And the lives they lived. Each making in the six figures, they enjoyed the O.C. lifestyle. With Pacific Ocean views and their own private Garden these two were doing great. And of course their mortgage and their HELOC on a 2005 purchased house that has already lost 20% of its value within the last year.

Today, they're trying to get by on his unemployment benefits of about $450 a week, which covers only about an eighth of the basic payments they owe every month.

They have $10,000 in monthly fixed bills - their home equity line, mortgage, health and life insurance premiums. This does not cover food, utilities and other basic necessities. They are trying to do everything before they have to give up their home. They must have believed all of the housing hype, internalized it.

"We've used up most of our reserves, cashed in her 401K," said Kent. "We're going Mach 1 into a wall. When we run into it, then we've got to decide what to do next."

Despite their financial problems, the Copes have worked hard to protect their credit rating, staying current on bills.

Selling to the subprimers - and it sounds like that becoming subprime is their biggest fear. Giving up their retirements just to make sure they never become one of their old customers. This will probably prevent them from walking away - even when it may be in their best interest.

For Mysti, 37, all her efforts to find work since she lost her job last May have been futile. She said she believes the attention given to subprime borrowers who have run into trouble paying their mortgages work against her and other former colleagues. It's almost like having "Enron" on your resume.

"The media has somewhat tarnished the subprime industry and all the employees, and portrayed them as being dishonest," she said. "We're not dishonest. Not everybody was a bad borrower. Not every company was a bad lender."

Are trying to blame the media for the media for the mortgage meltdown and credit crunch? Since this is much bigger than Enron it is probably worse on the resume.

Mysti said she and many other employees who survived the early rounds of layoffs at New Century thought they'd be able to ride out the bad times even after the firm stopped taking new mortgage applications in March of last year and filed for bankruptcy in April.

"We were New Century. We were a large corporation. We were the No. 2 subprime lender in the industry," she recalled. "You figured someone would come in and want to invest and take it over."

But the potential buyers soon disappeared as did the remaining jobs. She and her co-workers got word on May 3 that they were being laid off, effective the next day.

Within in 2 months the company went under. Things were bad but since they internalized all the hype they could not see what was coming.

The Copes are just two of many in Orange County, formerly the center of the nation's subprime lending industry, now trying to move on. Nearly 9,000 jobs have been lost there in the past year, with more than 4,000 alone in Irvine, where New Century was based.

The subprime industry in Orange County was a close-knit close cluster of lenders. The industry rapidly expanded as executives at one firm would strike out on their own and setup shop nearby. But the industry fell apart even more quickly.

This is what keeps Irvine Renter so busy - these clueless insiders thought they were on top of the world - until their world imploded. We hear about how Countrywide's CEO was selling his stocks while the industry was imploding - just like Enron. People knew time was running out but were telling the employees that things were going great - their's was a huge organization that was too big to fail - it had to be worth something to someone. Are any of them too big to fail or is the collapse too intertwined with too many to allow them to fall?

"You know you could take a roller coaster ride down," he said. "But you never envisioned it could be a free fall.
It's not just the subprimers that are in free fall anymore.

Sunday, March 30, 2008

The Serial Refinancer

Today we have a case where the owners could have made out very well on their property. The owned it for almost 9 years and could have walked away with almost $300,000 in the bank when they sold this property. Instead they decided to become serial refinancers. It looks like it started to get a lower rate, but then something changed and they decided to start taking money out of their property. Now it looks like it they will be lucky to break-even. I have seen other cases on craigslist of people not wanting to pay a realtor commission - some state it out-right. They do not seem to be listed with any for the for-sale-by-owner with MLS lists. This sale may be so tight they can't take the 6% hit but they do not know how to aggressively list the property themselves.

Here is the property -

The description -
Lincoln Park, NJ: For Sale By Owner Large 5 Bedrooms/3 Bathroom home in a great location of Lincoln Park. Quiet, family-friendly dead-end street in a desirable non-flood area. Living room with recessed lighting. Gorgeous fireplace and separate sitting area. A beautifully updated kitchen with granite counter tops, tile floor, and custom-made island. Family room has an efficient wood stove and charming slate floor with recessed lighting. Master bedroom has a private bathroom. Sliders from the newly renovated dining room to a large and lovely patio and a scenic backyard with an enjoyable above-ground pool. Perfect for your large outdoor get-together. It is public water and sewer. Approximate taxes: $ 7500

And here is the financial side of the property -

  • The property was purchased in May 1999 for $234,000.
  • The original mortgage from May 1999 is unavailable online.
  • The owners took a HELOC out in Jan. 2003 for $25,000 with First Horizon Home Loan Corp.
  • The owners took a mortgage out in Jan. 2003 for $154,000 with First Horizon Home Loan Corp.
  • Yet another mortgage the next May (2004) for $148,500 again with First Horizon Home Loan Corp.
  • In Sept 2004 they took a larger mortgage, this time for $344,000 in an ARM with Washington Mutual, the loan was closed Nov 2006.
  • Some time went by, but in April 2006 the owners took a $170,000 HELOC with Bank of America, this was closed Nov 2006.
  • In Oct 2006 the owner refinanced again for $402,500 with REMI Capital.
  • Approximately 3 months later in Jan 2007 the owners took a $100,000 HELOC with Bank of America.
  • Currently on sale for the reduced price of $489,000 on craigslist.
The owner could have walked away with a minimum of $282,000, that would be if they did not put anything down in 1999 - which was very uncommon at the time. In May 2004 they probably owed $173,500 assuming their 1999 and 2003 mortgages were paid off but not in the database. They decided they needed the money in 2004 so they refinanced for more than the original purchase price with what looks like a large cash out. This cash-out was probably around $170,500, the renovations do not look like they were that expensive. The kitchen probably incurred some money but since it is limited to counter-tops, floors and the center island it is less than the $50,000 average spent on kitchens. Not sure what was done to the dining room received, unless they knocked down walls since new floors are not mentioned, maybe new chandelier and moldings. But that money was not enough since the received another sizable HELOC. It looks like within 6 months they spent another $58,000 so they rolled up the HELOC and last loan into a new loan. However, they needed that HELOC so within three months they took another $100,000. My guess is that they spent approximately $86,500 or close which is why they are not using a realtor.

Either way these serial refinancers went from a great position to have a large net equity even with small changes. Now they are going to be lucky if they break even. We know they did not spend that $282,000 on a granite counter-tops and other kitchen enhancements. So in the 5 years in which they took seven different loans they averaged spending approximately $56,400 per year using their home equity as an ATM.

Friday, March 28, 2008

Explosive Equity News

Incredibly informative HELOC's and second mortgages from CNBC called Equity Loans as Next Round in Credit Crisis. Here are some of the most interesting parts -

Americans owe a staggering $1.1 trillion on home equity loans — and banks are increasingly worried they may not get some of that money back.

...It is a remarkable turnabout for the many Americans who have come to regard a home as an A.T.M. with three bedrooms and 1.5 baths.

...Lenders also encouraged many aspiring homeowners to take out not one but two mortgages simultaneously — ordinary ones plus “piggyback” loans — to avoid putting any cash down.

The result is a nation that only half-owns its homes. While homeownership climbed to record heights in recent years, home equity — the value of the properties minus the mortgages against them — has fallen below 50 percent for the first time, according to the Federal Reserve.

...When borrowers default on their mortgages, lenders foreclose and sell the homes to recoup their money. But when homes sell for less than the value of their mortgages and home equity loans — a situation known as a short sale — lenders with first liens must be compensated fully before holders of second or third liens get a dime.

With this type of debt out and the huge drops in house values, lenders are losing money left and right. Many of these losses are due to greed and bad business practices. With lenders loaning upto 120% of the houses value and approximately another 10% tacked on in foreclosure costs - house values would have had to increase by a record 30% year-over-year to sustain these numbers without the lenders taking a loss. Increases of 30% every year on end is totally unsustainable. Anyone who could not see that should never be allowed in the banking/finance/mortgage industries - they are frauds, liars, or incredibly gullible.

The numbers in this article are eye-poppers S1.1 trillion dollars in equity being spent - we know that bumped up the economy. People were living off of debt and inflated prices. I think it is time to review this GDP without and with Mortgage Equity Withdrawal from Calculated Risk to see how much this debt really affected the economy -

According to the numbers reported there would have been no growth in 2001 and 2002 and minuscule growth in 2003, 2004 and 2005 if people did not tap into their equity. This huge amount of spending with the realization that at a time with the highest levels of home ownership was taking place. It is ironic that at a time with the highest percentage of home ownership we are also in the highest levels of debt and own the smallest percentage of our houses.

All the numbers in the article, along with calculated risk's excellent graph, illustrates that the Great Housing Bubble was unsustainable. We are already seeing record foreclosure rates and record house value declines. As the consequences permeate throughout the country things will decline even more. As a said earlier this week, just wait until eating take-out is considered the luxury and too expensive.

Thursday, March 27, 2008

Take the Money and Run - Morristown Edition

Today we have another example of people taking all of the equity plus out of their house or HELOC Heaven as I like to call it. This case takes place in Morristown. Let's take a look at the property -

Property Features

  • Single Family Property
  • Status: Active
  • County: Morris
  • 3 total bedroom(s)
  • 1.5 total bath(s)
  • 1 total full bath(s)
  • 1 total half bath(s)
  • 5 total rooms
  • Style: Ranch
  • Master bedroom
  • Living room
  • Kitchen
  • Basement
  • Bathroom(s) on main floor
  • Bedroom(s) on main floor
  • Master bedroom is 13x10
  • Living room is 21x13
  • Kitchen is 11x14
  • Basement is Partially Finished
  • 1 car garage
  • Attached parking
  • Heating features: Radiators - Hot Water,Gas-Natural
  • Interior features: Range/Oven-Gas, Eat-In Kitchen, First Level Rooms: 3 Bedrooms, Bath Main, Kitchen, Living Room, Second Bedroom is: 10x10, Third Bedroom is: 9x9
  • Exterior construction: Aluminum Siding
  • Roofing: Asphalt Shingle
  • Approximate lot is 71X178
  • Approximately 0.29 acre(s)
  • Lot size is less than 1/2 acre
  • Utilities present: Public Sewer,Public Water,Gas In Street

Lets look at the financial history of the property -

  • The home was purchased for $335,000 in June 2004
  • The first mortgage in June 2004 was for $301,500 with an ARM from Coldwell Banker Mortgage
  • In August 2004 a mortgage of $34,962.47 (yes that number is right) Beneficial Mortgage Corp
  • A third mortgage was taken out in March 2005 for $80,000 with Irwin Mortgage Corp
  • In Sept. 2006 Coldwell Banker started the foreclosure process.
  • Currently the property is bank-owned and for sale at $299,900 - approx 10% less than the 2004 purchase price.
It looks like the owners walked away when the foreclosure process started because the tax records show an unpaid sewage bill for the end of 2006.

The owner of the home did pretty well putting down a 10% down payment on the property of $33,500. They either scrimped and saved or received a generous down-payment gift, my guess is the latter. Within 2 months of purchasing the home they took out the second mortgage - they got their down payment back plus some of the closing costs back with this loan. The number looks strange - the first time I have run across with anything in the cents column. At this time they were ahead $1,492.67 - not much, but nice little pocket change for owning a home for two months. With the 2005 mortgage the owners were now ahead $81.492.67 - averaging a payout of $9,054 per month of owning the house. Their equity made an excellent second income, especially for such a modest property.

The losses for the house will be pretty substantial. The second and third mortgages will have a combined total loss of $114,962.47. After the standard 6% realtor's commission Coldwell will lose the least of the three lenders - $19,594. But the total loss of this property will be at least $134,556.47 which turns out to be approximately 40% of the original 2004 purchase price. Remember legal costs for the foreclosure process are not factored in the 40%, they could easily run this property to a total loss of 50% of the original purchase price.

As for the current status of the mortgage companies involved - Irwin Mortgage has shut its doors, Beneficial and Coldwell are still going strong - but with losses like these how long they will survive.

Wednesday, March 26, 2008

Watching Money Disappear in Florida

Another state with more new tightwads. While the focus of this blog is on New Jersey it is very interesting to see what is going on in the rest of the country and beyond. In North New Jersey things are going great as compared to what we hear about California, Nevada, Arizona and Florida. Today's article analysis is of Floridians Forgo Beer, Take $200 Vacations as Home Prices Fall. Due to the huge drop in housing values in the Miami area, Bloomberg features a very interesting and informative article on the changes within one community.

Miami-area homeowner Richard Welch is spending $70 less on groceries a week after his house lost $145,000 in value. Rita Roland cut off 11 inches of hair to save on salon trips, and Victor Parris stopped drinking his favorite brands of dark ale.

The grocery shopping changes are a bit harder now due to the rise in food costs, however this is an area where a little planning and smart shopping - sales, bulk and coupons - could really amount to no real changes to food consumption. It could also be easily achieved by cutting back on store prepared foods which have a large value-added mark-up.

``Absolutely, I feel less wealthy than I did in 2006,'' said Welch, 48, a corporate tax auditor. He said he and his wife, Barbara, are slashing spending by 30 percent, including canceling their cable television.

He is less wealthy if he considered his home equity part of his usable. The 30% spending cuts are significant cut - but even more significant is if the previous lifestyle was only achieved by using Mortgage Equity Withdrawal methods. Cutting cable and other "extras" is a better choice than losing your house.

The Melrose Cove homeowners' association expects to bring in $20,000 less in dues this year as residents struggle to pay bills. The group plans to reduce spending on landscaping, painting and other improvements by $41,000, said Welch, the association's president.

Eight of Melrose Cove's 153 single-family homes are in foreclosure, Welch said. Fifteen percent of the other households are delinquent on quarterly homeowners' dues, he added.

The association is not making these cuts by choice - the foreclosed home are not paying their dues. With the other 15% delinquent they are probably down almost a quarter of their dues. Also any money they banked for long-term expenses is not generating much interest at all - so this group is really taking a hit.

Roland, a single mother, left Los Angeles and moved to Melrose Cove in 2004, lured by the lower costs and slower way of life. She bought a three-bedroom house, her first, for about $350,000 and intended to sell for a higher price after five years, she said. Her house hasn't appreciated since January 2007, when it was worth about $425,000.

``I looked at my house as a bank account that was going to accrue interest on a daily, monthly, annual basis,'' she said. ``I'm looking at not gaining money on this stock that I call a house, and may actually lose money.''

Sometime during the Great Housing Bubble people stopped viewing houses as places to live - instead they became investment vehicles. Some people got lucky and were smart enough to pull out when the bubble was at the peak. However many people were either too greedy and figured they could beat the system or jumped into the game at the peak. All of these people ended up becoming knife-catchers. Irvine Renter puts it nicely by asking if a new home-buyer is interested in paying for the previous owners excessive lifestyle. Also notice the get-rich-quick because house prices only go up mentality that permeated throughout the bubble.

Also if the house was valued at $425,000 in 2007 it most likely lost value - and since it is in the Miami area it is easily a double-digit loss. A conservative 10% loss would put the value at $382,500 with a realtors 6% fee she would only make a estimate $9,550 so at least should would not be taking a hit. But with a 19.3% loss the Miami area took her house would be valued $342,975 or $7,025 less than the purchase price, with a standard 6% realtor fee she is looking at a $322,397 for an estimated total loss of $27603.

To save more than $1,600 a year, Roland said she cut her 14-inch-long hair to three inches so she wouldn't have to pay for Japanese-style thermal straightening. She's given up $400 monthly shopping trips to the mall with her 6-year-old son, and hasn't bought any new clothes or shoes since October.

Roland said she never tapped her home equity with a line of credit. ``I didn't want the headache,'' she said.

She may have never taken out a HELOC but the article forgot to tell us if she is one of many habitual cash-out refi people. This woman seems to be making a drastic lifestyle change - it is not clear if it is because she realizes she will not get rich of her house or for some other reasons like an Option ARM or is currently underwater. I don't even want to know what the $400 shopping trips to the mall involved. Malls are a great place to go when you want to watch your money disappear - especially with a young child who is going to want snacks and toys. Unless you are incredibly frugal and incredibly strong-willed it is very hard to resist the temptations the mall's provide.

Parris stopped buying Guinness and Royal Extra beers for himself or a round for friends, which used to cost $50 to $60 every Friday night. He's also giving up weekly dinners at the Crab House and Bahama Breeze to save more of his $69,000 salary, Parris said.
This is an example of throwing away approximately 10% of your net income. Hanging out with friends is great - and going to the bar with your buddies is great. But blowing over $200/month is no so great. And eating out at least twice per week can easily cost $50-100 ($200-$400 a month and up) depending on the prices and service. I predict the restaurants, nail salons and landscaping will be some of the hardest hit service business as the bubble deflates. These businesses are not directly tied to housing prices like Real Estate and Construction, but these businesses grew astronomically during the bubble when people were throwing away money anywhere they could.

Sal's Italian Ristorante is getting more pizza orders for delivery and pickup and fewer customers dining in, said co-owner Clifford Marzouka.

Just wait until pick-ups and deliveries are considered too expensive.

Annette Aquino, a 42-year-old music-industry production manager, put her three-bedroom home up for sale after a divorce in October 2007. She's dropped the price from $400,000 to $370,000, and is dismayed to be getting offers between $250,000 and $300,000.

There are not enough numbers given to know if this person will lose money by taking one of the lowball offers. But if she is over her head due to her newly single status she may have to take any offer she has - and eventually make a deal with the bank for a short sale if she has to. I read and hear about so many people not wanting to take a large loss but end up throwing away more money as compared to taking a big loss early on, if the market is falling she may think $300,000 was a great offer that she may never see again.

In 2006, Aquino and her then-husband spent $2,500 for a vacation to Puerto Rico. Last month, she bought two tickets to New York City on Spirit Airlines for $77. She walked through Central Park with her daughter, got drinks at Starbucks and looked at snow for the first time. Total cost of the five-day trip that included a stay at a friend's place: $200.

Only $2,500 for vacations - our New Jersey couple featured on Sunday spent a mere $7,000 every year. Actually her $200 vacation in New York sounds incredibly cheap. Spending less than $50 for all other expenses than plane fare sounds almost impossible - the person they stayed with must have picked up most of the tab for food and travel to and from the airport.

If all the people in the article were living within their means and had an emergency nest egg this article would make little sense. I have a feeling that left out is that most have ARMs or are underwater and very close to trouble. If not why would the article end with the following -
``I'm not in the same situation as those people in foreclosure,'' Aquino said, knocking on her wooden kitchen table. ``But the way it's going, I could be.''

Tuesday, March 25, 2008

Home Values Decline

The New York Times has an article today called Home Prices and Consumer Sentiment Slide. It is basically a synopsis of all of the various economic indicators released the past two days. The first thing the article discusses is that home prices have fallen on the average of 10.7% nationally year-over-year this past January. Consumer confidence has also fallen from 76.4 in February down to a dismal 64.5. Between the lower value of houses mean the decline of money able to be taken out in one's HELOC - since it is an 'equity line of credit' less equity means less spending. As these rates lower we will be hearing about more and more lines of equity getting shut down. See yesterday's story Bye Bye HELOC people are getting notices about their lines getting shut down everyday.

The interesting part of this article is the repeating of the National Association of Realtors (NAR) spin on the existing home sales levels for February. The slight up-tick of 2.9% comparing February's numbers to January's, portraying that the market has bottomed. There was a slight up-tick, these numbers are traditionally reported as year-over-year not month-to-month. The year-over-year numbers were down by 23.8%. Here is part of the post from Seeking Alpha that explains the problem with this type of spin much better than I could -
"Changes from January to February are measuring seasonal differences, not actual improvements in house sales." Can you imagine what it would be like if we reported retail sales from December to January this way? Headlines would misleadingly state: "Retail sales plummet 65%!" That is why with highly seasonal data series, the preferred methodology is to report year-over-year data -- not month-to-month variations.
As Seeking Alpha notes this spin could have negative affects if sellers are convinced the bottom has turned and refuse to drop prices, which in turn would lower the number of sales. This could easily have negative consequences that out-way a the positive. Especially when the positive is just an illusion.

Monday, March 24, 2008


Interesting article from MSNBC about Home equity loans drying up for some. The main story in the article focuses on a woman from Cali who had a $100,000 HELOC with Countrywide. She was up on her bills, has a good credit score and still has significant equity in the home, but the line of credit was shut down anyways. With the numbers given in the article even with the house depreciating she still has approx. 45% equity in her home so of course she is dismayed and confused as to why her line was stopped. The worst part of the story is she paid over $2000 in fees about 2 years ago to open the line and never used more than $14,000. Countrywide said she could hire her own appraiser and fight it. Of course she is in RE and only receives commission, she was planning to use her HELOC as a cushion for slow months.

Too bad she does not read Housing Panic then should would have expected this. The warning are there but HP says it outright -


Let's go back to the MSNBC article. First why are HELOCs being used, most people are not using them for emergencies, they are using them to subsidize a lifestyle that is not affordable to them -

As property values soared across the country in recent years, such home equity lines of credit helped consumers finance everything from home remodels to vacations and nights on the town. But as home values have dropped, consumers have seen their equity shrink or even disappear, which in some cases means the lender no longer has any security for the home equity loan.
The banks were giving away money at low rates so people could just throw it away. And the way the banks/lenders did it makes absolutely no business sense -

In recent years, Hagar says lenders would loan up to 120 percent of a home’s value (up to 100 percent for a primary mortgage plus 20 percent for a home equity line). But now lenders have returned to their prior conservative metrics. This means they’ve capped lending for 90 percent of the home’s value, including the primary mortgage and home equity line. And they're doing it at a time when many markets’ home values are declining.
So banks were loaning out up to 120% of the value on a house. Banks were taking huge risks, giving 20% over the value. On a million dollar home this is $200,000 not a bad amount of extra cash in ones pocket, especially when one took 100% financing and included the closing costs in their mortgage. Remember most banks figured foreclosures would be low since people wanted to keep their homes - but these patterns came from when people actually had to put money down to get a house, not when people were given basically free money for buying a house. And for all those 120% financed people who decide to walk away - and there will be many - it really is free money. Also, if one figures in the attorney's fees and the realtors commission when a loan goes bad it probably is at least another 10% of the homes value in expenses the banks/lenders have to eat. So banks could lose an extra 30% about of a houses peak price. In some areas that have already had double digit declines banks/lenders are losing up to 50% of the peak purchase price. How long can one stay in business doing that? Well I guess if the Fed (really taxpayers) are subsidizing this behavior they can stay in business a long, long time.

Madden’s arguments aside, lenders say the suspensions are good for the consumer.

“We don’t want the customer to owe more on the house than it’s worth,” says Thomas Kelly, a spokesman for Chase Home Lending.

Actually, this is good for everyone and the way it should be.

Sunday, March 23, 2008

Jersey Tightwads? Not by choice, of course

Interesting article from todays Star Ledger with the long title of As indicators point to recession jittery Jerseyans look for ways to curtail their spending. For many, it means tough choices. This article is chock full of examples of middle class people living like they are rich. Eating out $4 coffees, two-three times per week, cleaning services, yard service, $7000 vacations, and high end hair salons. This is the outward lifestyle parallel to pergraniteel inside the homes. More cases of people using their equity to provide a second income in order to live a lifestyle they really can not afford. The tough choices in the following stories come from people who appear to not know how to live within their means.

The grande mocha, as it turns out, says a lot about the economy.

A few months ago, even before consumer confidence officially began slipping, Lori Mozenter put an end to her regular visits to the local Starbucks, where she would plunk down nearly $4 for a cup of the rich, chocolatey coffee drink.

"I would drag my kids to Barnes & Noble just so I could go to Starbucks," said Mozenter, a nurse who lives in West Windsor with her husband and kids.

It is amazing how much people throw their money away without even thinking. The $4 is jut for her drink - how much does she spend buying her kids a treat or the $1 cookies they sell. Starbucks is a great place to burn through your money. I stopped frequenting Starbucks years ago - when I realized that for the same price of a day's coffee I could buy a weeks worth and high quality coffee too. Now the local supermarkets sell starbucks coffee beans at the supermarket why bother shelling out that much more. Once in a great while it be nice as a treat just like eating out - for a financial prudent person it is considered a splurge not a routine.
... These are signs, too: A retired Monroe Township couple canceled their annual summer vacation, which has amounted to as much as $7,000 in past years. Middle-class families are reconsidering whether they can afford a $650 swim club membership for the kids this summer.
A retired couple throwing away $7000 on a vacation. That is fine if you are rich, but how many people are using their equity when you are using your equity it does not make any sense. As for the swim club, people really need to figure out how much one uses the facilities. It is probably a good deal for some and others are just throwing their money away. Compared to upkeeping your own pool, $650 is very reasonable. However, if you only go once in a while on weekends it is not worth the cost.
...Lisa Evans, a single mom from East Windsor who works as an engineer, said last year she ate out two, and often three, nights a week. Now, she limits herself to one night.

And when she does go to a restaurant, it's usually for takeout so she doesn't have to leave a tip.

"You've got to do what you've got to do," Evans said.

A few months ago, Vickie Ciotta of Bridgewater and her husband decided they had to budget a specific amount to keep their dining expenses limited. "We still do it. We do it less fancy and with more thought," Ciotta said. "You see your money going on gas and you think, we have to economize."

Between tips and the huge mark-up on drinks going out to eat is expensive. As I said before when growing eating out was considered a special treat, now it is a weekly event. If people compared their weekly grocery store expenses against what they spend to eat out they will realize they are throwing away a lot of money. When I first started working it seemed nice in the 'I deserve it' mentality. People also do not always realize the efforts in going out - once kids come in the picture it is very evident. The whole relaxing issue is out the window.

Just wait until articles start mentioning Whole Foods - especially the prepared foods. When I added up what my family spent of prepared food I found we could have gone to a restaurant instead. Naturally when we have to pick up one of their specialty items we only get one or two things from the prepared foods. Due to Whole Foods high costs and strong temptations I try to reduce my trips and buy only what I came for.

...The mantra among many consumers with trepidations about their jobs, their investments and what troubles may still be coming, seems to be that even making little cuts will help.

Bridgewater resident Regina Tegeler is shopping around for a new internet provider in an effort to reduce her monthly expenses, and she has decided that she spends too much at the hair salon.

"I'm not getting my hair styled and colored as much," said Tegeler, a strawberry blonde sporting a short cut. "I'm doing a little bit more myself."

At the John Roberts salon in Metuchen, stylist Richard Sauer said his business is down 20 percent compared with last year. After the winter holidays, business normally falls off, he said, and then it starts coming back in February. Only this year, it never rebounded.

"I just feel that people are stretching it out. If they normally come for a coloring every four to six weeks, they're waiting eight to 10 weeks to come in," he said. "The cheaper salons are probably doing better."

Frequent trips to the salon is quite expensive - and Northern NJ has few afford ones - their seems to either be the cheap SuperCuts or at minimum $50 a cut salons. At least she realizes she could buy a box and color her hair for under $10 herself versus the $100 a salon charges. I think we will begin to see nail salons close soon. This is another thing that also grew during the boom. Growing up people only had manicures and pedicures for very special occasions and many just did it themselves, now going to the nail salon has become a bi-weekly event with the occasional "nail" emergencies.

..."When we decided to do the renovation, we started tightening our belts more," Murdock said. The lawn service went. So did the cleaning woman, easily trimming their monthly spending by $1,000.

"Now," she said, "it's purely a matter of watching our expenses."

Here are two more things that were only used by the wealthy that are now common place. Average people having landscaping service and maid service. As for yard service what happen to neighborhood kids coming by to cut the grass. Now we have expensive professionals come by small yards with their riding mowers and people paying $200 per month to cut a 50X100 lot. I understand the need by the elderly or those with physical limitations, but when the same healthy person is paying $100 and month to go to a gym and paying someone a $200 to do a little yard work they are just throwing their money away. Throwing away money on house cleaning is also incredibly excessive. I can understand using a service prior to a fancy dinner party or very special occasions, but many people have someone come by just to clean their toilet and vacuum their carpets every week.

Another area where I expect to see a drastic change is the shopping habits of us middle class New Jerseyans such as the suddenly ubiquitous Coach bags and regular trips to Nordstram and Neiman Marcus.

We will look back on all of the excess one day and wonder what we were thinking.

Saturday, March 22, 2008

More Mortgage Scams

There is an interesting article from the USA Today about seven firms in Cali closing due to mortgage fraud. Some of the fraud was so unbelievable - and the victims appear to have no recourse. People either had the mortgage papers forged or had so many fees they really very little money from a sizable cash-out refi. Here is the outright fraud story -

Bremner found pieces of documents that had been cut to remove signatures and notary seals. Loan applications, escrow agreements and other documents had signatures that had been taped on, he said.

"That validated the statements that the victims had been making over and over again: That they did not recall signing these documents and they did not agree to the terms of the loans they were given," says Bremner, a senior investigator in the real estate fraud unit of the San Bernardino County district attorney's office.

Wow, that is pretty sloppy and brazen - and it went on for years. Here is the story about the astronomical fees paid -

For Tracylyn Sharrit, 40, the regulations would be too late. After meeting with Eric Pony, she said she found her signature forged on loan documents and the monthly payments on her three-bedroom, 1,100-square-foot home in San Bernardino jumped from $1,070 to $1,868.

The money promised to her in an equity cash-out has been whittled away on fees, and her loan amount ballooned from $167,000 to more than $260,000.

My guess with this situation is she met the thief made some negotiations and he did something completely else. I assume there were 2 sets of documents, the set she signed that had a lower fee with an acceptable rate schedule and a second set that has exorbitant fees with much higher rates. She signed one, but she used another set.

Among the greed, the careless and no regulations there was no incentive for anyone to follow a decent set of procedures. With the frenzy that was going on and people able to at least break even during the Great Housing Bubble. Even on bad deals the mark was not left holding the bag.

This is also a very sloppy group. I am sure many others were done on scanned documents that will be significantly harder to prove and fight. Now lets find out a little about the

Late Tuesday, the alleged ringleader in the scam, 25-year-old Eric Pony, and his sister, Paulette Pony, 23, turned themselves in to police to face charges including conspiracy, grand theft, forgery and elder abuse. Five other suspects were also arrested.

The crackdown began with Eric Pony's company, Lifetime Financial, and spread to others after Pony lost his real estate license last September and transferred his operations to other companies with active mortgage broker licenses, authorities said.

Paulette Pony had her commission as a notary revoked in December, after investigators uncovered a misdemeanor forgery conviction in 2003, more than a year before she became a legal notary.

The pair, working with their mother, Wilma Pony, channeled most of their mortgage applications through New Century Mortgage, which has since folded. Wilma Pony has not been charged criminally, but is a defendant in the lawsuit filed Monday by the attorney general.

Bremner said loan documents often ran a cumbersome 300 pages. In many cases, problems were missed amid the rush to earn commissions for quickly approving deals.

"Based on the volume of loans that New Century was doing at the time, it was either a combination of just missing these items or just looking the other way," he said.

..."Those [set of proposed] bills together represent a fairly comprehensive package of reforms," Leonard said. "They would fix some of the distorted incentives around kickbacks to (mortgage) brokers ... and strengthen the system of accountability for everyone in the mortgage origination process."

A set of corrupt siblings a more company that was processing anything that came their way and no regulations to adhere to these problems were bound to happen. With incentives to push more deals with flexible/pliable fees and permitting kick-backs what did anyone expect. Between scams and steering fraud conducted by mortgage brokers is going to be a very unfortunate but common story.

Thursday, March 20, 2008

Just because they make more does not make them smarter

Shocking news from MSNBC - the rich (well those that make over $100,000) are also in the mortgage mess. I think MSNBC needs to rethink their idea of what is rich in the 21st century. On either coast they are middle class, not even upper middle class here in NJ. The story is very long so I will cut some key parts and add my 2 cents. So lets look at the story -

...These are not lower- and middle-income borrowers, but more affluent consumers with annual incomes of $100,000 or more who are increasingly being ensnared in the home mortgage crisis.

People in all income categories “are facing the shock of new payments that can be twice as much as previous ones,” said Susan M. Wachter, professor of business and a real estate specialist at the Wharton School of the University of Pennsylvania.

...Today’s ARMs were “designed to fail, so you have to refinance,” Ms. Wachter said. “It shouldn’t be surprising that values go up and down in this kind of situation. And when you most need to refinance you can’t — the crux of the crunch.”

Remember the brokers make money everytime you refinance.

Jeffrey Conner, a San Francisco real estate lawyer, says he regularly hears from his clients “that lenders assured them they could always refinance.”

Refinancing requires some equity. Even if homeowners put a substantial amount of money own, many have no equity because their homes are worth less than they owe.

Refer to the story below where people always think they can refinance over and over again...

“It’s a game of chicken,” Mr. Baker said. “And you can’t play it effectively unless you know what your risks are, including whether lenders can come after your other assets if you walk away.”

Borrowers should determine if they live in a state with nonrecourse laws. In general, lenders in those states cannot pursue borrowers for money owed. But these laws are complex and change often, so consulting with a lawyer may be necessary, Mr. Geller said.

Finally some good advice.

In Oceanside, Calif., north of San Diego, people paid $650,000 to $750,000 in 2003 and 2004 for row houses on Cleveland Street, said Chris McBrearty, certified mortgage planning specialist, in Carlsbad, Calif., who wrote many mortgages there. When prices for the houses rose as high as $1.5 million in 2005, many of those people refinanced with ARMs to take out cash, he said.
Heloc Heaven in San Diego!

“But if your payments are still going to be more than half your gross income, the lenders won’t do it because they figure you’re going to default later,” Mr. Geller said. “It’s not rational to dedicate your life to making the next $5,000 monthly payment on an asset declining in value.”

Who could afford half of their income to go to housing. That is crazy - but read on...

The lawyer, now divorced, calculated that the mortgage payments, now $6,200 a month, plus taxes consume 96 percent of his net income, which includes occasional rent from vacationers who use the house. He lives with relatives and sleeps on the floor.

Does this man eat?

That borrower, a real estate consultant in California who did not want to be identified because he feared angering his lender, said he used his understanding of state law to negotiate the refinancing. He bought a condominium two years ago for $450,000 and invested another $50,000 for improvements. His ARM had a 5.5 percent initial rate that was soon resetting to 7.25 percent. But his condo is now worth only about $350,000.

His lender agreed to give him a 6 percent fixed-rate mortgage and, he said, to knock $135,000 off the principal.

This man should go into business and sell tips. He obviously has much better techniques than No Hope, I mean Hope Now. Probably has a much better future in mortgage re-negotiations than in real estate.

Are they really subprime?

Just because brokers lie does not mean people are subprime. People with excellent credit were lied to and taken advantage of by mortgage brokers during the Great Housing Bubble. I know someone with good credit that is just like one of the people in this article Brokers who lie and more subprime nightmares.

Here is the first story in the article

She thought the $1,478 monthly payment quoted by her mortgage broker included taxes and insurance. In fact, Cruz says she asked the broker repeatedly if those costs were included and was reassured they were.

"We just took his word for it, and unfortunately that's not what it was," Cruz said.

Soon, she began receiving tax bills from her town of East Windsor, Connecticut. She couldn't afford to pay them.

And the second story -

Working out a new loan has also been a struggle for Odelle Boykin, a Connecticut home health care worker who housing advocates claim is a victim of a predatory lending.

Boykin says her mortgage broker promised her when she refinanced two years ago at a teaser rate she could afford that she could refinance again when the payments went up. She says when the loan was about to reset in October, with payments shooting up from $1,431 to $1,702 a month, she contacted the servicer, Fremont Investment & Loan, but the company told her it no longer handled refinancing. The payment is set to go up again next month.

We are going to hear story two over and over again. I tried warning people during the bubble - what if your broker is no longer in business in a few years or you run into problems or interest rates shoot higher before you can refinance etc. etc. etc. But the lure of cheap money and low payments was too strong for too many people. Also the idea that the smart people had ARMs and we timid conservative people were the ones going with 30 year fixeds.

Also no wonder people call it Hope No or No Hope -

Faith Schwartz, Hope Now's Executive Director, says the number of loan modifications is increasing. But she admits the vast majority are not getting their payments reduced. "If it's appropriate, they are," she said. "The key here is that it's between the servicer and the borrower. Every circumstance is different."
So other than letting the government know the particulars of your finances what good is it doing? I wonder how much worse off the Hope Now people will be as compared to the You Walk Away people. I think much, much worse.

Wednesday, March 19, 2008

A Dover Nightmare

The first thing that the mortgage company should do is press charges against who ever appraised this property and the realtors who were involved in the 2006. Even at the peak the numbers do not make sense. The house is small with very little property and was over priced even at the peak. The last buyer and the bank to a huge loss on this one. Let's look at the numbers below...

  • The Property was purchased in Sept. 2006 for $395,000
  • The first mortgage in Sept. 2006 was for $337500 an Adjustable Rate Balloon with Mortgage Lenders Network
  • The property is still listed on craigslist (posted March 13) as above for $195,000
  • On March 6, 2008 the property sold for $165,000

The 2006 buyer put down (lost) a $57,500 which is a substantial deposit - approx. 14.5% of the total house price. The 2006 purchaser also lost all of the closing costs, which can be pretty substantial. The lender - or whoever bought the note - lost approx. $182,400 between the mortgage loss and the realtors fees. That does not include all the other foreclosure paperwork expenses - a lis pendens was filed in May 2007. The total loss on the property was an enormous $239,900 not including all the closing costs and lawyer fees. That is $74,900 more than the house is currently valued at!

Of course the lender in this story, Mortgage Lenders Network filed bankruptcy Feb. 2007. A business can not take hits like this and remain in business.

The 2006 buyer either was scammed himself like the $15,000 strawberry picker who purchased the $750,000 house in CA or was part of the scam himself!

Are consumers really benefiting?

Reading the article in the WSJ it makes it sound like people are really benefiting from the fed rate cuts. The article called Why Only Some See Benefits from Fed's Cuts notes that rates are dropping for home equity lines but at the same time people are losing access to those same lines. Here are some interesting parts -

Rates on home-equity lines of credit have dropped to 6.27% from 8.25% since September of last year, according to Partly as a result, the amount that homeowners borrowed against their lines of credit rose slightly in the fourth quarter of 2007 -- the first such rise since early 2005, according to data from Equifax Inc. and Moody's Rates on home-equity lines of credit should fall further after the Fed's latest cuts, but that might have less effect than would ordinarily be expected, as some banks make these loans harder to get.

In recent months, Countrywide Financial Corp., Washington Mutual Inc., and others have reduced or frozen the amount of credit available to certain borrowers to protect themselves against falling home values and rising delinquencies. Indeed, banks are expected to post a jump in losses from home-equity loans amid a rise in delinquencies. About 4.65% of fixed-rate home-equity loans and 2.01% of home-equity lines were delinquent in the fourth quarter of 2007, up from 3.11% and 1.07%, respectively, a year earlier, according to Equifax and

Indeed, mortgage brokers say their customers are having a harder time borrowing against the equity in their homes. "We're seeing a lot of lenders freezing whatever is outstanding," says Mitch Ohlbaum, a mortgage broker with Legend Mortgage Corp. in Los Angeles. He says some clients, worried about getting cut off from existing lines of credit, have started drawing down their lines in a pre-emptive move.

"They're putting the money into savings accounts and CDs because they're afraid they're going to lose access to the funds," he says. "It's their safety net."

People are afraid to lose the second income that the HELOC's provide. Even taking a loss on the money by sticking into account that will not make them any money. But the equity has become a type of security to many people, it will be hard to leave behind. And it also deter when they have to transition from a spend thrift to a tightwad.

Tuesday, March 18, 2008

Update to the Tightwad Post

I did not catch this on the first read - but you know HELOC is the blame when a statistic like this pops up in the budgeting article -

Merrill Lynch's Rosenberg said that in the fourth quarter of 2007, Americans' household debt almost equaled 140 percent of their after-tax income and that they were spending 14.3 percent of their after-tax income paying down that debt.

"Simply put, that means Americans are spending more on servicing their debt than they do on food," Rosenberg said. "This is not just affecting stressed-out or soon-to-be-foreclosed home owners. This hurts everybody."
It would be very hard to have the average spending done on credit cards alone - they are very expensive and it is much easier and cheaper to HELOC it. To many people it seemed like easy money, just refi and you suddenly have more money and none of those credit cards bills. People are spending more on debt fees than on food. How long can that last, especially with the good times ending? Like I said before, with the HELOC and refi house money drying up, it is like millions of Americans have lost a high paying second income. Remember, people were using their HELOCs to pay their mortgages!?! Crazy as it sounds it become rationalized during the bubble.

Tightwads Everywhere

This nation is going to change from spendthrifts to tightwads as people lose those second incomes (HELOCs). We are seeing article after article of people having to change their ways. Today The Guardian has an article about the changes that people are having to make in order to save their homes - but is going out to eat and reducing your shopping really that much of a sacrifice?

After years of living large, U.S. households are finally learning what financial experts thought they never would: to live within their means.

Economists have long warned that the U.S. consumer was on an unsustainable spending frenzy and that savings rates were dangerously low. Now, families are being forced into financial responsibility by the housing downturn and a weakening economy.

... "Frugality is in, extravagance is out," he added.

... "We had to cut eating out at restaurants and we had to stop shopping," Parks said. "That was the hardest part for my teenage daughters because they love to shop. But I sat them down and we agreed we'd do anything to keep our home."

... "We get home owners coming to us in trouble, but then we look and see they have only make $50,000 a year and yet they own an Escalade," he said, referring to a Cadillac sport utility vehicle that sells for about $55,000. "And you have to ask them 'What on earth were you thinking?'"

Giving up shopping for non-essentials, eating out, high end cars and expensive vacations are not really hardships for anyone. Has life has in America become so cushy that cooking for yourself is something to be sad about? Sadly I think it has. Remember the best thing we could do after 9/11 was to shop. So I guess eating out was not about luxury it was about saving the country and being patriotic.

When the Tightwad Gazette is on the best sellers list we will know the nation has turned a corner. Personally, if I worked at one of these debt agencies the first thing I would tell people was to read the book. Take it out of the library if you can not afford to buy it. You will learn so much about how you are throwing away your money even on the little things that require no real changes. Even little things can add up. And until you start recycling your plastic bags, canceling cable and the internet, and consider your big no-cooking treat left-over night you are not really being frugal. There is a giant difference between living in your means and becoming frugal. None of the people in the article are even close. If giving up eating out is now considered frugal we have a long, long, LONG way to go...

Monday, March 17, 2008

Stand Up or Walk Away

More walking away stories today. Regardless of the other market turmoils today - people from Main Street are still trying to figure out how to deal with being underwater. The You Walk Away folks are getting so much publicity lately they should cut their advertising to $0.

Here are 2 stories from today's SF Gate article -

"It's throwing good money away after bad" to pay an escalating mortgage on a home that's plunging in value, said Army Sgt. 1st Class Nicklaus Skaggs of Vacaville. He and his wife, Tishara, stopped paying their mortgage in February. They signed up with a new company called You Walk Away to help guide them through the multi-month foreclosure process.

The couple paid $455,000 for their Vacaville home almost three years ago, shortly after Nicklaus Skaggs returned from a year in Iraq. Now the home's value has dropped to $290,000. Their adjustable-rate mortgage, which started at about $3,000 a month, has reset twice, climbing to about $4,000.

They have no regrets about their decision.


A Discovery Bay man who asked not to be identified said he is "upside down" on his house by about $260,000. Instead of bemoaning the situation, he plans to capitalize on it.

"I refinanced a couple of years ago and pulled out $100,000 and put in a fabulous pool," he said. "Now I've got this fabulous pool and fabulous house, but it's not worth anything. Why shouldn't I be building equity over the next four to five years instead of playing catch-up?"

The man said he has not made a mortgage payment for five months.

"I'm playing the bank game," he said. "I'm playing chicken with them. I already got them to agree to put (the unpaid) payments on the tail end of the loan. What I'm really pushing them to do is to (adjust my mortgage) for the current market value and write off the rest. I'd love (to have it) lopped down to a $450,000 basis rather than $710,000."

If the bank won't negotiate, he'll walk away, the man said.

and why would they make these choices-

"In the long run, I think this is the best financial solution," Nicklaus Skaggs said. "I have to do what's right for my family. I don't care if someone judges me. I certainly wouldn't put my family in a position to lose $150,000 if I can help it."

Any way you look at it - when people realize they do not have to take these incredible losses they banks will suffer - technically. The banks will pass it on to all of us - so basically we are all underwater now, some just more than others.

Sunday, March 16, 2008

Depressional Parallel Number 4 - Government Inaction

Via Chuck Schumer and Fox News we get parallel number 4 to our unfortunate series.

Chuck Shumer today -

The President is indeed behaving like Herbert Hoover. We’re in the most serious economic problem we’ve been in in a very long time — much worse than 2001. The President’s hands-off attitude is reminiscent of Herbert Hoover in 1929 and 1930.

Herbet Hoover December 2, 1930 -

Economic depression cannot be cured by legislative action or executive pronouncement. Economic wounds must be healed by the action of the cells of the economic body - the producers and consumers themselves.

George W. Bush March 14, 2008 -

The temptation of Washington is to say that anything short of a massive government intervention in the housing market amounts to inaction. I strongly disagree with that sentiment. … Government actions often have far-reaching and unintended consequences. If we were to pursue some of the sweeping government solutions that we hear about in Washington, we would make a complicated problem even worse — and end up hurting far more homeowners than we help. ...As we take decisive action, we will keep this in mind: When you are steering a car in a rough patch, one of the worst things you can do is overcorrect. That often results in losing control and can end up with the car in a ditch. Steering through a rough patch requires a steady hand on the wheel and your eyes up on the horizon. And that's exactly what we're going to do.
But not to worry - according to Paulson the government do "'what its takes' to stabilize chaotic markets and minimize the economic damage" at least where wall street is concerned - just not for homeowners.

Cashed Out or Bought Too High?

Interesting article from the New York Times about short sales. A short sale is "defined as selling for less than the mortgage owed, in a deal with the lender to forgive the rest of the debt and head off a foreclosure." There are only two reasons that how this could happen either the property was purchased at the height of the market with little to no money down or the owner took all of the HELOC out of the property. Most of the articles profiled by this blog it turns out the owners took all of the money - see here, here and here. What will today's article bring us?

From the article

IS it possible for a homeowner who owes $725,000 on a mortgage to sell a house for only $560,000 and still walk away happy, or at least relieved?

...The owner had been grappling with the costs of college tuition and a parent’s medical bills, and had refinanced the mortgage loan six times in five years to meet the growing expenses, Ms. Cunningham said.

The owner decided to sell the house, bought in 1999 for $310,000. But the $700,000 that a 46-year-old ranch in good condition might have fetched in a more robust market was not realistic.
Yes, more HELOC Heaven - this time in Upstate NY. He bought the house ten years ago so technically he would start building up some equity just from the original purchase price and paying off a decent chunk of the principal. However, he decided to cash out over $415,000 on the property with most of it taking place within the last 5 years. Wow that is like a second income of over $80,000 per year - Wow. I notice it is always medical and college issues that people site - but remember this post from last month

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 was really used for frivolous expenses and the "rock star" lifestyle.

But don't worry - this is still a happy ending.
“In the end, the seller got out from under,” the lawyer said. “The buyer was happy because he got a bargain, and the bank was pleased to have the situation solved.”

Selling Vs. Renting

The Record has an interesting article today about people who are offering both sales and rentals - and also rent to buy provisions for their properties.

Here are some interesting numbers to look at Gross Rent Multiplier (GRM) to calculate if the houses are overpriced. While it is recommended that all areas be calculated on its own - a general average is 160 - lower than 160 means house is priced low and will sell, over means that the house is priced too high.
When they listed the home a month ago, they priced it for sale at $1.8 million, but also offered it for rent at $7,200 a month.

The GRM is 250 which is very high, recommend price via GRM is $1,152,000

Two newly constructed, six-bedroom, 4 1/2-bath homes on Spring Avenue in Bergenfield. One is priced for sale at $928,888 and can be rented with option to buy for $5,000 a month. The other is priced at $899,999 and can be rented for $4,995.

The GRM for house 1 is 185 sales should be priced at $800,000. House 2 is 180 and should priced at $799,200.

In Saddle River, a four-bedroom, 3 1/2-bath French Colonial, renovated and rebuilt in the last few years, is listed at $1,475,000 for sale and $6,000 for rent.

The GRM is 245 which is also very high. According to general rule the house should be priced at $960,000. These people are probably taking a loss each month they lease - just trying to stop the bleeding a bit.

In Upper Saddle River, a five-bedroom, 3 1/2-bath stone-fronted contemporary with a pool and an elevator is priced at $1,375,000 and can be rented for $6,250 monthly.

The GRM for this house is 220 and price should be $1,000,000.

In Englewood Cliffs, a new eight-bedroom, 7 1/2-bath home with three fireplaces and a full, finished basement is listed at $2,990,000 for sale and $15,000 monthly for rent.

The GRM here is 199 and the price should be $2,400,000.

Allan Dorfman of Classic Realty Group in Fort Lee has been marketing a $3.2 million home in Tenafly for months. The sellers, who are downsizing, have already purchased an apartment. A month ago, they and Dorfman agreed to list their home for rent as well, at $25,000 a month.

Finally this house has a 128 GRM with a projected price of $4,000,000. The only house in the entire article that is priced to sell and rented accordingly.

It is no wonder that lowballs are on the rise with so many people still over pricing their properties.

Friday, March 14, 2008

Yet another parallel

Today marks another day for The Great Depression Parallels. First we looked at the huge increase in borrowing/credit/debt/installment accounts. However one wants to describe it is incurring debt and reducing savings. The second thing we looked at the moratorium on foreclosures. This was done during the Great Depression - is already happening now on a small basis and with proposals to do it nationally.

Todays parallel involves the government bailing out banks. The government through JP Morgan Chase bailed out Bear Sterns today. From Mish's Global -

"The notion that stocks pop because the Feds bail out a major investment bank - the first such action since the Great Depression - is the only reaction that defies credibility more so than the CPI numbers."

The first time since the Great Depression - and surely not the last.

Wednesday, March 12, 2008

More Irvine

Monday the focus was Mortgage Equity Withdrawal (MEW) - today the topic is mortgages as options. Here is a great paragraph from this post -

Speculators utilized 100% financing and Option ARMs with low teaser rates to minimize the acquisition and holding costs of a particular property. The small amount they were paying was the “call premium” they were providing the lender. If prices went up, the speculator got to keep all the gains from appreciation, and if prices went down, the speculator could simply walk away from the mortgage and only lose the cost of the payments made, particularly when this debt was a non-recourse, purchase-money mortgage. Another method speculators and homeowners alike used was the “put” option refinance. Late in the bubble when prices were near their peak, many homeowners refinanced their properties and took out 100% of the equity in their homes. In the process, they were buying a “put” from the lender: if prices went down (which they did,) they already had the sales proceeds as if they had actually sold the property at the peak; if prices went up, they got to keep those profits as well.
This is an excellent summation of what happened - and what lenders allowed to happen. The system was set-up to allow people to walk away without any real consequences. Buy properties, no money down, pay teaser rates, if investment tanks - owner just walks away, if investment prospers you reap all the rewards. What a system!

What - No More HELOCs?

Interesting article from the Wall Street Journal about the Souring of HELOCs.

Here comes another headache for banks suffering from the mortgage downturn: Losses on home-equity loans are soaring, even at some lenders that avoided big blunders on subprime loans.

When times were good, banks raked in billions of dollars in profit from home-equity loans, which allow borrowers to tap the accumulated value in their property with either a loan for a specific amount or a line of credit. As long as home prices were rising, lenders had little to worry about.

But falling home values are leaving banks with little or nothing to collect on many home-equity loans in case of default. Some stretched borrowers are keeping up with their mortgage and credit cards — but not their home-equity loan.

Meanwhile, financial institutions are refusing to provide home-equity loans to homeowners whose residences are already weighed down by big mortgages in states like California and Florida where home values are falling fast.

“This product was meant to help people do construction on their house, [and] do debt consolidation — not to take out every last dollar of equity in their home to finance a different kind of lifestyle,” Mr. Scharf said. J.P. Morgan is “rolling our changes back to represent that kind of product.”

Maybe Mr. Sharf should have made that declaration years ago before things got so out of hand. Also one of the reasons HELOCs interest payments are tax deductible is to fix up your house - not to live an affluent lifestyle, not to drive a Hummer, not to take exotic vacations, to to pay for plasma TV, and on and on and on...

And unlike first liens - HELOCs are harder to recoup.

"While banks can foreclose on a first-lien mortgage, lenders often have little recourse when trying to collect a delinquent home-equity loan, especially if another bank holds the primary mortgage. Banks holding home-equity loans generally can only seize the collateral -- a house -- after the mortgage is paid off.

When another bank holds the mortgage and the mortgage payments are current, the home-equity lender is effectively powerless to collect the debt.

Unfortunately for home-equity lenders, many borrowers understand that pecking order, concluding there are few repercussions if they stop making payments on their home-equity loan.

It is impressive how circumventing financial payments has become a very quickly picked up skill. So many people who could not understand the complexities of teaser rates and negative amortization now know how to live in a house for over a year and not pay their mortgage - and which bills to pay and which ones to not bother with.

Tuesday, March 11, 2008

The future will be bleak

Uh-oh. This article discusses how people are borrowing from their 401Ks to stop the foreclosure process. First people were borrowing against their equity to make mortgage payment - stated yesterday as more of a fantasy money but taking from your 401K is directly taking from your future and the consequences in todays terms are big. Is it really that important to live nice today? I remember growing up in the 80s and hearing about the elderly working poor eating cat and dog food. I don't know if that was urban legend or real but it made even teenagers a little concerned about our futures.

Struggling to save their homes from foreclosure, more Americans are raiding their 401(k) retirement accounts to pay their bills — and getting slammed with taxes and penalties in the process, according to retirement plan administrators.

Rather than borrow money from their 401(k) accounts, which would have to be paid back, a growing number of beleaguered families have been cashing out, plan administrators say.

...The main reason? The need to stave off foreclosure or eviction.

The 401(k) withdrawals are rising mainly because people such as Campbell and her husband want to save their homes. Merrill Lynch found that the primary reason for the rise in hardship withdrawals was to prevent foreclosure or eviction, based on its sampling of applications filed in January.

... For workers, the consequences can be severe. About 85% of employers bar employees from making 401(k) contributions for six months after taking a hardship withdrawal, says Pamela Hess, director of retirement research at Hewitt Associates. (HEW) Worse, employees who pull money out of tax-deferred 401(k) plans before age 591/2 generally must pay a 10% penalty on top of the taxes owed.

A 401(k) loan imposes no such punishment. "But let's face it: If your problem is paying bills, and if you take out a loan, then you just add another bill to pay," says Nevin Adams of, which monitors the 401(k) industry.

As Campbell considers whether to make another withdrawal, she notes, "It's not the kind of thing you want to use your 401(k) for. And if I keep doing this, I'm not going to have any retirement savings."

A few months ago I saw a post on one board that made a prediction that 401Ks and IRA would be altered to allow for mortgage payments to be drawn against the monies without consequences. I think to stave off huge foreclosure rates this would work better and be more publicly palpable than having banks write down equity levels on underwater mortgages. But this will still have dire consequences down the road.

Nevin Adams line about just another bill to pay was also true of the Refi-cash outs and HELOC's. People would run up credit card bills and buy expensive cars and put them on a 30-year payment plan. While the monthly payments seem lower at the time, the debt is still real and in many cases overwhelming.

Monday, March 10, 2008

Fantasy is so much better

It has been noted that equity is a fantasy and debt is real, and MEW is the process of living the fantasy with the addition of very real debt.
This great quote comes to us via Irvine Renter from the Irvine Housing Blog. He is the inspiration for me starting this blog and a recommended everyday read. Irvine's excellent analysis and ability to take pretty complex financial issues and explain them in layman's terms is wonderful. That is one reason for the inspiration and regular referrals. Today's post is no different. It is a great analysis of the MEW or Mortgage Equity Withdrawal.

While in my case he is preaching to the converted - about people using home equity for everyday expenses and paying off credit cards - only to run them up again. This turned into a viscous circle for many. A system was set-up to perpetuate this cycle. Whether the system was an accidental, careless or based on nefarious reasons is a debate for another time. It existed none-the-less and people, some innocent, got caught up in it. It became the center of our economy as the following chart illustrates -Since 2001 - mortgage equity withdrawal has been propping up the U.S. GDP.

Who is to Blame?

Over at TPM Cafe there is a great write-up over by Dean Baker what is going on in the housing bubble and who is to blame. The article is called The Recession: It's the Housing Bubble, Not the War. He writes -

The collapse of the housing bubble is a momentous event. We are seeing $8 trillion in housing wealth vanish before our eyes. This is the reason that Ben Bernanke and the folks at the Fed are running around like chickens with their heads cut off screaming about credit crunches. Falling house prices have led to massive amounts of bad debts, which in turn are forcing Merill Lynch, Citigroup and other major financial institutions to write off hundreds of billions in losses.

The collapse of the bubble has lead to a huge contraction of the housing market with sales down 40 percent from their bubble peaks and housing starts down by more than 50 percent. More importantly, homeowners are being forced to cut back their consumption as they realize that they have much less equity in their homes than they thought, and many no longer have any equity in their home to borrow against. The collapse of the housing market coupled with the downturn in consumption are the factors that are pushing the economy into what is likely to be the worst recession since World War II.

...The villains in this story are the economists who somehow couldn't see an $8 trillion housing bubble, the banks that fueled the bubble with bad and often predatory loans, the regulatory institutions that did nothing to prevent the growth of the bubble and the spread of predatory loans, and most of all, Alan Greenspan and the Fed who blessed the whole thing.

We have to hold these folks responsible for their bubble economics. The best place to start would be to remove them from positions where they are still making economic policy.

A great analysis and synopsis of the cause of the mess. It is nice to see someone laying the blame without focusing on the people who received the liar loans. The people giving the loans called them liar loans and encouraged people to take them.

Sunday, March 9, 2008

New Term - Great American Mortgage Crisis

Just came across a new term - The Great American Mortgage Crisis. I personally prefer the Great Housing Bubble - I guess we can see which one will catch on.

So this is the story I found it in - Many Ideas, But few are helping fix mortgages. It a good read that puts the housing market issues in general terms for even for those people whose eyes glaze over when you say "negative amortization" and act like you are speaking another language. That is probably partly why we are in this mess. So many people do not want to know or understand the details they are getting into - "just let me sign the papers and get my money" is complex enough for them. How many of these people thought they were financial wizards... I have met many.

So here is some good points from the article -

Interest rate cut....But to make the cut, the Fed will pump more money into the economy, which devalues the dollar and boosts inflation. That can drive down the long-term bond market, raising the rate on 30-year mortgages.

“The last two times the Fed dramatically reduced the fed funds rate, (long-term) mortgage rates went in opposite directions. It's been terrible,” said Mark Goldman, mortgage consultant with Windsor Capital Mortgage Corp.

Cutting the principal....Bernanke is asking lenders to rewrite their loans even though most loans are out of their hands. Instead, they have been packaged and resold to investors around the globe.

...Consider the implications. More than 10 percent of homeowners have mortgages that exceed their home's value. Some analysts say that number could top 30 percent this year. Does Bernanke expect lenders to rewrite all those loans? If so, what will happen a year from now if property values decline further?

Cutting government loan limits. Last week, government-sponsored lenders lifted the caps on “conforming” loans to let more people take advantage of their relatively low rates. The upper limits on loans from Fannie Mae, Freddie Mac and the FHA were once $417,000. Now those limits are being boosted nationwide. In San Diego's case, the new cap amounts to $697,500.

But when Fannie Mae and Freddie Mac lifted the cap, they raised their fees and tightened lending restrictions, meaning fewer borrowers will qualify.

Back to the future. So far, the best ideas are proposals to revive two programs created by Franklin Roosevelt in the heart of the Great Depression.

...Rep. Barney Frank, D-Mass., is pushing to help the FHA refinance 1 million troubled homeowners, as long as lenders agree to reduce their principal. Although cuts in principal could be problematic, Frank's bill is only one indication of the renewed interest in the FHA.

In the meantime, Sen. Christopher Dodd, D-Conn., is pushing to re-create the Home Owners' Loan Corp., or HOLC, a New Deal agency that helped defaulted borrowers buy their homes out of foreclosure with low-interest, long-term loans. Dodd proposes putting $20 billion into a similar program that would be embedded within an existing government agency, such as the FHA.

If the past is any indicator, this money would not be wasted. Ninety percent of the HOLC's loans were repaid, making it one of those rare government agencies that turns a profit. The concept has drawn support from both the conservative American Enterprise Institute and the liberal Center for American Progress.

Saturday, March 8, 2008

NJ Heloc Heaven! The First One... Finally

Well, I finally found someone in NJ who was able to be in HELOC heaven - I hope they enjoyed it. The house is located in Parsippany, NJ.

Here is some house info -


The web address for this property is:



You'll need to bring your checkbook for this one! A marvel of sun, light and space fill this amazing townhomes open floor plan. This desireable Hamilton model greets you as you enter into the ceramic tiled foyer. This contemporary style townhome features a decorators touch and boasts many upgrades including new cherry hardwood floors, 2 remodeled granite bathrooms and a granite filled kitchen. Enjoy cooking in the eat-in kitchen featuring cherry cabinets, a stainless steel backsplash, newer appliances and a ceramic tiled floor. You can easily entertain family and friends in the formal dining room or in the living room with a sliding glass door out to the expanded deck. Your new home has 2 well appointed bedrooms, a spacious family room, a loft perfect for an office/den, full basement and one car garage. In close proximity to Powder Mill’s pool, tennis courts, clubhouse, playground, major commuting routes and shopping makes this home available today and gone tomorrow.

This is one of the nicest properties profiled here. A perfect Pergraniteel Bubble House! Here is the financial history of the property -

  • Purchased in Feb. 2005 for $380,000
  • The first mortgage was Feb. 2005 for $304,000 ARM with Weichart Financial
  • Same day HELOC for $57,000 also with Weichart Financial
  • HELOCed again Feb 2006 for $70,000 with USAA
  • Another HELOC in Dec. 2007 - this time for $130,000 with USAA

The owners were able to put 5% down - $19,000 - which is pretty substantial sum of money. Especially during the Great Housing Bubble when people were often putting 0% down. This means they either they saved, they received it as a gift, or made some profit from an earlier sale.

With the standard realtor's fees of 6%, in this case $24,960 they would clear $391,040 if they received the full asking price - while only being $11,040 more than the original purchase price it is still a net gain. However, the owner chose the HELOC heaven path and upped the original $57,000 HELOC into a $70,000 one and then a $130,000 one. The use of the HELOC amounted to taking out $73,000 out of the house in 3 years - that averages to $24,333 per year. That is not too bad when used as a second income for vacations and cars.

Now with the original mortgage of $304,000, the $130,000 HELOC, and the $24,960 in realtors fees they (or the loanholders) will lose just $42,960. That is a pretty hefty loss in just 2 years.

My guess is the owners are living elsewhere and are not in a short sale mode yet - or they would not be advertising the possibility of a rental. This is common in other markets (like Irvine) - but I have not seen that much in Northern New Jersey yet...