Saturday, May 17, 2008

Bubble Smarts

During the boom everyone seemed to be making money. People felt they were so financially clever after all they were making money on their investments. Also if the lenders were approving their loans than everything was fine. There appeared no reason to question if a loan made sense - pre-bubble loans were made if one could afford them. Homedebtors assumed if they were given a loan they could afford it. Homedebtors still clung to the illusion that the lenders worked for them and were looking out for their best interest.

Like the woman profiled in today's New York Times article, there was always a plan. This article is titled A Thicket of Easy Loans that Entangled One Mortgage Holder. It is actually a refreshing article by someone who felt they were so smart and had everything figured out and are now realizing that they were wrong. Unfortunately the fall is not worth the new knowledge. Let's take a look at the article

ROBIN SOTIRE thought she had a financial plan all worked out when she moved from Arizona to Connecticut in the summer of 2006 to handle her mother’s estate and care for an elderly aunt. She was going to sell her house in Arizona, fix up her mother’s three-family home in Stamford using home equity loans, and then sell both houses. With the profits, according to her plan, she hoped to pay off a $645,000 mortgage she had meanwhile obtained to buy her dream home in quiet, rural Redding.

But Ms. Sotire’s dream soon deteriorated into a financial nightmare and has turned her into a statistic in the national foreclosure story. The self-employed healer and metaphysical mystic is in at least $1.6 million debt and facing foreclosure on both Connecticut properties. After taking out a combination of first and second mortgages, refinances and home equity loans on all her properties, she plans to file for bankruptcy.

... Ms. Sotire said the cycle began when she assumed responsibility for her mother’s house in Stamford after her mother died in 2003. She paid off her mother’s reverse mortgage debt on the Stamford house with a loan and took out second mortgages to fix up the property. She refinanced several times, including a March 2006 loan for $484,250 and second mortgage of $186,250 at an interest rate of 12.5 percent through Go Mortgages, a company now out of business.

... Though she had more than $500,000 of first- and second-mortgage debt for the Stamford loans, and still owed $149,000 on the Arizona house, she went ahead and bought the Redding colonial. She said she even used some of the money from the mortgages and equity loans for a $70,000 down payment on the Redding home.

... Jack Scherban, a Stamford lawyer who represented Ms. Sotire on the closings of several of her loans, said he cautioned her that she might be in over her head.

“It was piling on. I said, ‘Are you sure you can do this?’ but she definitely had a plan,” he said. “She’s very strong-willed and she was going to go through with it.”

... As she juggled the Stamford and Redding properties, Ms. Sotire fell into a cycle of refinancing to get cash to stay afloat and avoid the steep increases of adjustable rate loans.

... The bills between the properties soon became overwhelming. Her monthly bills on the properties were adding up to more than $12,000 at one point, and the lenders moved to foreclose.

... Ms. Sotire said she never lied on her loan applications, telling the various brokers that she was self-employed and that she had the potential for making $60 an hour when seeing clients.

Even though she knew it was a risk to buy the Redding home before the other properties were sold, she said she needed a quiet house where she could work.

“At times I was robbing Peter to pay Paul and was amazed when I got mortgages, but I really thought I’d be able to pay everything,” she said. “When houses didn’t sell, everything spiraled down. Looking back, I’m smarter and would do things differently.”

In story after story people would look at their net worth and fathomed themselves to be financial whizzes. And many times they justified their financial acuity by the fact that banks lent them money. After all banks and financial just don't lend anyone money - or at least before the Great Housing Bubble they didn't.

Also people seemed to forget that if you borrow your equity you still have to pay interest on it, and eventually pay it back yourself or sell the property to pay back the debt. But during the Great Housing Bubble everyone could pay back every loan - somehow. Everyone who has given a loan could pay it back - somehow. The average person was soon transformed into a great real estate genius - no matter the training or the investment. Until the Great Housing Bubble Illusion became the Great Housing Delusion.

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