Sunday, May 18, 2008

A Touch of HELOC in Morristown

Today's example is of a homeowner who bought early in the Great Housing Bubble. They tried for several years to be good homedebtors. But along the way they tasted the HELOC and liked it so much they went back for more. The were not the serial refinancers they were just dabbling but it became to much and now the bank owns their property. Here is a look at the house -

Sorry there are no inside pictures of this one. Here is a look property info -

BedroomsStyleLotYear BuiltBathroomsGarageSquare FeetPrice
2 Townhouse 0 1943 1
980 $189,000

Here is a look at the financials -

  • The property was purchased in July 2002 for $160,000.
  • The first mortgage was taken July 2002 for $155,200 with First Residential Mortgage Services.
  • The property was refinanced in May 2003 for $154,135 also with First Residential Mortgage Services.
  • In July 2004 a HELOC was taken out for $51,200 with Washington Mutual Bank.
  • In July 2006 the HELOC was increased/modified to $66,200.
  • The Foreclosure process started in Dec. 2007.
  • Currently the bank owned (commonly called REO or Real Estate Owned) property is for sale and priced at $189,000.
When the previous owners purchased the property they put a down payment of 3% which came to $4,800. While 3% is not a substantial down payment during the Great Housing Bubble 0% down payment was acceptable. A year later after paying off just over $1000 on the loan they refinanced. Refinances were pretty common in the early Bubble years due to the lowering of the interest rates. This was just a plain refinance - there was no cash out.

Just two years after investing in the house the owners took a hefty HELOC line. Now they owed more approximately $205,335 for the property. Just taking out a HELOC does not necessarily mean people are going through the money. Even during the Great Housing Bubble there were people who may have taken out a HELOC as an emergency fund. For most people just staying in a house for a few years generated a pretty hefty equity.

If you are taking a HELOC as basically a rainy day fund you would not need to increase the line. But these buyers did just that - raised their HELOC limit by $15,000 just 2 years later. At this point the leans against the property would total $220,335. Within 17 months of increasing the HELOC, the foreclosure process had started - and foreclosure processes usually do not start until 90 days after the late payment. So just over a year after borrowing another $15,000 the mortgage payments were not being made.
If the bank is lucky enough to negotiate the full asking price of the property they will lose $42,675. Not a huge financial sum to write-off but is still significant.

The second income that the house generated for the five years the previous owners had it was approximately $12,000 per year. A $12,000 a year second income may not make one live like a rock star, it is not a bad little extra chunk of change.

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