Leave my HELOC alone!

Another post about HELOCs getting closed by lenders. Today's article has new advice beyond the standard "how to fight for your HELOC info (summary - new appraisal, new bank, find money elsewhere, forgetaboutit).

One standard in these articles is for people to extract all the equity out before the line gets closed. Do they realize this is borrowed money and depending on their contract they most likely have some monthly payment - either just interest or principal and interest? Do they not realize that HELOCs usually have variable interest rates - so as rates climb so will the payments?

Here is an article from the South Florida Sun-Sentinel via Philadelphia Inquirer called Lenders limit or freeze home equity lines. First a look at some numbers, then to the financial advice -

In the first three months of 2008, losses on home-equity lines of credit nationwide rose to $1.3 billion from $204 million a year earlier, a 537 percent increase, according to the Comptroller of the Currency in Washington. The agency charters and regulates banks.

...
In fact, Americans now have the lowest level of home equity - market value minus mortgage debt - since the end of World War II, the Federal Reserve said earlier this month.

...
George Richardson, 45, of Wilton Manors, Fla., found out last month that lender USAA Federal Savings Bank froze his $35,000 line of credit. He said the lender did not consider his credit score or appraise his house.

...
Richardson and other brokers say people who still have access to a home-equity line of credit should consider drawing on the money now and depositing it into an interest-bearing savings account.

Boca Raton financial planner John Carrig said that was not necessarily wise because borrowers probably would not be able to earn enough in interest to offset the monthly cost of the equity line. In addition, people would have to report the interest on their annual income-tax filing.

This is the first article we have come across that had any kind of caution against draining the equity out of your house. There are a few people who have the time and skill to transfer the funds around to actually make the taking the equity worthwhile. But for most of us, we will simply fall further behind.

It was easy to feel like a financial whiz during the Great Housing Bubble. That was a time of easy credit and careless lending. That time is now gone.

Mountain Lakes was HELOC Heaven

Mountain Lakes was HELOC heaven for the previous owners of today's featured property. As the value of the property rose steadily so did the mortgage equity withdrawal. One of the most unfortunate aspects of the Great Housing Bubble was that one could get rich through debt. The more debt the more you goods one could accumulate and have the illusion of wealth. A new Hummer meant that you had money - not debt.

People did not realizing that home equity loans were based on the asset not on the ability to pay. People with low credit and no money were able to purchase properties. The old belief that banks only lent money to those who could pay it back was long gone - lenders were playing fast and loose with traditional lending standards and we are paying the price. So lets take a look at todays house through the Great Housing Bubble Standards. Here is the house -




Here is the property info -

Property Features
Single Family Property Status: Active County: Morris Year Built: 1912 6 total bedroom(s) 2.5 total bath(s) 2 total full bath(s) 1 total half bath(s) 11 total rooms Style: Colonial Master bedroom Living room Dining room Kitchen Den	Basement Bathroom(s) on main floor Master bedroom is 14x14 Living room is 28x14 Dining room is 14x13,Formal Dining Room Kitchen is 14x13 Den is 23x10 Basement is Full Hardwood floors Fireplace(s) Fireplace features: Living Room, Wood Burning Parking space(s): 4 1 car garage Parking features: Detached Garage	Heating features: Radiators - Steam,Electric Water Heater,Oil Cooling features: Wall A/C Unit(s) Interior features: Range/Oven-Electric, Center Island, Tile Floor, Wood Floor, Basement Level Rooms: Utility Room, First Level Rooms: Bath(s) Other, Den, Kitchen, Living Room, Second Level Rooms: 4 Or More Bedrooms, Bath Main, Third Level Rooms: 2 Bedrooms, Bath(s) Other, Second Bedroom is: 14x13, Third Bedroom is: 14x13, Fourth Bedroom is: 13x10 Exterior features: Deck, Open Porch(es) Exterior construction: Stone, Stucco Roofing: Asphalt Shingle Approximate lot is 100X150 Lot features: Level Lot, Open Lot Approximately 0.34 acre(s)

Here is the financials -

• The property was purchased in December 1998 for $539,000.

• The first mortgage from December 1998 is not available on online database, but the Mortgage was with Fleet National Bank.

• A HELOC was opened in January 2000 for $50,000 with Fleet National Bank.

• Another HELOC was opened in December 2001 this time for $150,000 with Fleet National Bank closed June 2005.

• The first mortgage was refinanced in May 2003 for $592,500 with World Savings Bank with a maximum aggregate balance to be 125% of original note ($740,625).

• A stand alone second mortgage was taken May 2003 for $79,900 with Commerce Bank.

• Another stand alone Second Mortgage was taken the following July of 2004 for $45,348.43 with Household Finance Corp.
  

• The property was refinanced again in March 2005 this time for $750,000 with an Interest Only ARM. The lender was Impac Lending Group for 5 years at 3.875 rate.

• A second stand alone mortgage was taken same day in March 2005 for $240,000 also with Impac Lending Group.
  

• A HELOC was opened the following July 2005 for $245,000 with Wells Fargo Bank.
  

• The foreclosure process started in April 2007 with Countrywide filing for Wells Fargo Loan.

• The Sheriff Sale sold the property back to Countrywide in April 2008.

• The property is currently for sale with realtor for $798,900.

The property was purchased before the Great Housing Bubble. Unfortunately the records are not available to let us know how much was put down. This was before 100% financing became common so chances are very high that there was a down payment. What we do know is that whatever the down payment was that was fully extracted with another $53,500 taken out add the $79,900 for a total extraction (without the HELOCs for $133,400). And note that the HELOCs were still open at this time.

By July 2004 if all of the HELOCs were utilized the full extraction would be $378,748.43 with the total debt being $917,748.43. But this was in the middle of the Great Housing Bubble - prices were rising in some places in the double digits. Lenders were allowing 125% of the equity to be extracted.

It looks like in March 2005 all of the previous mortgages were rolled up into two new ones for a total of $990,000. This was not enough for the owners so four months later with another HELOC the total debt for the house was $1,235,000. The also means the total equity extracted rose to $696,000. That totals an average of $69,600 of equity extracted per year. This house provided the owners a very nice second income.

So that brings us to the present. Since Countrywide foreclosed on the HELOC we know that money was used. Since the property is being sold through a lender, assuming a standard 6% Realtor fees, the property will net $750,966. However the various lenders will lose a whopping $484,034 on the property. This loss is comparable to those found over at our inspiration - Irvine Housing Blog.

Almost half a million lost and almost three-quarters of a million extracted and spent. This property was HELOC heaven during the Great Housing Bubble and has become mortgage hell at the bust.

Subprime got you down? Enjoy your Staycation!

Are you sick of spending so much money on airfare or gas? Sick of the over priced rentals long the shore blocks from the beach? Not enough money to go to Florida AND pay your mortgage? Enjoy a luxurious staycation!

There are two schools of thought going into the staycation - one is by choice and other is by force. If you have the mindset of the staycations being a frugal choice - rather than you do not have the money to travel you can enjoy yourself so much more!

A great video about Staycations (called Holistays) from the Daily Show -



Is is sad or funny that the line "Paris will always be there, but judging from the subprime crisis chances are your home won't" received such a huge laugh from the audience?

Gimme my HELOC! I need Pergraniteel!

We are on the precipice of Depression 2.0 and there are people upset that the can not use their home equity for $9,000 built-in refrigerators and $30-a-square-foot honed-stone tiles.

Apparently there are people who are still spending hundreds of thousands of dollars on home renovations. Yes there are people who have absolutely no clue that HELOC lenders are closed out by lenders. The Wall Street Journal found and profiled these people in Renovators in Limbo.

Hint - if you have to use your equity to pay for these renovations you really do not have the money to afford them. Another hint - there is a good chance your house is not worth what it was appraised at in 2005 or 2006. The peak housing bubble home values were an illusion. It was financial smoke and mirrors. Be happy if you did not drain out the equity on your home.

Here is the background on the frozen HELOCs from the WSJ article -

Borrowing against home equity has been a major source of funds fueling the renovation boom of recent years. But big lenders, including Bank of America, Citibank, Countrywide Financial, Washington Mutual Bank and USAA, collectively have told hundreds of thousands of customers this year that their home-equity lines have been frozen. Lenders typically include language in their agreements that allows them to cap or cut off a credit line if home values decline, or if a borrower fails to make payments on time.

New credit lines also are being limited. A few years ago, people could borrow as much as 100% of their house's value through a credit line and first mortgage; now most are being limited to no more than 65% of the value, according to HSH Associates Financial Publishers in Pompton Plains, N.J. Home-equity borrowing isn't being approved at all in some areas where house prices have fallen sharply, even for people with high credit scores. "It's ugly out there," says Richard Redmond, a mortgage broker in Larkspur, Calif.

The article includes five stories of people using their HELOCs for major renovations when the line were shut down. The first is about a women from Arizona (yes, she still had a HELOC line in Arizona) spending $40,000 on upgrades to her condo - bathrooms, stainless steel appliances, new floors and brick wall interiors. She will finish it in time.

The second story is about a Penn. man adding a 3-car garage to his house and had his line shut down because he forgot to make a $42 payment.

The third story is about an Ill. fellow who could not get a home equity line so he spent $8500 to get a cash-out refi for the $60,000 he needed. They never really discussed what he was using the funds for.

Another story is about a Georgia couple who were expanding the kitchen and family room with a planned $300,000 remodel. When their equity line was closed they downgraded their plans and sold stock to pay for the work.

The most interesting story is the following -

Countrywide froze Bill and Kathryn Keller's $900,000 home-equity credit line at the beginning of this year -- right before contractors were about to start a $450,000 remodeling of their three-bedroom house in Sausalito, Calif. Since they had access to other funds, the couple decided to proceed with the project, which included redoing the master suite and deck. But paying for it put a crimp in their cash flow. Mr. Keller, a portfolio manager, tried to persuade Countrywide to reinstate the line. When that didn't work he applied to refinance his house, but no lender would offer a new mortgage until the remodeling was complete.

"Lenders are looking for any reason not to give you money these days," Mr. Keller says. Months later, when the job was done, he was able to refinance with another lender for $1 million, which was enough to cover the project and pay off the $400,000 he already owed on his Countrywide home-equity line. But he's still annoyed that he had to scramble to get cash he thought would be readily available.

We are in one of the worse financial downturns since the Depression and people are annoyed that they can not do major renovations. The last story is about a portfolio manager taking another $150,000 out of equity after renovations and paying off the original equity-line. One would think a portfolio manager would understand the difference between debt and wealth.

The only real promising part of the article is the closing paragraph -

[The Arizona condo owner] actually wound up a little happier for the economizing. "In the end, I feel better, because we haven't borrowed as much," she says.

But the HELOC is your money! To spend right now! Anyway you want! Oh, you have to borrow it from a lender based on both what your property is worth and what you can afford to pay back. Oh, nevermind...

As long as the Lawyer is cheaper than the Mortgage

Last year it made big news when an Ohio judge stopped foreclosures since lenders could not prove who actually owned the loans. That legal argument has made its way into New Jersey courtrooms. As this article from the Star-Ledger called Lawyers' tactic slows rate of forfeited houses in New Jersey explains. Very informative article, read the whole thing, but here are some snippets -

Judges in at least four New Jersey counties already have halted foreclosures, using a federal court ruling in Ohio as precedent. And with 48,000 foreclosures expected to be filed this year -- twice the number filed in 2006 -- some attorneys believe challenging foreclosures can become a large and potentially lucrative area of practice.

"This is starting to creep up all over the state and all over the country as people start to realize these banks don't really know who owns the (promissory) note," said Peggy Jurow, a senior attorney at Legal Services of New Jersey, which is teaching lawyers how to represent pro bono clients in these cases. "It's scary to think how many people are losing their homes who shouldn't be."

...
"These lawyers are trying to grasp on the smallest legal issue, and they're losing sight of the justice involved," said Ralph Casale, a Denville-based attorney who has represented lenders in foreclosure for more than 30 years. "It comes down to this: Were you given the loan? Have you paid it? If you haven't paid it, doesn't the person who loaned you the money have the right to collect?"

...
"The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance," he wrote. "Finally put to the test, their weak legal arguments compel the court to stop them at the gate."

...
Neither side argues that borrowers don't ultimately owe money to someone. But homeowners fighting their foreclosures appear to have bought themselves time.

The counties where the foreclosures have been stopped so far are Passaic followed by Essex, Monmouth, and Ocean. If people can find lawyers to do this work pro bono they are doing well. However lawyer fees can add up fast and in some cases people have to figure off how they are best off.

Some interesting numbers from the article - 96% of the foreclosures were not challenged by defendants and 75% could have been successfully challenged. That 96% of the population felt if the foreclosure process started they were out of luck. No challenges just giving the house back to the lender. Stories of legal challenges and people living in their homes in the state of legal limbo are increasing.

The other side is that many people felt taken advantage of by the lenders. They already feel the system is rigged to work against them. Maybe as word spreads that one can fight and beat the system large numbers of people will begin challenging these cases.

All ARMed Out

It is always nice when sellers are realistic.

[Pat Sheridan] posted an ad on Craigslist, headlined: "$999,000 Elephant Rock For Sale - House comes with it!"

Own a famous landmark for under one millions - sounds like a great deal. What is it really worth?

He admits the price is a bit unrealistic. The appraiser he recently hired told him his spread was worth $285,000, elephant "trunk" included.

So the property is worth less than a third than the asking price. Why would the owner want to sell it?

He had a fixed rate when he refinanced two years ago to cash in the home's equity to pay off about $25,000 in bills. He said it seemed like a good idea at the time.

"I was foolish when I signed up for an adjustablerate mortgage, like a lot of other fools," he said. "I did it to myself. I can't blame anybody else."

If he refinances now on the $263,000 balance, he said he'd have to pay a prepayment penalty of about $15,000, which he refuses to pay, even for his sacred elephant.

He was single in 2002 when, after renting the place for several years, he paid $208,000 for the fixerupper. He later married his artist wife, Nikki, under the Elephant Rock arch. They have done extensive landscaping and renovating to the one-story frame home. It has exposed wood and timbers, thick wood floors, stained and leaded glass windows, a bank cashier's cage pantry, jetted tub and Elephant Rock paintings by Nikki. The exterior has a turret, decks and patios.

Hopefully owner, featured in he Colorado Springs Gazette, is able to negotiate with the lender and is able to refinance without paying the high prepayment penalty. The prepayment fees often written into the ARMs are what really hurts the homeowners. Are there provisions that the bank still collects the fees if the house is sold? The loan is then prepaid earlier as well. Do the loans basically lock people into their debt? The house can basically become one's own prison - a new twist on the debtor's prison.

At least the owner is trying to sell himself. If he ends up with a realtor he will be paying that $15,000, maybe a bit more maybe a bit less depending on the percent, to a someone other than the bank.

Interesting story about a homeowner that signed for a terrible loan. But remember during the Great Housing Bubble lenders and government figures were pushing the benefits of ARMs. They could save you money. As long as rates stayed low they were wonderful. But ARMs were gambling that the rates would always stay low - or at least long enough to get a good deal.

What are Foreclosure Costs?

Often in posts we discuss the approximate costs that lenders incur during the foreclosure process - the number cited is $50,000. A reader pointed out that sounds a bit high for a few legal fess and filings. So where did the that number come from - the government! The Joint Economic Committee gave the number of the total foreclosure costs of $77,935.

This is how the $77,935 breaks up -

Homeowner: $7,200
Local government: $19,227
Impact on neighbor's home value $1,508
Lender: $50,000

The homeowner costs come mostly from moving, time off work and lost equity. Notice how the lost equity component is factored in to be very small for the homeowners.

The local government incurs costs mostly through lost taxes and fees. Question - does this mean that lenders are not responsible for taxes when they foreclose on properties? That seems a bit illogical.

The impact on the neighborhood is mostly due to the lowering value of the properties due to foreclsoure and the increased taxes to make up for the lost revenue. Another number thrown around some places that the costs on the neighborhood from a foreclosed property is 1.5% of the property values. We can explore that number in another post.

Now, to the important part. What does the lenders loss of $50,000 comprise? The pre-and post-foreclosure expenses that lenders incur include the following:

• Loss on property/loan
• Property maintenance
• Appraisal
• Legal fees
• Lost revenue
• Insurance
• Marketing
• Clean-up

Here is a more detailed explanation courtesy of Sheldon Liber at Blogging Stocks -

The lender is going to have to find a "qualified buyer" in a tough market, and the credit worthiness is going to have to be better than the first time around, with less generous terms. They will have some clean-up costs after the homeowner moves out, which could easily run $5,000 for paint, some carpeting, examination by an inspection service and repair of any minor things they find. Then they have to cover the cost of not being paid any mortgage money. If it takes 90 days to find a buyer, and there is a quick escrow period of 30 days, they have to cover for 4 months. Figure a rate of 5%, and the cost is about $2,150 per month for 4 months, $8,600.

They will have to pay at least a 4% commission, which adds another $16,000 on a $400,000 home. They have insurance costs, legal costs, processing fees, appraisal fees, and they even have to pay a gardener and service people to maintain the property while it is on the books. And there is one fee that most people would never think of but assures that the lender wants to get the property off their books. They have to keep cash reserves in the bank as a percentage of deposits and assets. This means a $400,000 asset on their books is going to reduce the amount of money they can lend, even if they have the money to lend, until they dump the property. All this assumes they sell the house for the $400,000, but they may not, if the house has gone down 10% or $40,000, quite likely in many parts of the country, now they are really taking a bath.

So there you go - the economic losses and hits of a foreclosed property. In some markets where the houses values have depreciated 50% or more the losses to lenders are even more devastating. And in many cases there is no one interested in taking over some properties - at any price.

The Harvard Report

During the Great Housing Bubble things were wonderful. There was easy access to money - even those with bad credit could access it. It was easy to buy a house - the better the credit the easier to buy. No money for a down payment? No problem there was 100% financing. Wanted a bigger house than you could possibly afford? No problem there were pick-a-payment mortgages that let you pay a fraction of a normal mortgage payment. Had an unreliable income? No problem just use a stated income loan - no reason to show you really had money coming in lenders would just take your word for it.

Times were good. Unrealistic? Yes. Unsustainable? Yes. But things everyone was making money and we felt wealthy. Hopefully those feelings and memories can carry us through the on-going slump. Marketwatch has a summary of the Harvard University annual report on housing. Here are some of the findings -

The housing slump, already shaping up to be the worst in a generation, still hasn't run its full course, according to Harvard University's annual report on housing, released on Monday.

...

Other key points in the report:

• Last year marked an acceleration of home-sale declines, propelled by falling home prices and the credit crunch. The pain in the housing market spread to the rest of the economy by the beginning of this year, as the drop in home building, turmoil in the credit and stock markets and the effect of falling home prices on borrowing and consumer spending contributed to the slowdown.

• Real home equity (adjusted for inflation) fell 6.5% to $9.6 trillion in 2007. And home-price declines as well as a slowdown in home-equity withdrawals conspired to trim one-half of a percentage point from real consumer spending and more than one-third of a percentage point from total economic growth.

• During 2003 to 2005, housing prices surged so far ahead of incomes that by 2006, the number of households (both renters and owners) paying more than half their income on housing rose to 17.7 million, or 15.8% of all households. Today, lenders are requiring larger down payments and higher credit scores, squeezing many would-be buyers out of owning a home -- even though prices have fallen.

• More proof of the changing lending landscape: Subprime loans fell to 3.1% of originations in the fourth quarter of 2007, from 20% in 2005 and 2006. Interest-only and payment-option loans fell to 10.7% of originations in 2007, from 19.3% in 2006.

Some unsettling findings in the report is while prices are being lowered the pool of potential pools is shrinking drastically. Another group removed from the housing buying market are former owners who are now in or have just gone through foreclosure. The damage to this group's credit scores will prevent them from buying homes for years.

Another unsettling part is that more than 10% of new loans are option arms. We know that these are unsustainable. They are really only suitable for a small portion of borrowers - much less than 10%. Numbers are 70-80% of option arm borrowers can only afford the minimal payment. So if these current numbers are still applicable we know that 7-8% of all current home purchasers can not really afford the property. That just means more hurt down the road. Borrowers are still adding more debt on top of falling equity - something shown to be a dangerous combination.

From HELOC To Foreclosure in Pequannock *See Update Below

Sorry for the late post today - life got in the way...

Today's story is of about a nice little starter house that failed. There was some serial equity extraction - but nothing out of hand. Maybe it the extraction pushed the owners over the brink. Maybe it was something more unfortunate like a job loss or illness or just some bad financial management practices. Whatever happened prior, today the lenders own the house and the former owners have seen their credit ratings have drop. Well, enough of the speculation, let's take a look at the property -



Here is the property info -

Property Features		Find Out More
Single Family Property Status: Active County: Morris 3 total bedroom(s) 2 total bath(s) 2 total full bath(s)	7 total rooms Style: Ranch 1 car garage Parking features: Built-In Garage Heating features: 1 Unit,Gas-Natural Interior features: Eat-In Kitchen	Exterior construction: Vinyl Siding,Crawl Space Foundation Approximate lot is 50X175 Approximately 0.2 acre(s) Lot size is less than 1/2 acre Utilities present: Septic,Public Water,All Utilities Underground High School: Highview

Here are the financials -

• The property was purchased in Jan. 2002 for $209,000
• The original mortgage in Jan. 2002 was for $188,100 with Washington Mutual.
  
• The property was refinanced with cash-out in July 2003 for a new mortgage of $215,000 with First Magnus Financial Corp.
  
• It was refinanced again in October 2004 for $217,000 with Commerce Bank.
  
• A HELOC was opened in November 2004 for $43,000 with Citibank.
  
• The foreclosure process started Jan 2007.
• The property is currently for sale with a realtor, listed at $279,900.

The owner was able to put 10% down ($20,900) when the property was purchased. A year and a half later they pulled out the down payment along with another $6,000 of equity. A second refinance 15 months later was probably for a lower rate since the equity out was only $2,000 more. The minimal cash-out could have easily been done to pay for the closing costs of the refi. One month after the second refi the owner set up a HELOC for $43,000. The total equity out listed on the house would be $260,000.

The lender took over the property in January 2008. The foreclosure judgment was only for $232,635.90. If the property sells for the full sale price the lender actually nets almost $30,000 ($29,624.10 to be precise). With the large difference between the judgment and the selling prices it looks like some portion (if not all) of the HELOC was used. A lender asking for significantly more than the judgment in a foreclosure case is very unusual. Could the HELCO lender negotiated a portion of the sale price? It does not appear that any price reductions have been taken. This property has been tracked for over a month prior to this posting and there have been no price reductions yet. Usually we see small yet frequent incremental reductions on these cases. We will see where it ends up selling for...

*Updated findings in Comments Thanks to Tom from Bergen Jersey Foreclosures. Here is what he found -

Since the house has been foreclosed, Citibank would have been out it's HELOC. When a senior lien holder takes possession of a property, all junior liens get wiped out in NJ.

Looking at the foreclosure details, it seems that Citimortgage actually took possession of the property and did the foreclosing. To protect it's interest in the HELOC, Citi most likely purchased the primary lien from Commerce Bank. There were probably also back property taxes that Citi paid off.

Interesting find - one question about this. It is reported that the foreclosure process often costs about $50,000 - with the costs incurred is it really in Citibanks interest to foreclosure with the costs in mind? Did Citibank take a gamble that it could get all the money back plus for this foreclosure?

Makes the story even more interesting...

Is the Fast Track the wrong track?

Here is the video of Testimonials from the Fast Track Real Estate Investors Training Program that was featured in the Is this a Real Estate Scam? post. Beware! Watch At Your Own Risk! You will never get those 11 minutes back if you watch the entire video. Best choice is just forward to about minute 9 for an illustration of the video's quality.




No comments on the testimonials, since most of it is inaudible due to the background noise. Listening to the videographer eating in the last few minutes and not turning off the camera after the last testimonial is what really profiles the organization's professionalism. It appears the only directive was to make sure the Fast Track poster is featured throughout the entire video.

Remember, this is the top feature on the testimonial page. This is what they want people to watch. This is how Fast Track wants to impress new recruits and get people to spend $3000 for a 6 day, 15 part course. Hopefully Fast Track is more successful in the real estate investing than producing testimonials.

The participants of such groups probably did very well during the Great Housing Bubble. Just buying and holding a property for a period of time would bring decent returns. The important part was knowing when to sell. But the bubble is deflating and our profiled investors are now defaulting on a large numbers of properties.

Full disclosure - all knowledge about the Fast Track Real Estate Investment Program is discussed in the posts here and here and the adjoining comments. There has never any other contact with the organization through any poster affiliated with this blog.

Equity Issues In Bergen County

There is an excellent analysis of the foreclosure rate as it relates to mortgage equity withdrawal (MEW) over at Bergen Jersey Foreclosures. Here is one of the key finds -

About 28% of the recent foreclosures in Bergen County seem to be a result of people cashing out their equity. Of the 135 homes that the foreclosure process was initiated that had judgments against them in excess of the average purchase price, the average price was $324,838 but the average judgment is $486,531. That's almost 50% more than what they paid for the house.

Bergen is not great for putting the mortgage documents and other public records on line - so the calculation is based the foreclosure records. On a side note - even the Morris County database which appears to be the best in the State is cumbersome and time consuming. Doing research at the county clerks office must be so much more difficult. But the difference between the prices and the judgments show significant extractions were taking place.

People throughout the country were using equity to live a lifestyle they could not afford otherwise. Everyone seemed to think they were clever investors because of the skyrocketing property values. And the pressures to own property during the bubble were enormous. One hope for Bergen County and the rest of Jersey is that we will not have the housing fall out that is occurring in Florida, California, Nevada and Arizona. But this is evidence that equity extraction is going to have affects even in Bergen County.

"Operation Malicious Mortgage"

"Operation Malicious Mortgage" seems to be the phrase of the day. Headlines throughout the country boasting those arrested for various mortgage fraud schemes. Between the headlines of the Bear Sterns traders being arrested followed with a cross country sweep of mortgage brokers, real estate appraisers, bankers, lenders and realtors. Today on some level there feels like some justice done own the mortgage meltdown.

Here are some key parts of "Operation Malicious Mortgage" as reported by the Los Angeles Times.

The FBI estimated the losses to homeowners and other borrowers who were victims of mortgage fraud at more than $1 billion. That is a small fraction of the near $1 trillion in losses worldwide that have been chalked up to the U.S. mortgage fiasco, and federal officials said the number of cases under investigation continues to grow rapidly.

...
Prosecutors said their crackdown resulted in 60 arrests on Wednesday alone, including in Chicago, Miami and Houston. Mueller said the FBI had seized more than $60 million in assets as part of the sweep, including luxury cars, speedboats and a helicopter.

..
The first category ["fraud for profit"] accounts for about 80% of all mortgage fraud and involves such schemes as skimming equity or borrowing against falsely inflated property values -- scams often carried out by several players working in concert. Fraud-for-housing schemes are perpetrated solely by borrowers who acquire and maintain real estate under false pretenses.

Waiting until well into the aftermath to punish those accountable for crimes committed years ago in some ways seems too little too late. These task forces should have been well underway during the Great Housing Bubble. Perhaps if the high profile mortgage scam arrests were taking place in 2003 the bubble would not inflated to the levels and the current devastation would not be so severe. Now we will just have to wait and see if any big fishes are caught.

Slow Motion Implosion

The option arms are coming. Pick a payment will soon be replaced with pick a foreclosure date. These loans are non sustainable for the current housing market. Home values are decreasing while the money owed on most option arms is increasing. While in theory it sounds great thinking that people are choosing to pay the lowest amount and socking the difference away in a higher paying account. But lets be realistic, the difference of a full payment, full interest and teaser rate level that 70% of Wachovia customers are paying is being used just to get by.

The difference in the value of what the house is worth and what is owed is becoming a larger and larger gap everyday. Yet Wachovia is aggressively notifying customers about what their pick-a-payment loan really means. A few phone calls will stop the coming implosion? Not likely, but Bloomberg news has an article regarding Wachovia Moves to Assure Borrowers Understand Loans. Lets take a look -

Wachovia is contacting people who apply through independent mortgage brokers to ensure ``the customer understands the key features of the Pick-A-Payment loan product,'' according to a June 11 memo from Tim Wilson, head of loan origination at the Charlotte, North Carolina-based company. The loans let borrowers defer part of their monthly bills.

...
Golden West was the market leader in option-ARM mortgages, with about $120 billion of the loans when it was acquired by Wachovia. The loans, termed Pick-a-Payment by Wachovia, allow borrowers to make lower initial payments that don't even cover the accrued interest. Almost 70 percent of Wachovia's borrowers choose to pay as little as possible.

...
The unpaid portion gets added to the principal of the loan. That can backfire on the bank if a borrower defaults while home prices are falling, leaving the lender unable to recover the full amount owed. U.S. single-family home prices fell at a 6.7 percent annualized rate in the first quarter, Waltham, Massachusetts- based research firm Global Insight Inc. said June 2.

...
Wachovia's new policy ``is far too little and far too late and indicative of how bad it is,'' said William Purdy, a Soquel, California, lawyer who concentrates on home refinancing. ``These loans are ticking time bombs and probably the worst thing the bank can say it has ever done to its customers.''

The new policy of calling borrowers applies to loans initiated by brokers, which make up 30 percent of the bank's mortgage lending, said Vecchiarello, the Wachovia spokesman. The bank began contacting would-be borrowers to verify information and improve customer service.

Do the homeowners really understand the loans? Are they pretending to realize they are getting deeper and deeper in debt everymonth hoping that by the time they reach their cap there will be some kind of program so they will not face foreclosure? Wachovia should realize that a large portion of the loans are already in trouble. People can not refinance - the debt is more than the value of the property. The only sales will be short sales.

The implosion is coming for the Option Arms - the only real question is when. The problems have been documented here and here and here. The map of misery post also shows where the fallout will be the highest.

California Devastation

The man-made disaster happening right now in California is getting little attention. If not for advocates and international press, we on the East Coast would never learn how bad the Great Housing Bubble aftershocks have really hit California. Other areas like Arizona and Nevada probably have some of the same images. Over at Mish's Global Economic Forum he put together a compilation called Tent City USA of some of the most heartbreaking and devastating videos. Here are a few of them -

Southern California Shanty Town / Tent City


TENT CITIES SPRING UP IN LOS ANGELES


Homeless Upset Over Tent City Eviction



These videos show the current devastation and fall out from the Housing Bubble. These used to be called "hoover towns and hooverville." Now they are being labeled as "Tent Cities" but probably labeling them "Mozilla villes" or "Greenspan Estates" would be accurate. They are popping up all over California. While the MSM will not put an accurate and accountable label the blogosphere should. That will be the only punishment some of the responsible parties will ever face.

We hear about the record foreclosures but little about what really happens to the people after they leave their homes. Not everyone can have family to live with. Not everyone can have the money or opportunity to go to a rental. Also notice that unlike natural disasters, these victims are treated as criminals. Two hoses for 350 people. Six port-o-potties for 350 people. Third world conditions in the wealthiest (perhaps former wealthiest) country in the world. This is the former Great Housing Bubble now just Housing Rubble.

What Happened, What's Next

Today is the last piece in Washington Post's three part series on the credit crunch but should be called The Rise and Fall of The Great Housing Bubble. Today the focus is on the aftermath - after the subprime market imploded. Here is a good summary -

After years of giving out mortgages to millions of people with less-than-stellar credit histories, lenders were imploding as subprime borrowers defaulted on their loans. The contagion spread quickly to Wall Street, which had packaged those risky loans and sold the securities to big investors in the United States and around the world.

With business decisions like giving hundreds of thousands of dollars to people who could and/or would not pay it back things were going to get bad. Packaging these loans up and selling them as great investments was bound to eventually become a problem - people who knew what was going on saw that the system was flawed. Many people viewed themselves as just cogs in the massive Housing Bubble machine. Now they try to claim they only understood their part and did not or could not see the big picture. Starting with the fed -

At the Fed, Bernanke has been working to expand the agency's role in monitoring how Wall Street bundles mortgages. The central bank is closely studying a wider range of financial institutions than ever before. Meanwhile, the Fed has so far this year provided $435 billion in short-term loans to squeezed banks.

Some economists have said that the Fed played a role in creating the problem. "The U.S. was too ambitious in trying to prop up growth in the early 2000s through low interest rates, through aggressive fiscal policy, in ways that weren't sustainable," said Kenneth Rogoff of Harvard University, a former chief economist for the International Monetary Fund. "It exacerbated these risks down the road."

Alan Greenspan, who was famously opaque while presiding over the Fed during the bubble, bluntly defends his tenure. "The prevailing notion is that the bubble is indigenous to the United States, is caused by Federal Reserve policy and if the people at the Federal Reserve, especially the chairman, were sensible, this thing would not have happened," Greenspan said in an interview. "History is being rewritten, and I will tell you this is not the history that I remember."

The people who had access to the big picture apparently were looking elsewhere - still are. The spiral got so big, with flaws throughout the system. Loans to people who could not pay. Derivatives to unheard of numbers. Top ratings to junk loans and bonds. The entire system was broken - but made many people rich, very rich so many did not care to ask the hows and the whys. Notice that the story of the various regulators and their roles were not in the article? The Fed is illustrated more as a reactive force trying to stop implosions and prevent a global economic meltdown. Was there no one who could have been a proactive force? Were Keith from Housing Panic and Grim from NJ Real Estate Report the only few (besides Edward Gramlich) ringing the alarms?

And this is what is happening currently -

Some of the nation's biggest banks have lost billions of dollars and have booted out their top executives. Some forecasters predict that 3 million more homes could go into foreclosure in coming years. The housing problems are often concentrated in low-income, high-immigration neighborhoods in places such as Prince William County, where there were 3,344 foreclosures last year, up from 282 in 2006 and 52 in 2005, county records show.

Meanwhile Washington is fighting about how to clean up the housing mess. A mess that will affect all of us - whether we were involved in the housing boom or not.

Charting the Great Housing Bubble

There is a three part series in the Washington Post regarding the Great Housing Bubble. The main page is here. The first part focuses on the run up during the boom. It discusses how the mortgage industry changed and how collateralized mortgage obligations, CMOs, helped to fuel the subprime mortgage market. Now there were people willing, even wanting, to buy these products. One of the best passages in the first section is the following -

A mortgage lender could hire practically anybody. "It's not rocket science," Connelly would tell new hires, such as the busboy who quickly traded in his Toyota Tercel (value: $1,000) for a Mazda Miata sports car (value: $25,000). Pinnacle was running out of office space, forcing some loan officers to work on window ledges or out of their cars.

Interesting that there is no real requirement for the person helping people with the biggest investments of their lives. At least the realtor gets some training and requires a license.

The second part of the series focuses on the housing bust. Suddenly the subprime market popped. The thought was this would be contained only to a small population of borrowers and not spill over into the entire housing market or economy. Here is an important point about how loans during the subprime market -

As his team analyzed the individual loan files, Zimmer said he was struck by evidence of fraud, such as doctored bank statements. "Fraudulent loans were a big part of the subprime mess," he said. Mortgage brokers forged borrowers' signatures and pumped up their income, he said. People seeking to buy and sell a home for a quick profit lied that they were going to live in the home -- qualifying for a lower interest rate. But People's Choice calculated that it would have been too complicated and expensive to go after fraud, Zimmer said.

Fraud was being committed but a such large levels that it was almost impossible to prosecute. Some of the fraud was committed so people could live the American dream of home ownership. Other times it was just for a mortgage broker to get a bigger piece of commission. It still seems as if no one has been or will be accountable - aside from losing a house and/or a job.

For most of these callers, he had nothing to offer. "What happened was the values had dropped, the credit scores had dropped, and the loan programs had gone away," Connelly said. "I would hang up the phone and be frustrated that I didn't have a solution."

With the subprime market disappearing overnight there was nothing to offer people. There were no real choices except eventual foreclosure - a stage we are still at with many buyers. The discussion also explores the changing role the fed took along with the ever evolving view of the housing crisis.

Tomorrow concludes the series with a discussion of the aftermath. However make sure you stop by the main page and look at the four interactive charts featured - in The Anatomy of a Meltdown: The Credit Crisis with focuses on Global Wealth, Federal Reserve, Wall Street and Main Street.

An Addition to Foreclosure in Rockaway

Today's example is about homeowners who seemed to have purchased a starter home. They were faced with a dilemma common for owners of small homes - move up or renovate up. There are many factors owners need to consider in making the choice. For this homeowner the choice appears to be the addition of a second floor. They converted the house from two bedrooms to five. From the picture it looks like cute home. From the description it sounds like a decent place. What could the homeowners lose ... unfortunately for these owners the house. Since it is a foreclosure we get the front view only.


Here is the property info -

Property Features
Single Family Property Status: Active County: Morris Year Built: 1957 5 total bedroom(s) 3 total bath(s) 3 total full bath(s) 10 total rooms Style: Colonial Living room Family room Kitchen Basement	Laundry room Bathroom(s) on main floor Bedroom(s) on main floor Kitchen is 19x10 Basement is Full Fireplace(s) Fireplace features: Living Room, Wood Burning Parking space(s): 1 1 car garage Attached parking Heating features: 2 Units,Gas-Natural Forced air heat Central air conditioning	Interior features: Dishwasher, Refrigerator, Carpeting, Basement Level Rooms: Bath(s) Other, Exercise Room, Laundry Room, Walkout, First Level Rooms: 2 Bedrooms, Bath Main, Family Room, Kitchen, Living Room, Second Level Rooms: 3 Bedrooms, Bath Main, Master Bath Features: Jacuzzi-Type, Stall Shower Exterior features: Deck, Storage Shed Exterior construction: Vinyl Siding Roofing: Asphalt Shingle Approximate lot is 100X205 Lot features: Open Lot Approximately 0.47 acre(s) Lot size is less than 1/2 acre Utilities present: Public Sewer,Public Water,Electric Service

Here are the financials -

• The property was purchased in December 2002 for $275,000.
• The original mortgage was for $261,250 in December 2002 with Weichert Financial Services.
  
• A second mortgage was taken in April 2004 for $125,000 with Roberts Home Design.
• The first and second mortgages were closed and combined into a new mortgage for $435,000 in December 2004 with First Interstate Financial.
  
• A HELOC was opened in May 2005 for $75,000 with Sovereign Bank.
  
• Foreclosure started December 2006
• Currently for Sale with Realtor for $392,900 down from $398,900 and originally priced at $404,900.

The homeowners started out in a decent position - they were able to put together a 5% down payment of $13,750. Not bad for a first time buyer. This was also before the peak in the bubble so the price was still pretty reasonable.

Seventeen months after purchasing the property it looks like they decided to add a second floor. It also looks like they received the loan from the contractor - many renovators and contractors offered loans during the Great Housing Bubble. The builder is now out of business and has a bad review at rate your builder - see it here. Bad contractors are one reason many people choose not to use this route for a larger home and instead buy larger.

The owners then combined their mortgages, took back their down payment and took out another $35,000 through a cash-out refinance. This additional cash-out easily could have been for costs overages incurred during the renovations. The homeowners may have wanted some upgrades and the builder probably tacked on some extra charges.

Obviously the cash-out refi was not enough, less than six months later a HELOC was opened. But the costs on the improved home turned out to be too much for the homeowner. Nineteen months after obtaining the HELOC the foreclosure process started.

From the price at the sheriff sale, $477,157.11, it appears that some of the HELOC funds were utilized - however this owner did not drain all the equity the lenders had made available. Guess they never heard of using the HELOC to pay the mortgage?!?

So if the lender receives the current full asking price, the realtors take the standard 6% being $23,574. The difference in the sheriff sale price (usually purchased for the amount owed the lender or note holder) and the sales price is $84,257.11. That means if selling for full price the lender will lose a total of $107,831.11.

While the lender will take a big hit, the homeowner is the one to feel bad for. Spending years putting on an addition - all the headaches involved with that alone are a nightmare for most. Then to lose the house to foreclosure - this former homeowners probably asking themselves everyday what all the work was for. All that effort only to lose everything.

What equity loss really means

The equity loss has not been distributed throughout the country at the same levels. We know that some areas the houses both appreciated and depreciated annually in the double digits. In these areas building equity just meant holding onto the home for a year. In other parts of the country that had only moderate property value increases mortgages had to be paid down to build equity.

In most parts of the country buying at peak or putting zero down there is a good chance there is not equity. During the Great Housing Bubble lenders were allowing upto 120% equity withdrawal on a property. If you pulled out 20% more than your house was worth you are already underwater - and there is no equity left. In the Washington Post there is an interesting article about equity losses not being felt evenly. First we take a look at the big picture -

To no one's surprise, home-equity holdings on a national basis got creamed during the past year. Homeowners lost an estimated $879.6 billion in net equity wealth -- that's the difference between the current market values of their houses and their current mortgage debt. In the first quarter of this year alone, estimated national equity losses totaled $399.1 billion.

Americans' equity in their homes represented just 46.2 percent of their properties' market values during the first quarter of this year. Put another way, total mortgage debt exceeded owners' equity and constituted almost 54 percent of total home values.

The Fed's estimate of a nearly $880 billion loss of home equity wealth may strike you as shocking, but look at that number with some recent perspective. During the housing boom years, nearly $3 trillion in net equity was racked up in a few years as prices exploded in local markets with high levels of speculative investments powered in part by low interest rates and funny-money mortgages.

But on a more regional level this is what it means -

The losses are highly concentrated. "The Fed's [equity decline] numbers for the country as a whole are really being dragged down disproportionately by the big drops in prices in California, Florida and a handful of other states," [Jay Brinkmann, vice president for research and economics at the Mortgage Bankers Association] said. "Most markets haven't been hit anywhere near as hard."

...
Five-year data from OFHEO suggest that is correct. Houses in Naples, Fla., lost 18.7 percent last year, but are still up a net 61 percent over the past five years. In Riverside-San Bernadino, Calif., houses lost 13.8 percent last year, but are still up by a net 71.5 percent since 2003. In metropolitan Washington, houses lost an average 5.1 percent last year, but have gained a net 68 percent over the past five years.

The gains and losses were not distributed evenly. The losses are hard and they have an impact. One huge impact is the massive changes in the loans lenders are willing to make. Easy credit, no doc loans, 100% financing are becoming a thing of the past. The smaller pool of buyers will also have an impact on the slower rise in property values - that is a simple law of supply and demand. Some of the equity people had is now gone - and areas like Merced, Calif. the equity is long, long gone. The best way to build equity will be the old fashioned way of paying off the mortgage and not extracting any equity through a HELOC.

Sphere: Related Content

More Reverse Mortgage Info

The Reverse Mortgages are still getting pushed hard. Ads can be heard on the radio almost everyday. Trusted spokespeople disclosing the benefits. But this article from Bloomberg warns Reverse Mortgages Promise Seniors Cash, Advisers Urge Caution. Here are some interesting parts -

Reverse mortgages are for people aged at least 62. The loans, which lenders charge fees equal to as much as 6 percent of a home's value, allow borrowers to use their home equity to get cash tax free. After the borrowers die, or move, the lenders are repaid when the house is sold.

Pending legislation may spur more senior homeowners to consider reverse mortgages. Those who have enough equity in their homes can qualify for loans up to $362,790 backed by the Federal Housing Administration. A housing bill in Congress includes a proposal to raise the payout to as much as $550,000 and eliminate the current limit of 275,000 reverse mortgages that the Department of Housing and Urban Development can insure.

...
``Homeowners who have enough cash flow should stay away because there are better alternatives for tapping the asset of their homes, like a home equity line of credit,'' said Tom Orecchio, chairman of the National Association of Personal Financial Advisors in Arlington Heights, Illinois.

...
Homeowners considering a reverse mortgage should take into account their age and how long they plan on being in their houses, Orecchio said. The loans are better suited for homeowners over the age of 75, who plan on being in their homes for a minimum of five years, he said. Borrowers under the age of 75 may outlive the equity in their homes and the fees and costs associated with the loan make an early move prohibitive.

Related financial products offered to borrowers may also tie up their cash. A survey by the American Association of Retired Persons' Public Policy Institute said that 9 percent of borrowers were offered investment products such as annuities and long-term care insurance when they got their loans. Peskin said it is a conflict of interest to sell reverse mortgages along with annuities or long-term care insurance, and won't deal with brokers who do.

Probably a few years down the road we will hear more and more pitfalls about reverse mortgages. People who lose their homes because they live too long. Families that owe money due to reduced home values. There will be stories. We will see grandmas crying on the evening news. Reverse mortgages will probably be like ARMs great tools for people who really understood all of the various consequences - but nightmares for the average person. They are complex legal and financial arrangements and should not be entered into lightly.

Foreclosures Up

In article from todays Yahoo News courtesy of the Associated Press there is an article called US foreclosure filings surge 48 percent in May. That is devastating news. We hear about the buyers picking up deals on the rebound, but what about all the people who will be left out of the house buying process for years to come. That number is clearly rising. Here is a few graphs from the article -

The number of U.S. homeowners swept up in the housing crisis rose further last month, with foreclosure filings up nearly 50 percent compared with a year earlier, a foreclosure listing company said Friday.

Nationwide, 261,255 homes received at least one foreclosure-related filing in May, up 48 percent from 176,137 in the same month last year and up 7 percent from April, RealtyTrac Inc. said.

First this is a huge increase over the last year. That is 261,255 homes that are currently in some state of the foreclosure process - that does not include homes in the foreclosure process that did not have a filing in May, so the numbers are probably even higher.

The combination of weak housing sales, falling home values, tighter mortgage lending criteria and a slowing U.S. economy has left financially strapped homeowners with few options to avoid foreclosure. Many can't find buyers or owe more than their home is worth and can't get refinanced into an affordable loan.

Making matters worse, mortgage rates have been rising, reflecting increased concerns about what the Federal Reserve might do to battle inflation. Freddie Mac, the mortgage company, reported Thursday that 30-year fixed-rate mortgages averaged 6.32 percent this week, the highest level in nearly eight months and up sharply from 6.09 percent last week.

The increase of interest rates will cut into what buyers can afford. In order to turn over the properties prices will have to decrease even more. Those ARMs and Option ARMs - that once made very expensive properties appear to have affordable monthly payments - are no longer available. The time when you could state your income to purchase the home of your dreams - that is also a thing of the past.

Rick Sharga, RealtyTrac's vice president of marketing, said foreclosures are unlikely to peak until sometime this fall, as more loans made to borrowers with poor credit records reset at higher levels. "I don't think we've seen the high point," he said.

When the rest of the ARMs reset and the Option ARMs recast we will see a huge swell of homes going into foreclosure. The high point will come in the next few years. And so the downward spiral goes.

As foreclosed properties pile up, they add to the inventory of homes on the market and drag down home prices. The trend is most dramatic in many parts of California, Florida, Nevada and Arizona, where prices skyrocketed during the housing boom and are now falling precipitously.

Sales of foreclosures, vacant new homes and other distressed properties now dominate some markets, causing grief for individual homeowners who need to sell for other reasons, like a job in a new city.

Nationwide, one out of every four sales between January and March was a distressed sale, and that figure jumps to more than 50 percent in the hardest-hit areas like Las Vegas, Detroit and distant suburbs of Los Angeles, according to Moody's Economy.com.

Sellers are going to have to compete with banks. The banks will eventually just want to unload the properties at any price. It is a good time for buyers, but there is a much smaller pool of buyers now.

This is rough news. It will continue the downward housing spiral. As more homes go into foreclosure, prices will fall. As prices fall more people will be underwater. This in turn will increase the rate of foreclosure. And so the cycle goes until something stops it.

How much would you pay to stop foreclosure?

With the rising number of foreclosures driving down home values spurring more foreclosures everyone seems to be looking for a fix. The expense to lenders is huge, the growing difference between the original loan and what they can resell a property for, as well as all the other expenses involved in foreclosure. The Washington Post has an article regarding Mortgage Investors chipping in for Homeowners' Counseling. It will be much cheaper in the long to counsel people on how to avoid foreclosure than to foreclose on a property. Lets take a look at how it works -

Nonprofit counselors have long depended on charities and governments for funding. They see the change as a long-sought acknowledgment from the financial industry that their efforts to help distressed homeowners also help the people who lent them money.

The effort is expected to cost the industry millions of dollars over the next two years and expand the availability of services, said Tom Deutsch, deputy executive director of the American Securitization Forum, the trade group behind the change.

"It's a good investment," Deutsch said. "It is helping borrowers understand their options, and the credit counselors are very good at doing that."

Hope Now, a coalition of lenders and nonprofit groups, plans to announce today adoption of the guidelines for the payments, up to $150 for a session with a distressed homeowner. Nonprofit agencies can receive more if there is a positive outcome for the lender.

...
The funds will be in addition to the $180 million in grants Congress has approved for nonprofit counseling agencies, as well as payments the industry already makes to the 450 housing counselors who staff a hotline for homeowners. That hotline, 888-995-HOPE, has reported 315,000 calls this year, compared with 245,000 for all of last year.

"If the financial services industry embraces this fee-for-service, the value that counseling brings, this could be revolutionary," said Marietta Rodriguez, director of national homeownership programs at NeighborWorks America, a nonprofit group based in the District. "Right now, counseling is really being paid philanthropically and through government sources, and given the magnitude of the problem, they are not sufficient sources."

The costs incurred in counseling will be significantly less than the cost of foreclosure - both to the homeowner and the lender. While there will always be people who will face foreclosure due to life's circumstances (death, divorce, illness) the ones who are just using bad financial judgment - or no financial judgment) will be helped by such efforts. Hopefully this succeeds in the mission.

Is this a Real Estate Scam?

This is another update to the Sunday post on a Roxbury loss. The case with the story was that the buyer seemed perfect - too perfect. Some digging through the Morris county database illustrates that there are some questionable activities going on. The findings from the Roxbury case may or may not be legal in New Jersey but it is definitely questionable and seems unethical. But being unethical does not mean anything was illegal was done - that is for someone with a legal background to determine.

First some background on the buyers investment group. Two of the properties where purchased through trusts. From the testimonial page from the Fast Track investment club -

Before aspiring to be a real estate investor I never knew what a trust was. After joining GSREIA and attending a trust workshop hosted by Tony Reaves, I learned just how important a tool a trust can be for asset planning. When I decided to take title to properties in Trust, Tony held my hand through this process, making sure that I had all the necessary documentation. I was faced with major opposition by my lender's attorney. Who after several conference calls with Tony, finally allowed me to take a title to the property in trust. Tony's guidance was tremendously helpful.
Garth Naar, Mablewood, NJ.

It sounds like the lender's attorney questioned some of the actions taken and was strong armed into accepting a questionable deal. The use of trusts were one of the ways the properties that will be profiled below were obtained.

And another testimonial is from the owner of the site We Buy Houses All Cash and Any Condition! The tag line states "Don't let the Banks steal your home!!" Is the reading between the lines that this group will steal your home instead? Or "buy" it for $10 through a trust? Don't know, just asking.

Now, back to the the case of the Roxbury foreclosure. These cases profiled are limited to Morris County due to database access. There appear to be 4 main actors involved in with the property purchases and trades. They are noted by their initials: LC, JC, and JA or on the purchases and trades, in addition a Mrs. JA is listed on several of the Lis Pendens. So here is the findings with each listing group is a separate property.

Property 1 - Roxbury, NJ

• The Property was purchased by LC Trust for $10 - Nov. 13, 2003
• LC sold the property to JC for $350,000 March 9, 2005
• JC took an ARM mortgage for $280,000 on March 9, 2005 with Argent Mortgage
  
• JC sold the property to 3rd Party for $349,000 on Oct 26, 2005. JC also claimed owner occupied for sale on State of New Jersey Affidavit for Exemption.

Net from Exchanging Property and Taking Mortgages $279,990

Property 2 - Chatham, NJ

• JC purchased the property for $830,000 in May 2005
• JC took a mortgage for $664,000 also in May 2005 with World Savings Bank
  
• JC sold the property to JA for $1,100,000 on August 25, 2006
• JA took a mortgage for $110,000 in Aug 2006 with American Brokers Conduit
  
• JA took an ARM mortgage for $880,000 also in Aug. 2006 with American Home Mortgage - Lis Pendens filed March 13, 2007
  

Net from Exchanging Property and Taking Mortgage $160,000

Property 3 - Roxbury, NJ

• The property was purchased by LC using a Trust for $10
• LC sold the property to JA for $250,000 in June 27, 2006
• JA took a mortgage for $200,000 in June 2006 - Ivy Mortgage - Lis Pendens filed March
  

Net from Exchanging Property and Taking Mortgage $199,990

Property 4 - Wharton, NJ,

• JC purchased the property for $230,000 on Sept 14 2006
• JC took an ARM mortgage for $207,000 in Sept 2006 with People's Choice
  
• JC refinanced for another ARM mortgage for $314,500 the following March 2007 with Option One Mortgage - Lis Pendens filed November 16, 2007
  

Net from Exchanging Property and Taking Mortgage $84,500

Property 5 - Dover, NJ, 2007

• JA AKA JC - actually states AKA on deed - purchased the property for $180,000 on June 1, 2007
• JC took an ARM mortgage for $170,000 also on June 1, 2007 with Option One Mortgage
  

Net from changing property and Taking Mortgage -$10,000

Net profit for all the above deals $554,480

The interesting part of the above Dover sale is that someone marked on the deed that JA is Also Known As JC. If it is the same two people just changing the paperwork back and forth the deals seem even more questionable.

These following cases are too complex to be sure what happened with the available data. Please chime in if you have any insight.

Property 6 - Wharton, NJ

• JA Purchased the property for $121,000 in Aug 1997
  
• JA Received $5,500 Grant from Morris County Division of Community Development Oct. 2001
• Trustee for JA from JA filed Chapter 7 Deed for $33,462 in Aug 2002
• JA took an ARM mortgage for $165,000 also in Aug 2002 - Wells Fargo
  
• The property was deeded from LC Trust to JA Trust for $10 in Jan. 2004
• LC sold the property to JA for $320,000 in Jan 2004
• LC obtained an ARM mortgage for $288,000 in Jan 2004 with Argent Mortgage - Lis Pendens filed Oct. 2007
  

Property 7 Dover, NJ

• JA sold to 3rd Party for $125,000 in July 14, 1999
• JC purchased from same 3rd Party for $340,000 on June 22, 2004
• JC took an ARM mortgage for $306,000 also June 2004 with Argent Mortgage - Lis Pendens was filed December 4, 2007
  

This Dover case is the first time a different one of the four names was listed on multiple transactions.

Upon final analysis, perhaps the goal was to gain the properties through trusts, sell the properties from the trust to one of the group members, and then eventually re-sell the property. Is that to muddy the water for the final purchaser or just to legally gain the property? The group has one successful case, but another case of complete failure (the foreclosure case). Are the ones that do not get resold going to fall into foreclosure? It looks like it. Is this a real estate investment group on the up and up just buying too many houses? During the peak of the bubble they only had a few properties but since the bust they have acquired more.

In the meantime the homes are resold to each other for higher values and funded through subsequent mortgages. These four (maybe only two) investors have cleared over a half million dollars through these methods. If everything is legit that is a great second income for just pushing paperwork around. These activities may be legal or not, but either way the methods are questionable.

All comments on the findings welcome!

Housing Swap

The big story today is from the Wall Street Journal's article on buying a new home to bail on the old one. It is a step up from the walking away phenomenon - the houses are so underwater that the homeowners finds a new affordable property and abandons the old one. Here are some snippets -

In markets hit hardest by falling home prices and rising foreclosures, lenders and brokers are discovering a new phenomenon: the "buy and bail," in which borrowers with good credit buy a new home -- often at a much lower price -- then bail out of the "upside down" mortgage on their first home.

Homeowners are able to pull off this gambit -- which some lenders and real-estate agents call mortgage fraud -- by taking advantage of mortgage-lending practices that allow them to buy a new primary residence before their existing residence has been sold. And with the lending industry in disarray as it tries to restructure millions of mortgages, some boast they are able to pull off the strategy with ease.

In some cases, homeowners are coached through the buy-and-bail process by real-estate agents and brokers who see nothing wrong with it. Some blame the phenomenon in part on lenders' unwillingness to cut deals or restructure loans made when home prices were inflated. "It's just a business decision," says Linda Caoili, a Sacramento real-estate agent who is working with Ms. Augustine and others who are considering walking away from their mortgages. "If you're upside-down $250,000, why would you keep it? It just doesn't make sense."

To be sure, walking away from a mortgage, even if legal, has plenty of drawbacks: Borrowers lose the ability to take out unsecured loans, since foreclosures can stay on a credit report for seven years. In some states, lenders can sue for assets, including a new house.

...
The mortgage industry is starting to wise up to the practice and is scrambling to fight back. Buy-and-bail is "certainly fraudulent and unfortunately on an uptick," says Gwen Muse-Evans, vice president for credit policy and controls at Fannie Mae. Although she doesn't have data to quantify the size and scope of the trend, Ms. Muse-Evans says overwhelming anecdotal reports have prompted the agency to draft tougher regulations aimed at closing one big loophole that allows underwater homeowners to qualify for new home loans.

Is this another case of blaming the borrower? Over at Calculated Risk they note that lenders have been pushing the numbers for home buyer fraud - making walking away seem widespread but no one can produce numbers. This story sounds similar - anecdotal reports and no data.

In the article there are several examples of people "buying and bailing" but it sounds like most of them can not afford the properties. Two of the examples relocated and are unable to sell the properties without incurring a loss. The featured example sounds as if the owner will not be able to afford her house when her ARM resets - and she can not refinance since the home is worth half of the value she bought it at 2 years ago. It sounds more like the owners want to purchase new homes just prior to foreclosure hitting the old properties. Is this really "bailing" - in most of the cases the buying is done after the bailing but just before foreclosure. This sounds like another case of lenders trying to get sympathy by blaming the ruthless borrowers.

Is your HELOC making you sick?

Here we thought HELOC were like Sunday picnics in the park with good times and happiness for all. who participated. But the new study shows that drowning in debt has more negative consequences than just owing alot of money - your health takes a toll too. This interesting article from USA Today discusses Stress over debt taking toll on health. Here are some of the findings -

When people are dealing with mountains of debt, they're much more likely to report health problems, too, according to an Associated Press-AOL Health poll. And not just little stuff; this means ulcers, severe depression, even heart attacks.

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Although most people appear to be managing their debts all right, perhaps 10 million to 16 million are "suffering terribly due to their debts, and their health is likely to be negatively impacted," says Paul J. Lavrakas, a research psychologist and AP consultant who analyzed the results of the survey. Those are people who reported high levels of debt stress and suffered from at least three stress-related illnesses, he says.

That finding is supported by medical research that has linked chronic stress to a wide range of ailments.

And the current tough economic times and rising costs of living seem to be leading to increasing debt stress, 14% higher this year than in 2004, according to an index tied to the AP-AOL survey.

Among the people reporting high debt stress in the new poll:

• 27% had ulcers or digestive tract problems, compared with 8% of those with low levels of debt stress.

• 44% had migraines or other headaches, compared with 15%.

• 29% suffered severe anxiety, compared with 4%.

• 23% had severe depression, compared with 4%.

• 6% reported heart attacks, double the rate for those with low debt stress.

• More than half, 51%, had muscle tension, including pain in the lower back. That compared with 31% of those with low levels of debt stress.

So the fun and games are over. The Great Housing Bubble has popped. The pain from the debt is going to be felt in many, many ways both expected and unexpected.

Bad News for Good Samaritans

When houses go into foreclosure there are many reasons why hte property values fall. The houses are rarely kept up - no one to cut the grass, pick-up any debris, clean the pool. The properties can be magnets for vandals, copper thieves, and "bandos" (people looking to squat in abandoned properties). It seems like common sense to allow any neighbors or neighborhood association to keep up the property. However according to the USA Today article, Foreclosures become forgotten burdens in neighborhoods, those trying to do good are also the ones breaking the law. Here is a snippet -

Fallout from the foreclosure crisis is forcing neighbors and local officials to research who is legally responsible for mowing the lawn, cleaning the swimming pool, etc.

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"It's a huge issue for us. It's more complicated than it might seem outwardly," said Elisabeth Shurtleff, public information officer with the Nevada Department of Business & Industry. Nevada had the nation's highest state foreclosure rate in April, 3.6 times the national average of one in every 519 households, according to RealtyTrac Inc. in Irvine, Calif., which compiles monthly foreclosure data. "It's definitely a problem finding out who would be responsible and what the statutes provide for that responsibility. It's quite complex, especially the way financing has evolved over the years," Shurtleff said.

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Vacant homes also become health and public safety concerns, said Peter Kristian, president of Community Associations Institute in Alexandria, Va., and also general manager of Hilton Head Plantation Property Owners' Association in Hilton Head Island, S.C. Standing water in swimming pools, the danger of houses being stripped for materials, like copper piping and aluminum siding, and invasion by vermin are issues faced by communities.

Often, the first responders are concerned neighbors, who haul their lawn mowers next door. But that carries risk. Being a good neighbor is also, legally, trespassing, said Donald Isken, a real estate lawyer in Wilmington, Del.

"I always tell people, if you can avoid the self-help remedy, then you can reduce your exposure to personal liability for property damage," Isken said.

In some cases, homeowners' associations have the authority to do the remedial work necessary, said Isken. But the process to allow the association on the property takes time, "so the neighbors have to live with an eyesore," Isken said.

There are threats that the good Samaritans that are trying to keep up the property and the neighborhood may be therefor held responsible for property damage. Such a lose-lose situation for the neighbors. The time, effort, and expenses involved tracking down the legal owner of the foreclosed properties are another hit against the neighborhood.