Sunday, July 13, 2008

Living Large in Lake Hopatcong

Recently, our inspiration blog, Irvine Housing Blog had a great post on the four different Great Housing Bubble market participants -

1. Renters
2. Owners who bought before 2002 and did not abuse home equity lines of credit (HELOCs)
3. Owners who bought after 2002
4. Owners who abused HELOCs

Here is some further detail from the great Irvine Renter regarding categories 3 and 4 -
Owners that bought after 2002 will probably go underwater, and the closer the purchase was to 2006, the further underwater they will fall. Owners who abused HELOCS have put themselves in the same situation as late buyers by increasing their mortgage balances mostly through foolish consumer spending. These last two groups will experience a great deal of stress once the veneer of denial is stripped from them by the continuing decline in prices. Stop for a moment and contemplate how large a group of people it is that purchased after 2002 and/or abused HELOCs.
In todays profile we will look at a property that was purchased at the beginning of the Great Housing Bubble - which is already one strike against it. Then the homeowners decided to go to category 4 by extracting all the property's equity. The date of purchase and the HELOC abuse puts today's example in both categories 3 and 4. At the peak of the bubble these Lake Hopatcong homeowners were living large on the income their equity gave them. Unfortunately, that was just asking for trouble. And trouble came in the fashion of ruined credit and foreclosure. Now lets take a look at the property -

Here is the very limited property info -

3 Bedrooms
3 Baths

Here are the financials -

  • The property was purchased October 2003 for $384,900.
  • The original mortgage in October 2003 was for $307,920 with Citimortgage.
  • A HELOC was opened on the same day in October 2003 for $38,400 with CitiBank.
  • A HELOC with Fleet Bank for $98,400 the following April of 2004.
  • Another HELOC with Fleet was opened the following December 2004 this time for $64,200.
  • A Lis Pendens filed May 2006 for the original Citimortgage.
  • A Lis Pendens was filed May 2006 for the April 2004 Fleet HELOC.
  • The REO property is currently for sale through a realtor for $465,000.
This is an interesting purchase. It looks like the homebuyers put a whopping 20% or $76,980 down payment. Twenty percent during the Great Housing Bubble is almost unheard of. And since they immediately opened a HELOC for 10% of the purchase value the property may only had a 10% down payment. That is still pretty substantial.

However, the down payment did not stay in the bank long. Six months after the purchase the homeowner opened up a HELOC and extracted the $38,580 already in the property plus another $59,820. Those funds did not last long. Since just 8 months later another HELOC was opened. This made the total potential mortgage equity withdrawal of $124,020. That is significant withdrawal in just 14 months of ownership.

From the picture and the asymmetrical balance of the house, it looks like there may have been an addition. Maybe that was done by these owners. And maybe the HELOCs were asset rather than income based. But whatever happened, these homeowners were not able to pay the bills.

Just 17 months after the final HELOC the homeowners had not one but two different lenders start foreclosure proceedings against them. If the homeowners did utilize all of the equity granted to them, in the fours years of homeownership them, then their property gave them a nice second income of $31,005 per year. And if the property sells of the currently asking price the lenders will lose approximately $71,820 from the sale.

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