Sunday, November 9, 2008

No Money Down in Denville

During the Great Housing Bubble things that did not seem to make sense were common everyday, ordinary practices. One perfect example of this was 100% - or more - of financing for a property. All the buyer had to do was a sign some papers and they could own a house. No scrimping and saving was necessary. If your finances were questionable just opt for a no document loan.

People were not really worried about buying how they would pay for their mortgage. The property would increase in value so if worse came to worst they could just sell it for a profit. Houses would get scooped up well before foreclosure. Bad credit did not matter, one would just have to pay a bit more in interest. There were lines of lenders willing to give anyone loans.

House values only went one way so this appeared to make good business sense. Until it didn't. Then everything came crashing down. Which brings us to our featured example. Although the property was purchased post-bubble, they still received all the perks of 100% financing, ARM and balloon payments. But since it was post-bubble they also faced foreclosure and credit ruin. Lets take a look -

Here is the property -

Here is the property info -
  • Single Family Property

  • Status: Active
  • County: Morris
  • Year Built: 1935
  • 3 total bedroom(s)
  • 1 total bath(s)
  • 1 total full bath(s)
  • 6 total rooms
  • Style: Ranch
  • Living room
  • Kitchen
  • Basement
  • Bathroom(s) on main floor
  • Bedroom(s) on main floor
  • Basement is Unfinished
  • Heating features: Gas-Natural, Gas-Propane, Oil
  • Forced air heat
  • Exterior construction: Wood,Crawl Space Foundation
  • Roofing: Asphalt Shingle
  • Approximately 0.18 acre(s)
  • Lot size is less than 1/2 acre
  • Utilities present: Public Sewer,Public Water

Here are the financials -
  • The property was purchased in November 2006 for $267,800.
  • The first mortgage at time of purchase was for $214,240 using an ARM and a balloon payment with WMC Mortgage Corp.
  • On the same day of November a piggy back mortgage was taken for $53,600 also with WMC Mortgage Corp.
  • The foreclosure process was started in June 2007.
  • The property, currently for sale through a realtor, is listed at $193,900.
The property was purchased with 100% plus $40 financing. Strange as it sounds the numbers were double checked due to the extra $40, but that is on the paperwork the lender and borrower signed and filed.

While 100% financing was common during the bubble, when the bubble started deflating and mortgage brokers were closing shop this was a harder deal to come by. Today it would almost impossible. And with the owner making at most 4 months of mortgage payments it illustrates why 100% financing was a bad idea.

One reason why 100% financing is often called leasing from the bank is that the only investment people have is their credit. The only thing the owner will lose is their credit. If they stayed in a fought the foreclosure they could have lived at the property for less then renting. Perhaps it was not worth the damage to their credit, but that is the only consequence the former owner will face.

As for the lender, the property will lose at least $85,574 if it sells for the full asking price. That loss is just for the original money lent less the new selling price in addition to the standard realtor's commission. But since we know there are additional costs that lenders face in the foreclosure process, this property will easily exceed $100,000 in total losses. Not a good business plan.

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