Sunday, December 14, 2008

Renting from the Bank in Dover

One of the most interesting phenomenon of the housing bubble was when lenders decided to become landlords. This is called renting from the bank or in bubble terminology - loanowership or loanowner. The lenders basically own the property in cases where the prices went down - if prices went up the proceeds went to the "owner."

During the housing bubble people regularly rented from the bank - put no money down, and perhaps paid even less than standard monthly carrying costs (principal and interest). For some reason lenders really thought this was a great idea - one that would always remain profitable.

There is a great quote from Todd Sinai, an associate professor of real estate at the Wharton School of Business at the University of Pennsylvania found in the International Herald Tribune -

"There's a whole lot of people who would've been stuck as renters without these exotic loan products. Now it's like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren't any worse off than renting, and you got a chance to do extremely well. If it's heads I win, tails the bank loses, it's worth the gamble."

Putting zero percent down was worth the gamble. Adding an interest only ARM or an Option ARM makes the gamble even better. The puts nothing in but can win big. It seemed like lenders were giving money away no questions asked. Logic was lost on the greed of the transaction. Which brings us to today's example were we find a buyer that was lucky enough to find a lender that was willing to let them gamble with the banks money. Lets take a look at today's Dover property -

Here is the property -

The front of the house.

The cute kitchen.

And the nice living room with hardwood floors.

Here is the property info -

Property Features
  • Single Family Property

  • Status: Active
  • County: Morris
  • Year Built: 1957
  • 4 total bedroom(s)
  • 2 total bath(s)
  • 2 total full bath(s)
  • 7 total rooms
  • Style: CapeCod
  • Master bedroom
  • Kitchen
  • Basement
  • Bathroom(s) on main floor
  • Bedroom(s) on main floor
  • Master bedroom is 19x15
  • Living room is 16x11
  • Kitchen is 13x11
  • Basement is Finished
  • Hardwood floors
  • Fireplace(s)
  • Fireplace features: Living Room, Wood Stove-Freestanding
  • 1 car garage
  • Attached parking
  • Heating features: 1 Unit, Baseboard - Cast Iron, Multi-Zone,Gas Water Heater,Gas-Natural
  • Cooling features: House Exhaust Fan
  • Inclusions: Home Warranty
  • Exterior construction: Vinyl Siding
  • Roofing: Asphalt Shingle
  • Pets allowed
  • Approximate lot is 50X112
  • Corner lot
  • Approximately 0.13 acre(s)
  • Lot size is less than 1/2 acre
  • Utilities present: Cable TV Available, Garbage Service Included,Public Sewer,Public Water,Gas-Natural

And here are the financials -

  • The property was purchased in January 2006 for $370,800.
  • The original mortgage at the time of purchase wash for $296,640 using the interest only ARM payment plan with First Magnus Financial.
  • On the same day another mortgage was taken for $74,160 utilizing a balloon payment also with First Magnus Financial.
  • The property is currently for sale with a realtor for $270,000.
  • Incidentally, the house was previously purchased in December 2004 for $339,900.

First thing to notice is that this was a 0% down payment purchase. Second thing to notice is that the mortgage was an interest only ARM - so none of the principal has been paid down yet - so the loan is probably still for the original $370,800 purchase price.

Then we see that the property is selling through a realtor - so the real lender (whomever was the last one holding this loan) will be losing at least $117,000 on this property if it sell for full price and the realtor takes their standard fees. Yes, we are assuming this will be a short sale - all the evidence points in that direction. If the buyer had no funds to put down, and did not pay any principal, chances are very high that there is no way they will come to closing with a check.

On a side note, 2e have profiled another property that was 0% down and they were also financed with First Magnus Financial (see here). First Magnus has long closed up shop. Now lets get back to today's example.

With the 0% down the "owners" were renting from the bank. And between the balloon payment and interest only arm (we are surprised they did not get an Option ARM) they were being subsidized by the bank while renting from them. Pretty good deal they had - no money in as the price went down, but could have sold for a profit if only the bubble continued.

Our guess, the three years of the interest only is just about up, a new monthly payment is unaffordable and the owners are trying to get out before they lose the property. This is a smart "owner" - probably negotiated a short sale so their credit won't take a huge hit if they can get out before the rates reset. But in the current market this sale will be a real nail-biter - Will they sell the house first or eventually wind up in foreclosure?

1 comment:


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