Sunday, January 11, 2009

Withdrawing Equity in Jefferson

Mortgage Equity Withdrawal was a big thing during the bubble. Using a HELOC meant that you were in charge of your money. Smart investors withdrew that equity and used it for more important investments. Investments like dinners out, vacations, coach purses, new cars, and buying things that you wanted NOW.

Equity withdrawal was part of the bubble mentality. Our new financial outlook would revolution financial planning. Since house prices only went up if someone ran into trouble they could just sell, or refinance. Pay the mortgage with the HELOC. There were solutions to everything. But then the bubble burst. Our solutions did not work the way we planned.

The new financial outlook was unsustainable. And yet enterprising homeowners could still find lenders with the bubble mentality. There would still be lenders who gave 120% of the property value in 2007. We found one of these lenders and enterprising home owners in our example today. Lets take a look -

Here is the property -
The front of the house.The Living Room with hardwood floors.
The gourmet kitchen with Housing Bubble mandatory Stainless Steel appliances and granite counters. (Notice the property meets the required bubble favorite pergraniteel!)

Here is the property info -

Property Features
  • Single Family Property

  • Status: Active
  • County: Morris
  • Subdivision: The Peaks
  • Year Built: 2006
  • 4 total bedroom(s)
  • 2.5 total bath(s)
  • 2 total full bath(s)
  • 1 total half bath(s)
  • 9 total rooms
  • Style: Colonial
  • Master bedroom
  • Living room
  • Dining room
  • Family room
  • Kitchen
  • Den
  • Basement
  • Bathroom(s) on main floor
  • Master bedroom is 18x13,Includes: Full Bath, Walk-In Closet
  • Living room is 14x14
  • Dining room is 14x12,Formal Dining Room
  • Family room is 19x14
  • Kitchen is 26x12
  • Den is 14x10
  • Basement is Partially Finished, Full
  • Hardwood floors
  • Fireplace(s)
  • Fireplace features: Family Room, Wood Burning
  • Parking space(s): 3
  • 2 car garage
  • Parking features: Built-In Garage
  • Heating features: 2 Units,Electric Water Heater,Gas-Natural
  • Forced air heat
  • Central air conditioning
  • Cooling features: 2 Units
  • Exterior construction: Stone, Vinyl Siding
  • Roofing: Asphalt Shingle
  • Pets allowed
  • Lot features: Level Lot, Open Lot
  • Utilities present: Cable TV Available,Public Sewer,Public Water,Electric Service, Gas-Natural

Here are the financials -

  • The property was purchased as a new construction from the builder for $564,889.74 in January 2006.
  • The original mortgage on the date of purchase was for $451,911 with an ARM from Wells Fargo.
  • In April 2006 the property was refinanced with cash-out for $532,000 using an ARM from Heritage Mortgage Banking Corp.
  • The next month, May 2006, a HELOC was opened with Wachovia accessing $28,416.00 of the equity, the line was eventually closed.
  • In February 2007, the previous HELCO was closed and a new HELOC was opened with Bank of America for $103,000.
  • A Lis Pendens was filed against the mortgage that originated with Heritage Mortgage in November 2008.
  • The property is currently for sale and listed with a realtor for $519,000.
  • The property taxes for 2009 is $10,555.25.
For potential owners, if the property is purchased for full asking price with 20% down (which would be merely $103,800) using a 30-fixed at today's rate of 4.875, the payment with taxes would be just $3076.58 per month. Just add insurance and you are well over $3100 per month. With the 28% debt ratio, the potential buyer(s) should make about $130,000 per year to purchase this property.

Now lets go analyze the current owners situation. When the new construction was purchased, the owner put a hefty 20% down, which equaled $112,978.74. A huge down payment during the bubble, and still very respectable.

It must have been too much down, since just 4 months later the owners refinanced with cash out - withdrawing $80,089 of their equity out of the property. However that was obviously not enough cash-out since just one month after that the first HELOC was opened for $28, 416. After this extraction a mere $4,473.74 of the original down payment remained.

After 9 months the first HELOC must have run out - the homeowners closed that line and opened a new HELOC for $103,000, taking out potentially an additional $74,584. The new HELOC made the potential equity extraction $635,000, which was $70,110.26 more than the original purchase price. As home values were declining, the equity extracted from this property increasing.

Obviously there is a large discrepancy between what was (possibly) borrowed and what is owed. And since a Lis Pendens was filed, payments were not always made. [The refinanced mortgage was resold several times during its existence so there is a slight chance the Lis Pendens was a paperwork issue not a payment issue - we have heard rumors of this happening.]

Now on to potential losses. If the property sells for full asking price, with the realtor receiving the standard commission, the lender(s) will probably lose between $44,140 and $147,140 depending on HELOC usage. That loss is just for the money lent to the homeowners. This is listed as a short sale, but we are inclined to believe anyone who enjoys MEWs would be bringing a check to closing.

Just remember, this purchase and equity withdrawal were basically after the bubble burst. Lenders could see trouble coming and yet the withdrawals were still occurring.

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