Sunday, March 1, 2009

Over Extended in Oak Ridge

When we hear about foreclosures there are two groups that people think about. Prior to the big bubble burst, when someone was in foreclosure, people thought of medical problems or a death of a family member. Someone in foreclosure usually received sympathy from their fellow homeowners, thinking "but for a string of bad luck it could be me."

Now during after the great housing bubble burst and we see people buying mortgages with negative amortization and mortgages with one percent teaser rates that are the only affordable payments for the homeowners and zero percent downers with piggy back mortgages. The scrutiny against those in foreclosure are much more negative with a harsh judgment involved. The feelings of "you lost your house because of bad judgment and reckless spending" has permeated. Angry about the loss in their own home values, rather than sympathy a person in foreclosure can receive anger in its place.

There is anger at the system for allowing the financial system to get so out of whack. There is anger at the homeowners for buying properties they could never afford that were well, well beyond their means. There is anger at the government and regulators for not stepping in until well after the devastation has occurred. The anger of the current economic state is pretty much toward everyone that was involved in the financial transactions. Yes that includes the realtors and the mortgage brokers who worked within the system as well.

Now people are losing homes. People who put money down are underwater just due to the declines. The owners who used their properties as ATMs and got into the habit of withdrawing equity are in dire straights. The collapse is felt by all, but the over-extended are on the front lines of the economic meltdown. Financial mistakes and missteps are bringing people to foreclosure who never expected to be there. Getting caught up in the bubble spending might have been exhilarating at the time, but now it is depressing and life altering.

Which brings us to today's features property about a homeowner that bought their house with a solid financial plan, got caught up in the HELOC and ReFi fun. The property is now an REO, the bubble financing schemes aided in the property owners losing their home. Lets take look -

Here is the property -

Here is the property info -

  • Status: Active
  • County: Morris
  • Year Built: 1952
  • 3 total bedroom(s)
  • 2 total bath(s)
  • 2 total full bath(s)
  • 7 total rooms
  • Style: CapeCod
  • Master bedroom
  • Living room
  • Kitchen
  • Den
  • Basement
  • Bathroom(s) on main floor
  • Master bedroom is 26x14
  • Living room is 18x14
  • Dining room is 13x11
  • Kitchen is 14x9
  • Den is 12x9
  • Basement is Partially Finished, Full
  • 1 car garage
  • Parking features: Built-In Garage
  • Heating features: 1 Unit,Oil Water Heater,Oil
  • Exterior construction: Vinyl Siding
  • Roofing: Asphalt Shingle
  • Approximately 0.28 acre(s)
  • Lot size is less than 1/2 acre
  • Utilities present: Septic, Public Water, Electric Service

Here are the financials -

  • The property was purchased in November 2003 for $310,000.
  • The original mortgage at the time of purchase was for $248,000 using a 30 year fixed with Countrywide Home Loans.
  • On the same day as the purchase a HELOC was also opened for $31,000 also with Countrywide Home Loans.
  • In February 2005 the property was refinanced for $248,000 this time using an ARM with Countrywide Home Loans.
  • In December 2005 the property was refinanced again, this time with a cash-out for a loan totaling $320,000 using an ARM with Wall Street Financial Corp.
  • In November 2006 the property was refinanced with a cash-out total of $347,000 this time using a 40-year ARM with Village Capital and Investment.
  • In October 2007 the foreclosure process started with the filing of a Lis Pendens.
  • The property is currently an REO listed with a reator for $314,900.
  • The 2008 property taxes for the property were $6,638.31.

The property was purchased with a hefty 20% down payment, which was $62,000. Notice at the time of purchase that a HELOC was opened for another 10% of the purchase price. This could easily have been pushed by the lender, the double mortgage signing were became quite common during the housing bubble. Remember this was a different time when lenders were comfortable with a business plan that allowed people to owe more on the property than it was worth. Back in the bubble lenders did not care if people took more than 100% equity out of the property. We guess they assumed that by the time the papers were signed and filed the equity would have increased enough to cover it. (Now the opposite is happening, lenders worried that the appraised price still covers enough of the loan at closing.)

The first ReFi looks to be the type that would lower and change the rates. Remember during the bubble when people could "save" money by getting an ARM rather than a conventional mortgage. The philosophy was not to worry because you could just ReFi again in another few years when the mortgages reset. That's not working out as planned either.

So equity was not taken until after 2 years of ownership with the owner taking another $10,000 on top of their $62,000 down payment. That must have worked well since just 11 months later another $27,000 was extracted from the property. This made the total of equity extracted in less than a year $99,000 - with a withdrawal of $37,000 more than the purchase price. But this was bubble times when it was common for the house to pay you. With annual double digit appreciation rates, why not use your property like an ATM.

But notice that the last Cash Out Refi was with the more uncommon 40 year mortgage, so the loan was probably at the upper end of comfortable payments. And since Lis Pendens are usually not filed until after 2 months of non-payment, the property owner was unable to carry this new mortgage for more than 9 months without getting into trouble.

While it is difficult to distinguish the owners that run into trouble through no fault of their own - death or medical issues - this mortgage history would lead us to believe this foreclosure was probably due to bad financial planning. Taking loans on the amount of the asset not the ability to pay back the loan is a common problem from those that borrowed during the bubble.

So while the owner was able to extract an additional $37,000 of equity from the property prior to foreclosure, the lender will stand to lose about $50,994 if the property sells through the realtor (taking the standard commission) for full asking price.

For prospective buyers looking to own the Oak Ridge property, with a down payment of 20% and using today's Bankrate with a 30 year fixed the monthly payment would be about $1,391.11. Adding the taxes would bring monthly payments up to $1944.30 per month plus insurance and utilities.

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