We have not done an example in a while - thought one was due. And what better way to make a comeback then with example that illustrates everything that was wrong with the housing bubble. Renting from the bank through no money down and using a piggy back loan - check. Serial refinancing to cash out an accumulated equity - check. Using more and more exotic loans - starting with a fixed 30, moving to an ARM with a balloon payment and ending up Interest Only ARM - check kind. This homeowner never got the to the Option ARM, foreclosure happened first. But, unlike previous examples this time we are left with a plywood door - wonder what the interior looks like. Well, let's take a look at today's example -
Here is the property -
Here is the property info -
Here are the financials -
- The property was purchased in January 2006 for $335,000.
- The original mortgage at time of purchase was for $251,250 with Lancaster Mortgage Bankers.
- On the same day a second mortgage was opened for $83,750 also with Lancaster Mortgage Bankers.
- In July 2006 the property was refinanced with cash out for $380,000 using an ARM with a balloon payment with Long Beach Mortgage.
- In February 2007 the property was refinanced again with a cash-out for $391,000 using an Interest Only ARM with American Wholesale Lender.
- The foreclosure process started in March 2008 with the filing of a Lis Pendens.
- The property is currently an REO listed with a realtor for $307,900.
- The property taxes for 2008 were $5314.17.
The perfect bubble buyer - no money down AKA renting from the bank. Then we have the wonderful piggy back loans to remove that unwanted PMI surcharge. Oh the bubble was grand! Within 6 months of purchasing the property $45,000 was extracted through a refinance with a cash out. Did the money go to fix up the property or did it go other places?
Where ever the money went it disappeared fast - since 7 months later another cash-out refi took place, this time extracting another $11,000. With this loan the owner realized that paying into the principal was just too expensive so they opted for an interest only payment. Now that is really just renting from the bank - no money invested, no equity building up other than through natural market forces (which happened to start going in the opposite direction at this time).
Within just over two years the owner refinanced 3 times, extracted $56,000 of equity of out the property and then lost the property. Not bad to live in a house for a couple of years while generating an income of approximately $28,000 of income per year in the process.
The property owner probably made about 9 payments until the mortgage (rent money) was delinquent and a lis pendens was filed, which ended up in foreclosure. Now the property is for sale for $83,100 then the last refi and $27,100 less than the 2006 purchase price. Adding in the standard realtor's commission and the lender will lose at least $101,574 if the property sells for the full purchase price. Plus all of the other costs, which are numerous.
For those interested in purchasing today's plywood special, if they are able to put 20% down and received a 30-year fixed at today's Bankrate rate for Randolph, NJ averaging 5.875% the monthly payments would be $1563.55. Adding in the property taxes and the monthly payments would be about $2006.40 per month - plus utilities and insurance.
For the other interested in parties that are unable to put even close to 20% down lets look at some other numbers. Using the GoodMortgage.com that includes the PMI charges and the new rate, a potential new buyer is only able to put down 5% or $15,395. The monthly mortgage payment would be $1730.28, plus a PMI of $190.13, and the taxes of $442.85 totaling $2363.26. And for a buyer who puts only 3% down - the mortgage would be $1766.70, PMI now $258.84 the taxes stay at $442.85 for a total monthly payment of $2468.39. Plus utilities and insurance of course.
Note - Our summer schedule is very unpredictable right now, so we will post these when we can. Enjoy them when they come!