Posted on 07/29/2009 9:42:20 AM PDT by FromLori
Why are so many homeowners underwater on their mortgages?
In crafting programs to prevent foreclosures, policymakers have assumed that the primary reason homeowners owe more on their home than it is worth is that they bought at the top of the market. In other words, they’ve lost equity primarily through forces beyond their control.
A new study challenges this premise and finds that excessive borrowing may have played as great a role.
Michael LaCour-Little, a finance professor at California State University at Fullerton, looked at 4,000 foreclosures in Southern California from 2006-08. He found that, at least in Southern California, borrowers who defaulted on their mortgages didn’t purchase their homes at the top of the market. Instead, the average acquisition was made in 2002 and many homes lost to foreclosure were bought in the 1990s. More than half of all borrowers who lost their homes had already refinanced at least once, and four out of five had a second mortgage.
The original loan-to-value ratio for these borrowers stood at a reasonable 84%, but second and third liens left homeowners with a combined loan-to-value ratio of about 150% by the time of the foreclosure sale date.
Borrowers, meanwhile, took out around $2 billion in equity from their homes, or nearly eight times the $262 million that they put into their homes. Lenders lost around four times as much as borrowers, seeing $1 billion in losses.
“[W]hile house price declines were important in explaining the incidence of negative equity, its magnitude was more strongly influenced by increased debt usage,” writes Mr. LaCour-Little. “Hence, borrower behavior, rather than housing market forces, is the predominant factor affecting outcomes.”
If other housing markets across the country offer similar findings, then the study argues that current “policies aimed at protecting homeowners from foreclosure are misguided”
(Excerpt) Read more at blogs.wsj.com ...
In Texas, you can only borrow up to 80% of the home’s value when refinancing.
Of our three children, two are successful and well off. The other is smart, hard working, but in debt up to her little pink ears, all from bad decisions and thinking the good salary she earns (and she works very hard, sometimes 2 jobs)will purchase more than it actually will.
I, personally, am tired of bailing these people out.There are hundreds of thousands out there with just that financial mindset--get out of debt by going deeper in debt.
vaudine
Snicker I know but I figured it was worth the post because it makes a very clear point about us the taxpayers having to bail the losers out.
They had good example - just living like our government - you want it charge it and figure out how to stick someone else with the bill later.
How stupid where the banks to lend this money? You would think their accountants and risk management people would see the problems. What about the regulators? There is enough blame to go around for this meltdown.
I had a friend who worked for Chrysler, bought a big house up in Michigan when times were good thinking that he was golden.
He took out one of those interest only loans, then borrowed about 150% of the value of his house.
He’s hurting now and in foreclosure, and I thought he had common sense when we were growing up.
Choices have consequences my Grand Father used to say. He meant personal consequences not “collective” consequences. “Spread the wealth” = spread the consequences for irresponsibility.
Maybe, but a year ago here we had a parade of people saying “if you didn’t buy at the peak, you don’t have a problem.” I posted charts showing the massive amount of Mortgage Equity Withdrawls that took place after 2003.
Yes, this is obvious to anyone who was paying any attention at all. Unfortunately, 90% don’t pay any attention beyond CNN or Fox News or the local sports cast or Oprah.
I knew this, so I am not at all surprised by it, but this is a revelation to most people.
The banks turned around and sold the paper to Fannie Mae, they got a cash commission and walked away ahead of the game with all their fees.
Believe me, the banks looooved giving out this money.
And every time they refinanced there were $4,000 to $8,000 of fees added but they were sold on that their monthly cash flow payments would be less.
It was probably a one/two punch.
#1. Was all of the refing done based on the insanity that house prices only went up.
#2. When the housing values fell, many mortgage lenders cancelled lines of credit on those homes as total loan value exceded the appraised value of the home.
Re #1 Neil Cavuto touched on this a little last week re how people went whacko and did things to their homes that added little if any value.
Dream kitchens out here with costs between $50k to over $100k became the thing to do. Then, an outside kitchen/cooking center was often added at another $10-$20k. Often the couples doing this had no children/grandkids living at home, ate out or ordered food to go or delivered, and they might have used the new exquisite food preparing facilities during a holiday.
Powder rooms were marbelized, gold plated and fitted with $1,000 imported low flush toilets at costs of $5-10k.
Master BRs and baths were upgraded on a scale that would have made King Henry happy.
Entire families were taken on all expense cruises or special visits to Disney places. By family, this meant taking 2-4 Adult sons/daughters, their spouses and all the grandkids.
Movie rooms or entertainment centers were added to the houses, and often they were used minimally.
BMW’s and Mercedes became the family vehicles. In one area, the big Hummers, Escalades and Navigators replaced the Toyotas, Fords and Hondas.
Credit cards with so called free miles were flashed and used whenever possible.
Then, the home value went down and away went the credit lines. Seconds and thirds became due instead of being able to refi. The 10 to 20K owed on each credit card often went with just a minimum monthly payment or no payment.
Makes one wonder how many of these big spenders voted for the Change Ob0z0 was supposed to bring in.
A house across the street from mine is in foreclosure. In checking the public records, I found the husband and wife purchased it in 2001 for $128,000 with a mortgage of $120,000. Refinanced in 2004 with a new note of $149,000. Refinanced in 2006 with another new note of $156,000. Refinanced in 2007 with another new note of $176,000. All of the loans were adjustable rates, with really high intro rates. This last loan is adjustable at 7.25 percentage pts above LIBOR, with a beginning (and minimum!!) rate (in 2007) of 9.5%, and a maximum of 14.5%.
The house I am in was purchased in 2009 for $155,000, and is larger and newer than the one in forclosure.
...or every time their home’s value jumped up 20% “just because”, they took out a home equity to the very limit to buy that SUV or take that south seas vacation...
Even if you bought at the peak, you shouldn’t be in trouble if you got a mortgage you can afford. Assume your home has depreciated 20% from it’s purchase price. But, when you bought, you put at least 5% down. If you didn’t get a negative amortization or interest only loan, you have at least paid some principal down since the peak, over a year ago. You are probably ‘under water’ about 10%, which still shouldn’t be a problem with a mortgage you can afford and a home you like.
I don't know why we are bailing out lenders.
I don't know why we are bailing out the banks.
I don't know why we are bailing out the automakers.
A democracy cannot exist as a permanent form of government. It can only exist until a majority of voters discover that they can vote themselves largess out of the public treasury.
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