The negative equity epidemic

shesulsa

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Rhonda is in a panic.

The two-year introductory rate on her adjustable mortgage is about to expire and send her payments soaring. She thought she could refinance to a more-affordable loan, but the rates she's being quoted are just as high.

"So I then decided I would just sell the house and get out of it," Rhonda wrote in an e-mail. "WRONG! The houses in my area are selling for around $20,000 less than what I owe!"

Rising interest rates would put a strain on homeowners with adjustable-rate mortgages in any economy. But the situation is growing critical for millions of borrowers who are "upside-down," owing more on their homes than they're worth.

FULL ARTICLE

The new face of sudden onset poverty in America ... from homeowner to homeless.

I know a handful of people suffering from this very situation. Homeownership requires a fair amount of cash cushion - about enough to buy a car in cash outright - to keep the owner in increasing equity by keeping the home in good repair.

Folks ... home ownership is not a game. If you think you can't afford to buy a home, then don't.
 

beau_safken

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I see this all over the place here in California. Actually just as I left Seattle that is starting to happen more up there. I was a loan processor up there about a year and you wouldn't believe what some people are doing with their money.

The best ploy in the book is the so called "Reverse mortgage." Basically its a loan that hedges that real estate will constantly increase in value regardless of market conditions or economic climate. People will take a mortgage for 110% or greater of the value of the home. Example: 200,000 purchase price with 110% loan of 220,000 on the property. The people will then use the 20,000 dollar buffer to pay the excess of mortgage they can't cover on their own income. As soon as this buffer gets low or is depleted, then they re-fi the house and get a loan for the increased amount due to inflation, market rise or precieved value. So the logic is that they can have a home they can't afford now and wait until their future income rises to match the level of home they now own. Its really really stupid to do this as a sole proprieter and god forbid a couple. I have seen more foreclosers from this one form of mortgage than any other.

Another is a good one... Its a LIBOR(London index bond rate) loan. These loans are adjusted off either the 3 or 6 month london index bond rate, which is obviously lower than any normal rate. They then like any good adjustable rate mortgage are completely up to the usual bracketed adjusting rate...BUT These are adjusted off a foreign index and can be adjusted more frequently depending on the program. I have seen some that will be readjusted every 6 MONTHS!!

People I would seriously suggest taking Shesulsa's post as a good learning experience if you find yourself in this situation. And if your not...Find all those people with foreclosed homes and google the following "Short Sale"
 

Flatlander

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This 'reverse mtg' idea isn't legal in Canada - you can only refinance up to 90% of the value of your home.

It's too bad to see people hurt by bad planning, but when making decisions of such magnitude, it's necessary to consider the possible risks of what you're doing. Anyone who doesn't keep an eye to the potential for interest rate fluctuations is short sighted, and destined to fail in their plan.
 

Kacey

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I agree - and in addition, the big thing in Colorado is 'interest-free' mortgages, so people buy a house for a payment they can afford... until the interest kicks in, and then they go into foreclosure, because the payment with the interest is more than they can afford, made worse by the accumulated interest by the time the payment with interest comes due.

Luckily for me, I had a very competent realtor, who referred me to a very competent mortgage broker - they met on the Denver Affordable Housing Board, which, as the name implies, helps people buy affordable housing. Because of these two ladies, I bought a condo for payments (even with the association fee) that was less than the cost of my previous rent, and then, after 6 years of living in the condo and improving it, I sold it at a profit and used the proceeds to buy a house, which is now within my means (yay! 3 years next month!). The realtor helped me find decent places to live that were within my price range, and the mortgage broker helped me get the best financing - I refer these ladies all over the place, and, while they both like making a living, they have dissuaded a couple of people I know from buying houses because they won't recommend any of the shadier mortgage options, or let people buy outside their means.
 

Flying Crane

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yeah, it's crazy here in San Francisco, and people are doing anything (and I do mean "anything") to own a home. 40 year mortgages, interest only loans, and I have even heard of less-than-interest-only loans. It's a real gamble, and assumes you will never have any kind of emergency in your life that might require some cash, and assumes you will always earn more money in the future.

My wife and I considered a house here in the city a couple years ago. Listing at $550,000, it was just about the lowest priced house left in San Francisco. It was in a lousy neighborhood (prostitutes and pimps hanging out on both corners of the block, people sleeping in the doorways), and after my mother-in-law's friend, who is a contractor, took a look at the place he felt that just about everything needed to be rebuilt. Basically, it should just be razed to the ground and start over. Well with the bidding wars for every available scrap of land that go on out here the house actually sold for about $740,000, if you can believe it, and with necessary repairs probably costing $250,000 or more, this was basically a million dollar home in the ghetto. Just amazing. The averege dumpy little house with no yard here in the city sells for over $750,000.

I spoke with two different banks during that time, and they were perfectly willing to loan me as much as I wanted. It blew me away. You really gotta know your own capabilities and know how much you can afford. The banks will do anything to convince you that you can afford a crazy payment, and they act like it is just normal and everyone is doing it.

Personally, I'm waiting for the next big earthquake to hit. Hopefully I can pick up something for dirt cheap, if the resulting chaos is bad enough.
 

Flying Crane

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One of the big problems here in San Francisco is that few people actually want to make a long term home out of the house they buy. They are just real estate speculators, and they expect to sell the house within two years and make a killing on the profit. And people keep buying into it, pricing people like myself right out of the market.
 

beau_safken

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Not to mention there is a little issue with all this inflated bloat in our little market also.

I'm with ya Crane, soon as some kind of thing hits this town...Be it the next .com boom type things, or collapse of the dollar...ITs gonna be a good time to be cash heavy if possible.
 

bushidomartialarts

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i think we're seeing the beginnings of a crash in the real estate market. the RE market has been acting like a bubble economy for the past ten years or so. all of us are old enough to remember what happened when tech stocks did the same thing.

my wife and i just refinanced the house we plan to raise our children in. cashed in on some sweet equity to basically kill all our other debt. i don't see that opportunity happening again for us in the next ten to fifteen.
 

Flatlander

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Flying Crane said:
Well with the bidding wars for every available scrap of land that go on out here the house actually sold for about $740,000, if you can believe it, and with necessary repairs probably costing $250,000 or more, this was basically a million dollar home in the ghetto. Just amazing. The averege dumpy little house with no yard here in the city sells for over $750,000.
So, how does this compare with rent prices? By which I mean, to rent an equal amount of living space in an equivalent neighbourhood; how does this compare to the monthly mortgage cost?
 

beau_safken

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Basically the mentality I have run into is this.

New owners that aren't old money can't charge the amount needed to cover the mortgage. They do a reverse mortgage to supplement the rental income until the property has gained enough interest over the years to be refi'ed and then the new owner can get more cash. So pretty much the idea is this. Example(Very crude but just to make a point): Mortgage (Itemized to a single unit) 1500, Rent 1000-1250. Thats between 250-500 dollars lost. Owner will use the remaining amount from the reverse mortgage or an equity to make up the difference. So if this place had lets say for arguement sake 20,000 dollars in cash from the reverse. They can supplement a 5 unit apartment building for the following (20,000 dollars/5 units = 4000 dollars to supplement per unit. At 250 a month lost that will last for 16 months, or at 500 thats will last 8 months. Just long enough for the 6 month refi window to eclipse. ) They do this over and over and over....This a MAJOR reason we have jacked up prices here.
 

Flying Crane

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Flatlander said:
So, how does this compare with rent prices? By which I mean, to rent an equal amount of living space in an equivalent neighbourhood; how does this compare to the monthly mortgage cost?

Depends a lot on the neighborhood. If you are out closer to the ocean, which is away from downtown, things are a bit cheaper. A one bedroom apt. might run you about $1100 - $1400.

If you are closer to downtown, or in some of the other desireable (but not wealthy) neighborhoods, a one bedroom might run you as high as $1800. And a lot of these are pretty small, maybe 700 sq. feet, sort of dumpy crackerbox places without any character. I haven't priced the market recently so my numbers might be a bit off. My wife an I live in a live/work studio loft, with about 1100 square feet, wide open space, 13 foot ceilings in a converted Sears building, and our rent is a bit over $1800, including a parking space. This would be equivalent space and cost for a decent two bedroom in our neighborhood.

Back in 2000, at the height of the Dot-Com boom, I had been living in a rent controlled Victorian House with 5 housemates. I had been there for about 6 and a half years. My rent was about $350, and it was kept low because of the rent control. We had one floor out of three in the building, about 20 people total in the whole building. The landlord sold the building for somewhere around a million dollars, and the new owner decided to move into my unit. We all got the boot, and eventually he emptied out the entire house, 20 newly homeless people, in an extremely tight housing market. At that time, I was seeing one bedroom apartments renting for as high as $2400. I felt lucky to be able to find a one bedroom for $1400, out toward the ocean. That was pushing my absolute financial limits, and had I not been able to get something like this, I would have had to leave the city. Anyway, the new owner kept the building for just as long as he needed to under the local eviction laws, converted the units into condos, and then sold them all off for about $700,000 each for the lower two, and $900,000 for the top one. Fine example of real estate speculation. Meanwhile for myself and all the others, our rents increased by 400 to 600 percent.

I love this city, it has a ton of stuff that I like and I don't want to leave, but the housing fiasco makes me nuts.
 

michaeledward

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I saw this article first thing this morning. It certainly paints a scary scenario. And we have watched it unfold over the past 10 years or so.

That lender regulations were loosened to the point of allowing 'interest only mortgages' was a greed-induced euphoria among bankers. A hot market (dot-com-boom created) drove up prices, motivating buyers to purchase sooner than they would, which spawned these alternative mortgage plans, which scared more people into buying sooner, afraid they may be priced out of the market, which forced buyers into 'alternative mortgages', which drove up prices.

A vicious circle in which the ouroborus is unaware it is consuming itself.

I think prices are perhaps making a 20% down mortgage unrealistic. But a 30 year, fixed rate, 10% down mortgage should dictate how much house to buy. I am grateful I was able to re-finance from a 30 year fixed to a 15 year fixed 3 years into my first home purchase.

Although, we just opened an equity line of credit ... I think these are evil too. I did limit the total available credit to 25 grand. Hopefully, I won't ever need more than that at once.
 

beau_safken

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Thats a good idea Mike.

I have seen a good amount of people defaulting on their equity lines and losing their homes due to the equity line being secured by the house they were paying the primary mortgage on.
 

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Well on a positive note for my own self, in a few more months we expect to have the last of my wife's school debts paid for and we will be debt free. My school debts are paid for, the car is paid for, and we pay off the credit card in full every month. Looking forward to that! It'll be nice to have no extra monkeys on our backs for a while.
 

beau_safken

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Flying Crane said:
Well on a positive note for my own self, in a few more months we expect to have the last of my wife's school debts paid for and we will be debt free. My school debts are paid for, the car is paid for, and we pay off the credit card in full every month. Looking forward to that! It'll be nice to have no extra monkeys on our backs for a while.

WOOT, Let me know man. I'll get ya a "get out of debt" Gyro. Those damn Gyro's were soooo good.
 

michaeledward

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Flying Crane said:
. . . and we pay off the credit card in full every month.

Quite possibly the most important piece of financial advice available today. Right here ... for free. Don't carry any credit card debt.

Unfortunately, the same regulation loosening that made 'intrest only mortgages' available, also allows financial institutions to target credit card customers based on need, rather than ability to manage, and pay for, credit. Those least able to handle these horrible devices are swamped by the most offers.

The beancounters must have calculated that the 3 to 4 % default rate can be absorbed by those who carry balances month-to-month, without creating too much backlash. Didn't Citibank just post the highest profits ever for the industry. I believe this is criminal behavior. But, lets keep the crowd distracted with immigration and bird flu.
 

Flying Crane

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michaeledward said:
Quite possibly the most important piece of financial advice available today. Right here ... for free. Don't carry any credit card debt.

Complete agreement here.
 

Kacey

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I used the following service to get off credit card mailing lists, for several reasons:

- my mailbox is mounted outside my door, so anyone could reach in and grab things
- I don't want to get credit offers in the mail (or any other way) because I know the dangers of card-hopping
- credit card offers are something else to shred and throw away

http://www.dmaconsumers.org/cgi/offmailinglist has worked great for me to get off mailing lists - once I registered, the only companies I got financial offers from are those with which I have a financial relationship.
 

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