Monday, December 03, 2007

'I just wish we never would have bought'

In conjunction with the article linked below, the Sacramento Bee has posted an interactive map which shows foreclosures that have occurred over the last 13 months in the Sacramento region.

From the Sacramento Bee:

For more than 7,600 households across the region, the lights of home have gone out this year. Months after their foreclosure proceedings ended, they are scattered to new neighborhoods and to other towns. They are a harbinger of what's to come as the region's mortgage crisis spills into 2008.
...
As the turmoil mounts, assigning blame or asking why almost seems beside the point. People are losing houses for every reason you can imagine. They got sick and lost jobs. People got adjustable-rate mortgages with initial low interest rates that then reset to a higher rate, causing payments to soar out of reach. Mortgage brokers fraudulently sold them loans they didn't understand and couldn't afford. Many who bought early in the boom recklessly spent their equity gains and couldn't make their refinance payments.
...
"I just wanted to own a home," says Andrea Eddy, 27, a former state worker in Sacramento who lives in Trinity County now, a four-hour drive from the capital. "I thought everything was perfect with my husband and our jobs and our daughter, and that a house was the next step." A year after losing her new light-brown two-story home at Southport's Huckleberry Circle, she says, "I just wish we never would have bought."
From the Stockton Record (hat tip Tyrone):
When Jenny and Ricardo Hernandez bought their north Stockton home in 2005, their monthly mortgage payments were around $1,800. Now the payments total nearly $3,000 - more than the working couple's monthly net income - and the Hernandez family is facing almost inevitable foreclosure. Jenny Hernandez, 36, was just one of around 500 people who lined up Saturday at Stockton Arena for an informational workshop in the hope they might stave off foreclosure on their homes or improve their financing in a troubled mortgage market.
From the Central Valley Business Times:
[T]here may be little the government can do to bail out those faced with losing their homes as the interest rates on their mortgages goes up, says state Sen. Mike Machado, D-Linden, chairman of the state Senate’s banking and finance committee. “A mortgage is a contract and that contract in many cases has been bundled and has been sold away from the local bank or institution that issued the contract,” says Mr. Machado.

“It has become part of a securitized product that is now being marketed worldwide,” he says. “By coming in and by law trying to change a contract will send ripples … to the investment market in terms of the confidence investors will have in products that would be coming from the mortgage marketplace in the future.”
From ABC 7 (hat tip Jeff):
When it comes to the mortgage crisis, it's hard to find the bright side. But for a very few, the misfortune of others has been a financial boon. A nightmare for so many, the mortgage crisis has unlocked new business opportunities for at least a few people in East Contra Costa County. That's where changing locks on homes like this that have gone into foreclosure, has become a bit of a windfall for Joe Grant, the owner of "Poppa Joe's Lock & Key."
From the Associated Press: (hat tip Diggin Deeper)
Echoing the complaints of consumer advocates who have long pushed for mortgage lending reform, Robert Toll, chief executive of luxury homebuilder Toll Brothers Inc., said stronger restraints are needed to prevent a recurrence of today's problems. "We had mortgages available to the alive and standing and that was the only criteria," he said. "There's no reason why we can't set limits." Toll also said home prices "may not have stopped falling yet," adding that it may not "be the best time to buy a home."

Mark Zandi, chief economist at Moody's Economy.com, predicted that, if the economy slips into recession or if efforts to modify loans don't pick up substantially, the housing market downturn could last through the end of the decade. "This is the most serious housing downturn since the Great Depression," Zandi said.

25 comments:

smf said...

"When Jenny and Ricardo Hernandez bought their north Stockton home in 2005, their monthly mortgage payments were around $1,800. Now the payments total nearly $3,000 - more than the working couple's monthly net income"

Did I understand this right? The $1800 mortgage was over 50% of their income? And they still bought??

Sorry, no sympathy here. They were screwed the moment they signed into a loan that took over 50% of their income, regardless of any ARM adjustments.

Perhaps they were waiting to refi into a better loan? *snicker*

Just like some of these people that played fools after the burst, we can read something, and upon closer examination realize that it does not pass the smell test.

andnee said...

I read this article in the Sacramento Bee, and the author should be ashamed of himself. When are they going to stop portraying these people as "vicitims"?

They are victims, of thier own stupidity and short sightedness. The only upside to this is it seems no matter what the govt tries to do to stop this "horrible" correction is falling flat. We are at the point that nothing can stop this correction and any attempts are just lip service. YEA!!!

Professor Shays said...

While I understand the rationale for Andnee's position, we must remember that for many borrowers there was what I'll characterize as detrimental reliance on the expertise of the lending professionals. After all, would you as a prudent lender, provide financing where the borrower stood little chance of meeting the terms of the repayment contract (promissory note)?

My target in all of this is those at the center of greedy behavior. All you have to do is follow the money. That isn't money flowing to the borrower. Last time I checked, it was money flowing from escrow closing to trusted advisors like loan officers, real estate agents, etc.

When compensation for professional services is based upon a commission that is only earned based upon a successful closing, we can see the results. Having started in this business in 1972 as an escrow officer, and thankfully avoiding it since 1995 (the end of the last downward spiral), I have no vested interest in defending of the participants. Nor unlike many who participate in these forums, do I have a vested interest in holding back my opinions.

Blame here squarely falls on those trusted professionals who were more concerned about their commission check, than whether or not the deal made sense.

Daniel

Gwynster said...

For me what is intersting to me is reading the comments following an article such as this. The anger pattern seems to be fairly consistent whether I'm looking locally or nationally.

smf said...

"Blame here squarely falls on those trusted professionals who were more concerned about their commission check, than whether or not the deal made sense."

Sure it does, but there are some deals that smelled rotten from the beginning, and the 'victim' is only trying to play that card to avoid responsibility.

I have already told the story of when a broker tried to screw us twice by placing other terms on the loan papers.

But if a broker/lender comes and tells me that he can help me unlock my equity and reduce my payment, I don't have to look much to realize that it doesn't pass the smell test. Yet many received the same pitch and fell for it.

These people I mentioned above already had an onerous mortgage payment BEFORE an adjustment. The questions begs: why did they STILL purchase the home then?

aggiealum said...

I wouldn't call some of these brokers "professionals," unless the word con-artist follows the title. As for the "victims" (ie homeowners), a small part of me feels for them b/c all they wanted was to own a home, but most of me says, "due diligence." In the meantime, barring the USD falling into oblivion, my 25% down payment on the home of our "dreams" will probably grow to 35% within a year. No need to catch a falling knife as they say. Oh, just heard about a new home auction in Vacaville where a 4400sqft home sold in the mid $600's. A few months ago, someone bought the same home in the high $800's. The terms on the $600K home? 10/1 ARM @ 6% for this second home.

PeonInChief said...

First, it's not unusual for lower income people to spend a large percentage of their income on housing. Half of all tenants in California pay more than 30% of their income for rent, and a quarter pay 50%. And that's GROSS income. So many lower income people wouldn't think that was out of line.

Second, some of the folks had really bad things happen to them. Getting sick or losing one's job does not indicate a lack of virtue. When things like that happen to our friends, I hope that we don't bash them for not planning for it.

Third, there's a certain luck of the draw here. Someone who bought a house in 2001 and sold it in 2004 made pots, even though she was probably gambling just as much as these folks. They just happened to get lucky, while those who came in at the end were really unlucky. I didn't try to buy a house, but that was because the DH and I aren't planning to stay here after he retires. But remaining a tenant doesn't make me a more virtuous person.

Fourth, while some of these folks appear to have been positively dumb, there's plenty of blame to go round. Reasonable targets include the brokers and lenders who made these loans and the investors who bought them. They were gambling as much as the people now facing the loss of their homes.

And while I don't think anyone can bail these folks out, the more important issue is the regulation of the financial sector, so that these loans can't be made in future and they can't be securitized as anything but junk.

SheWrestles said...

The only solution is to begin a wholesale advertising and re-education campaign to teach Americans that realtors and lenders are not to be trusted under any circumstances.

But it could take 5-10 years for this to become a regular part of the national conversation, and another 10 years for it to become common knowledge.

Most readers here understand that a family should not spend 50% of their gross income on housing, but does the person of below average common sense know that?

I'm willing to bet that the average non-homeowner thinks of getting a mortgage as 'getting a home loan' rather than viewing it as 'buying a mortgage product'.

PeonInChief said...

She--

I don't think folks go out and look to rent apartments that costs 50% of their incomes. Many people have no choice--there's nothing cheaper out there.

wrong moves said...

Shew "Most readers here understand that a family should not spend 50% of their gross income on housing, but does the person of below average common sense know that?"

Common sense is not a commmon commodity

Chief "I don't think folks go out and look to rent apartments that costs 50% of their incomes. Many people have no choice--there's nothing cheaper out there."

For the lowest wage earners, maybe more so. For those making better than minimum wage, I think it takes effort, time, and a little negotiating finesse.

I don't blame the real estate and finance "professionals" as much as the debtors. The "pros" are merely a venue for the stupid to prove themselves as such. IE, if that couple can't afford 3000 per month, then they really couldn't afford 1800. Dead horse there. No sympathy here.

Diggin Deeper said...

The bailout, if it comes to pass, only affects those that weren't likely to fail in the first place. As I read it, only the most creditworthy holding teaser loans will be helped because they're the only ones left paying their mortgages in the first place. And if they are saved, they will continue to at least push cashflow through to the lenders.

The only way banks make money is to borrow at lower rates and lend at higher rates, usually on a leveraged basis. If they are forced to accept artifially lower rates due to this "bailout" how will they respond on future loans in order to compensate? If these are fairly insignificant in numbers, does that really aid the bank during this credit crunch period?

Further, the banks aren't protected from further loan losses and escalating loan reserves by the less creditworthy.
Those that cannot pay the reset payments, probably will not, and will fail anyway, as they should.

We've yet to see the regional banks weigh in and they are heavy into commercial loans. I highly suspect we'll see problems in this area before this settles out. It could very well overtake the place of those that get a pass on this "bailout" effort.

Imo, these artificially suppressed rates will affect very few mortgagees and certainly not the wide swath of those that need it most. It will do little to take the pressure off the wave of foreclosures that will and should take place next year. As someone put it earlier, it's a bandaid that's way too small to cover the wound.

SheWrestles said...

I understand that you don't want to be sympathetic to people who didn't know how to live within their means.

Here's my gripe with the lenders, though:

They (especially COUNTRYWIDE) make loans *knowing* that certain borrowers are going to default. But they don't care, because it's the frugal, hardworking consumer and taxpayer that's going to pick up the tab in the end.

Mortgage rates are coming down, but one of my credit cards just went up to 12%...just because they could. The increase doesn't affect me personally (right now), but what about their other customers?

I want to go back to trading with wampum.

Cmyst said...

Wrong Moves - "The "pros" are merely a venue for the stupid to prove themselves as such. IE, if that couple can't afford 3000 per month, then they really couldn't afford 1800."

Maybe it's me, but that doesn't make sense. Are you referring to an $1800 initial teaser rate payment on an ARM, that when it resets to $3000 the couple can't afford?
Cause I COULD afford to spend $1800 on a fixed rate mortgage payment, but not $3000. There's a $1200 difference there, that's a lot of dough.
I agree that this is a personal responsibility issue, and I have no sympathy for people who are now losing homes that they knew were too expensive for them. And most normal adults know what's too expensive, and if they're not currently renting a place that's decent -- again, there's a reason for that. It's pretty wacky that people who couldn't obtain a nice rental due to their credit/work issues were able to obtain loans for $1000's and "buy" luxury homes.

Diggin Deeper said...

We're going pay one way or the other. These debts don't just evaporate. They don't go away and they have to be settled. You can keep pushing them out further and further but they remain DEBT. Someday, they get paid off. The sooner the better.

The only way to recoup is to manage toward tighter risk policy. Since cheap money came about risk tolerance went so high, that lenders could put a monkey with smile into his own home. Not so today, even if rates are low. We're pushing on a balloon here. If you want cheap mortgage rates but risk tolerance is tightening it will show up in the form of higher rates elsewhere. I'd say your 12% CC rate is pretty generous. Many are well into the 19-22% rate.

G Spot1 said...

"Most readers here understand that a family should not spend 50% of their gross income on housing, but does the person of below average common sense know that? "

I think Steve Martin and Chris Parnell have a head start on a public education campaign to teach them this important lesson:

http://www.dailymotion.com/video/xt0c6_snldontbuystuff

Gwynster said...

I'm with Cmyst, $1800 to 2100 is doable. $3000 is most certainly not. If the $3000 was what they should have been paying with a 6.5% fixed due to the purchase price, then that $1800 is a helluva deal. Here is what I think Shrew meant.

Say the house was $450k, Piggyback 80/20 loans = 100% over 30 yrs.
@ 7% comes to $2993/ mo
@ 2.6% comes to $1801/mo

No way can or should a bank take on a 2.6% for 5 to 7 years unless they back load all that missing interest, compounded it, and that is a big if.

The point is that affordability should have been measured at the 6.0% to 7.0%. I'm betting that what the new plan will insist on using is documented income and not stated. That $450k house would require an gross income over 150k once you add in taxes and insurance and maintenance. Chances are they only make about 65k which would make the $1800 affordable but just barely.

The person with the $3000 reset would hasn't a prayer of holding onto that house.

Diggin Deeper said...

"No way can or should a bank take on a 2.6% for 5 to 7 years unless they back load all that missing interest, compounded it, and that is a big if."

You're right Gwyn, the banks GET their pound of flesh in some form or fashion. Whether you and I get higher rates to compensate, or something's done internally to each loan to make it right, given a second chance, the banks won't squander the opportunity. If they do backload, at some point, even the least savvy homeowner will figure out it was a bad deal.. getting much worse... and opting out later becomes one smart solution. But who wouldn't take advantage of this good fortune for as long as they could?

"The person with the $3000 reset hasn't a prayer of holding onto that house."

Not necessarily but highly probable. If they are eligle for the bailout, they might get a pass and be given the extended lower rate. Now whether that's a smart move on the mortgagee's part will end up being handled case by case. Again, if you're deep in debt by the end of the term, walking becomes a very credible option.

Patient Renter said...

"For more than 7,600 households across the region, the lights of home have gone out this year"

What melodrama. More accurately, the lights of the "owned" home went out and the lights of the rented home went on.

wrong moves said...

Cmyst,
From the story, it stated "their monthly mortgage payments were around $1,800. Now the payments total nearly $3,000 - more than the working couple's monthly net income".

I just didn't cut and paste enough.

If 3000 is more than the couples income (gross or net IMO,) then 1800 is WAY too much for them to pay in a mortgage. I don't care if the interest rate is a fixed 1.1 percent PITI for 15 years.

Sorry for not being more clear.

smf said...

"The person with the $3000 reset would hasn't a prayer of holding onto that house."

As soon as these buyers signed on the dotted line, foreclosure became their only 'out'. Refinancing out of the loan was not even on the books, despite assurances given.

SacramentoCrash said...

The only ones that came out of this disaster ahead of the "game" are the:

Mortgage "strategists" (loan whores)

New Homes Sales "Executives" (sales whores)

Agents and Brokers (____Whores). I can't say the copywrited word.

Wall Street Investment Bankers (money pimps)

Diggin Deeper said...

...and it looks like those groups are now in trouble.

I'd like to add...

Those who sold out early enough and parked their inflated equity outside the real estate market.

Those that didn't leverage and paid cash for their real estate.

Those that paid down their debts and ramped up their savings.

Those that weren't tempted enough to jump in with everyone else.

Not everyone on this blog got burned by the bubble. Many are waiting to make their move when things get right again.

Patient Renter said...

Group who has not come out ahead... yet:

Those who wisely sat out the madness, and patiently rented. :)

PeonInChief said...
This comment has been removed by the author.
PeonInChief said...

Okay, wm, let's do the math. A person making $10 an hour (more than the minimum wage)has a monthly income of $1730, a yearly income of $20,760. Thirty percent of $1760 is $519. The average price for a studio apartment in Sacramento is more than that. There were about 50 units at this price available on craigslist. A single person making this income might be able to find housing, but a single parent would have immense difficulty finding suitable housing. It would not be surprising to find that someone making this income would be spending close to 50% of her or his income, about $880 a month, for housing.

What's also obvious is that the 30% rule is somewhat misleading. Our $10 an hour worker really can't afford to spend $520 a month for housing. This would leave $1210, minus taxes, for all other expenses.

If someone who makes $10,000 a month wants to spend half of that for rent or mortgage payment, who cares? But most low and moderate income workers can't afford to spend nearly that percentage of income for rent and still meet other basic expenses.

This has been known for a long time. In 1976 Michael Stone and Emily Achtenberg looked at the government budget allocations for low and moderate income households. They found that a family couldn't afford to spend 25% (the standard at that time, to which we should revert) of income for housing until the household made $16,000 a year (this in 1976 dollars).

And tenants at that income level don't negotiate. They're in competition with lots of other people and they have no choice but to accept what's offered.