If there is any justice in our financial system, delinquent mortgage squatters will face negative consequences for receiving their free ride. Right now, millions of people are not paying their mortgages, and the banks are not foreclosing on them. I paid my rent for the last five years and many loanowners struggled to pay their bloated mortgages, but after milking their properties of all the equity, many Ponzis quit making their mortgage payments and have been living payment-free ever since. It’s not fair to those who pay for their housing to subsidize those that do not.
Delinquent mortgage squatters have been offered every chance to redeem themselves. Lenders and the government are offering loan modifications that have consistently gotten better for loanowners over time. Everyone who signed on to a toxic mortgage has been offered a stable government-subsidized loan. Anyone who is willing to pay for their housing has been given the opportunity to stay and pay. Anyone not paying their mortgage at this point is doing so by choice. In short, they are all strategic defaulters. Some may be chronically unemployed, and perhaps we should feel sorry for them, but nobody is shedding any tears over the unemployed renters sleeping in their cars.
With prices going up, squatters have greater incentive to start paying again, and many who were reluctant to pay before are applying for loan modifications now. The lure of appreciation and HELOC money will draw many back into the game. There is some risk that these squatters may get rewarded by the market with equity if they squat long enough. However, since banks are adding on lost interest, fees, and penalties, it’s unlikely squatters will ever see the green of equity again — thankfully.
The real consequence for the most committed squatters is that they will miss the recovery rally, whenever that is. The last people pushed out of their houses will be the ones who miss the steepest ascent of house prices during the recovery because they will have poor credit when everyone else is jumping back in. Whatever they may have gained by squatting will be lost to the market. Squatting creates an opportunity cost. They could have been owners when house prices are rising fast. I find comfort in knowing that squatting will have consequences.
‘Boomerang’ Home Seekers Become Eligible for Mortgages and Hit Market Again
By CONOR DOUGHERTY and DAWN WOTAPKA — Updated October 15, 2012, 1:08 p.m. ET
Millions of families lost their homes to foreclosure after the housing crash hit six years ago. Now, some of those families are back in the housing market. Call them the “boomerang” buyers.
The people who defaulted early and moved on with their lives will be the first to reenter the housing market during the recovery. Anyone who was responsible over the last three years regained their credit score and saved enough for a 3.5% FHA down payment. That group faced the consequences for their actions, and now they are on the road to redemption. They should be applauded.
It is difficult to quantify the exact number of boomerang buyers, but real-estate agents, mortgage brokers and home builders all say a significant number of new buyers are families and individuals who went through foreclosure as recently as three years ago, the time period that buyers who defaulted on a mortgage must typically wait before becoming eligible for a mortgage backed by the Federal Housing Administration.
On a recent conference call with investors, Stuart Miller, chief executive of Miami-based home builder Lennar Corp., said the company was seeing more people “coming out of the penalty box.” At Cornerstone Communities, a San Diego home builder, roughly 20 of the 110 closings they have had this year came from buyers who have been through a foreclosure or short sale, estimates Ure Kretowicz, the company’s chief executive.
The land developers and builders I have spoken with over the last year have reported the same thing. Many new homes are sold to people who time the closings to be three years and day after their foreclosure or bankruptcy.
“It’s more than incremental business, that’s for sure,” adds Dan Klinger, president of K. Hovnanian American Mortgage, the mortgage arm of builder Hovnanian Enterprises Inc. With growing interest from these formerly delinquent buyers, K. Hovnanian provides its sales staff with a flier with industry guidelines listing the mortgage-eligibility rules for all types of derogatory events, from foreclosure to bankruptcy filings. “The industry is saying, ‘Pay your dues and then get back into the market,’ ” Mr. Klinger says.
Using the three-year benchmark it takes to get an FHA-guaranteed loan, in this year’s second quarter there were 729,000 households that were foreclosed upon during the bust that are now eligible to apply for an FHA mortgage, up from 285,000 in the second quarter of 2011, according to an analysis of foreclosure data by Moody’s Analytics. The company projects that number will grow to 1.5 million by the first quarter of 2014.
The demand that will fuel the recovery rally will come from this group.
Typical boomerang buyers are people like April Del Rosario, who purchased her first home in 2006 when she was 24 years old. Newly married and unsure of what terms such as adjustable-rate mortgage meant, Ms. Del Rosario and her husband paid $315,000 for a two-bedroom condominium in San Diego’s Mission Valley area, a location they picked because it was central to their jobs. The $2,600 monthly mortgage payment was already a struggle, but when the mortgage rate was adjusted higher and Ms. Del Rosario became pregnant, the couple was overwhelmed. They lost the home to foreclosure in 2009.
“We were really young and stupid,” she says. “All of a sudden, our already really expensive mortgage was going to go up. I was pregnant and everything was just bad timing on our part.”
No, it was not just bad timing. It was bad planning too. They took on a mortgage knowing the payments were going up. That wasn’t a surprise. Their plan was probably to serial refinance from one teaser rate into the next or that they were somehow going to be making 50% more in a few years, which was particularly foolish knowing Mrs. Del Rosario was likely going to have children.
You can’t just ignore the foolishness of what people did that caused them problems during the bubble. It was bad decision making, not bad timing.
Three years later, the couple is back in the market. The Del Rosarios were recently approved for a loan for a $280,000 home in Chula Vista, south of San Diego, which, when it is completed in January, will have three bedrooms and a two-car garage. Instead of proximity to work, they picked the location based on its school district and their desire to live there a long time. And while they now must pay $300 a month in mortgage insurance, the family’s income has grown, and their total mortgage payment is still a little lower than before, around $2,400. “We’re trying to be really conservative. We just want to have a nice place for our son,” she says.
There is a web of rules for when and how people who have lost homes to foreclosure or short sales or have gone through a bankruptcy can become eligible for a new mortgage. It typically takes three years after a foreclosure or short sale for a buyer to qualify for an FHA-backed loan. In many cases, it takes just one year after a Chapter 13 bankruptcy discharge, according to the agency.
Fannie Mae or Freddie Mac require a wait period of as much as seven years after a foreclosure or short sale before a consumer can become eligible for a conventional mortgage, though some short sellers can purchase again after as little as two years.
Prior to the collapse of the housing bubble, the waiting periods used to be five or seven years depending on the transgression. Obviously, lenders are under pressure to lower these standards to get more warm bodies to qualify for loans so they can recycle their properties. However, reducing the waiting period also encourages strategic default. When a loanowner comes to realize they will obtain equity faster by defaulting and buying back at a lower price later, many choose to bail out. The whole point of a waiting period is to provide consequences for default.
Becoming eligible for a new mortgage doesn’t mean that buyers will necessarily qualify for one. Lenders still require borrowers to have strong credit score and to have been paying their other bills on time.
The waiting period is not the only hurdle.
But as rental rates continue rising—they climbed 0.8% in the third quarter to a national average of $1,090 per month, according to Reis Inc. homeownership is increasingly becoming cheaper than renting.
My reports show prices locally finally fell below rental parity last year.
That is part of what enticed Ronda Martinez, 39, back in to the market. In 2007, she and her husband, Mark, let their two-story, $430,000 home in Perris, Calif., go into foreclosure when they were unable to sell it when required to move to Phoenix for a job. …
“Initially people are upset and think, ‘I’ll never buy again,’ ” she said. But “there’s no reason to give up on owning.”
Actually, there are plenty of reasons to give up on owning. I have enjoyed the flexibility renting has provided me, not to mention the significant monthly cost savings over the last decade. Now that it’s cheaper to own than to rent, I am feeling pushed toward ownership — which is how the system is supposed to work. If there were supply in the local market, I would be looking to buy. Unfortunately, that isn’t the market we have right now.
Squatters lose in the end
Besides missing the recovery rally, squatters will lose another way as well. Since it looks like Congress is going to allow the debt-forgiveness tax bread to expire, today’s squatters will also face a huge tax bill once it’s finally over. Remember, these people are much deeper underwater than they realize because banks keep adding on fees, penalties, and lost interest. When these people get 1099s in a few years for several hundred thousand dollars, they will be in for a really rude surprise.
More than million dollars HELOC abuse and five years squatting
There are some squatters you really wan to see lose. The former owners of today’s featured property fall into that category. These people extracted about $1,500,000 from their property, and when they couldn’t pay the mortgage, they were allowed to squat for a very long time. They certainly obtained maximum benefit from loanership of this property.
- This property was purchased for $450,000 on 3/24/1988. Their first mortgage information is not available.
- On 7/13/1999 they refinanced with a $600,000 first mortgage and obtained a $50,000 HELOC. They had to wait out the downturn, but the moment they had equity, they went to the bank to extract it. I expect millions of Californians to follow in their footsteps once prices go up.
- On 5/1/2002 they refinanced with a $908,600 first mortgage.
- On 5/29/2002 they obtained a $224,000 stand-alone second.
- On 8/17/2005 they refinanced with a $1,500,000 first mortgage and obtained a $110,000 HELOC.
- On 6/1/2006 they obtained a $497,500 HELOC.
- Total property debt was $1,997,500 assuming they maxed out the final HELOC.
- Total mortgage equity withdrawal was at least $1,547,500 plus their down payment.
- Total squatting time was well over five years.
Their first notice of default was 2/15/2007. That was prior to when I started writing for the Irvine Housing Blog. The entirety of the last five and one half years I have been writing about HELOC abuse and squatting, these people have been living without a payment in a luxury property.
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Proprietary OC Housing News home purchase analysis
$1,399,900 …….. Asking Price
$450,000 ………. Purchase Price
3/25/1988 ………. Purchase Date
$949,900 ………. Gross Gain (Loss)
($36,000) ………… Commissions and Costs at 8%
$913,900 ………. Net Gain (Loss)
211.1% ………. Gross Percent Change
203.1% ………. Net Percent Change
4.6% ………… Annual Appreciation
Cost of Home Ownership
$1,399,900 …….. Asking Price
$279,980 ………… 20% Down Conventional
3.96% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,119,920 …….. Mortgage
$266,481 ………. Income Requirement
$5,321 ………… Monthly Mortgage Payment
$1,213 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$350 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$6,884 ………. Monthly Cash Outlays
($1,264) ………. Tax Savings
($1,625) ………. Equity Hidden in Payment
$383 ………….. Lost Income to Down Payment
$370 ………….. Maintenance and Replacement Reserves
$4,748 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$15,499 ………… Furnishing and Move In at 1% + $1,500
$15,499 ………… Closing Costs at 1% + $1,500
$11,199 ………… Interest Points
$279,980 ………… Down Payment
$322,177 ………. Total Cash Costs
$72,700 ………. Emergency Cash Reserves
$394,877 ………. Total Savings Needed