My point of view on home ownership and debt is very different than most financial reporters, and apparently it’s different than most Americans. In my view traditional views of home ownership, like those extolled in Mike’s weekend piece Why our less educated parents and grandparents were more intelligent on homeownership, have been replaced by a twisted concept of money rentership as a proxy for home ownership. I described the slow deterioration of our concepts of home ownership in the post Money rentership: housing and the new American dream:
One of the most common encumbrances on property is the mortgage lien, and it is among the most restrictive. For instance, if you own a property not encumbered with a mortgage lien, you could demolish any structures on the property (within legal and practical constraints) and nobody will care; it is your property. Once a property is mortgaged, the “owner” no longer has the right of demolition because a lender has claim to the real estate and has interest in preserving its value. In fact, the lender will even require a borrower to carry insurance to prevent loss. If the lenders is not the owner, how can they require insurance, and why do they care?
Lenders want to protect the value of their collateral, the property they may force sale of at auction. At a public auction, the lender, standing in first lien position, bids the property up to their outstanding balance in an attempt to regain their loan balance from a cash buyer. If the house is worth less at auction than their loan balance, lenders often buy the property at auction and sell in the resale market were prices are usually 15% higher. In short, through a complicated chain of events, lenders know the collateral may become their house, so lenders make borrowers care for collateral as if the lender owned it even though the lender doesn’t…
Hey, if it walks like a duck and quacks like a duck….
Since lenders behave like owners of a borrower’s real estate, and since lenders have right to force sale if a borrower defaults, lenders are owners, and owners are money renters.
Over the last several years millions of people faced the reality of these once-obscure nuances of property law when they were forced to vacate the lender’s collateral after a foreclosure proceeding. The mainstream media likes to portray this as “people losing their homes.” But that is not an accurate view of what happened. Borrowers were forced to leave houses purchased by the bank with the bank’s money because the borrowers failed to pay their rent on that money. That’s the reality of what happened. These people didn’t own anything. In most cases, they only owned a very small percentage of the bundle of property rights we call “ownership” from their down payment. Many of these borrowers put down nothing at all.
What did they own?
Retired loan owners
One of the saddest realities emerging from the aftermath of the housing bubble is the excessive debts given to seniors, many of whom are now facing foreclosure. It takes two parties to a loan, a lender and a borrower. Both are responsible for their decisions to enter into the transaction. In my opinion, Lenders Are More Culpable than Borrowers. However, in our rush to bash the banks for their predatory lending, and senior lending is ripe with this abuse, it’s important that we don’t lose sight of the foolishness of borrowers who made decisions that lead to their own foreclosures.
Foreclosing on seniors
I am fortunate that my own parents don’t have a large sense of entitlement. They live very modestly and within their means. Their property in Florida is paid off, and although they have debt on their second home in Las Vegas, it is small, and it’s more than offset by the positive cashflow from the other investment properties they picked up over the last few years. Other seniors haven’t been so conservative and responsible, and I can’t help wondering how many wage-earning children face bailing out their spendthrift parents who are facing foreclosure. I am thankful I am not facing those circumstances.
The reality is for every senior facing foreclosure due to their excessive borrowing late in life, there was a lender who gave them a loan the senior is struggling to repay. How did that happen? This raises some difficult questions for lenders that the mainstream media is ignoring.
Why would a lender underwrite a 30-year mortgage to someone who statistically has far fewer than 30 years to live?
Why would a lender underwrite a loan with excessively high debt-to-income ratios to people whose only income is social security?
Why would a lender put themselves in a position to foreclose on millions of seniors and deal with the bad press sure to result?
Geraldine Bates lost her husband to kidney failure last year. Now, she has fallen behind on her mortgage payments and is terrified that she will lose her home in Jacksonville, Fla.
Ms. Bates, 70, is caught in a foreclosure trap that is ensnaring widows across America: she cannot get help lowering her payments until her name is added to the mortgage note, but the lender says she must be current on payments before that can happen.
I’m surprised lenders would have such a requirement. Why would they want to limit anyone from assuming responsibility for repaying a loan?
The reality is that they don’t. Lenders are merely using this obscure provision they wrote into the contract to compel surviving spouses to dip into savings to make good on overdue payments. It’s backfiring on them when the surviving spouse doesn’t have the savings to dip into.
“I keep praying,” said Ms. Bates, who is fighting with the bank to stay in the four-bedroom house.
Why does a widow need a four-bedroom home? Is it really asking too much for her to sell and move into a small, more affordable home? She is displacing a family who would make use of that additional space.
Just as the housing market is recovering, a growing group of homeowners — widows over the age of 50 whose husbands alone were holders of the mortgage — are losing their homes to foreclosure because of a paperwork flaw that keeps them from obtaining loan modifications.
In the latest chapter of the foreclosure crisis, homeowners over 50 are falling into foreclosure at the fastest pace of any age group, according to nationwide data, in part because women are outliving their spouses and are unable to cope with cuts in their pensions, ballooning medical costs — and the fine print on their mortgages. …
Isn’t the real problem that these women can no longer sustain the entitlements they are accustomed to? Is that a problem the bank’s must solve by modifying a mortgage? Or perhaps the US taxpayer should be brought in to maintain her entitled state? Doesn’t anyone have to live within their means anymore?
Part of the problem, according to Debra Whitman, AARP’s executive vice president for policy, is that older Americans are saving less and borrowing more. Debt for Americans ages 65 to 74 is outpacing any other group, according to the Federal Reserve.
Part of the problem? That’s the whole problem. In case it isn’t obvious, people who don’t borrow money don’t lose their homes. Lenders are encouraging seniors to go Ponzi. And why are they doing it? Because they know seniors often have assets, and if lenders can get seniors to borrow a lot of money, lenders will have claim against those assets when the seniors die. Anyone hoping for an inheritance from their aging parents should advocate to restrict senior lending because otherwise, any assets left over will go the bankers to repay their loans. How would you feel about a banker stealing your inheritance? Or should our parents be encouraged to live for the day and leave nothing behind?
Housing advocates say most of their widowed clients still remain in their foreclosed homes.
Complaints from widows about botched forms, unanswered calls and the peculiar frustration of being asked repeatedly by servicers for the same documents … While the process of obtaining a modification can be taxing for healthy homeowners, it can be virtually impossible for older borrowers, many of whom do not have the energy to get through the bureaucracy.
Maria Ginise, a 75-year-old widow, says she has developed dizzy spells from the stress of trying to save her mobile home in Deerfield Beach, Fla. When she and her husband, Joseph, left Connecticut, Ms. Ginise said, she dreamed of beach strolls and shuffleboard evenings. But, after her husband died in May 2009, those plans were derailed.
Ms. Ginise, whose only income is Social Security, could not afford payments on her $140,000 mortgage.
A $140,000 mortgage on a mobile home? What lender gave this couple a $140,000 loan to buy a mobile home? Obviously, when this couple retired, they had no assets, and no way to pay other than social security. What is the best course of action here? Obviously, a big loss needs to be recognized, but how should it happen?
Should she be given principal forgiveness and allowed to keep this severely underwater mobile home?
Should the bank foreclose and boot her out?
The answers aren’t as clear cut when a 75-year old widow is involved. The answer is that this loan should never have been underwritten in the first place.
Since her name was not on the mortgage, though, Wells Fargo, refused to work out a payment plan with her. Now, she faces foreclosure. A spokeswoman for Wells Fargo declined to comment on Ms. Ginise, but said in a statement that the bank reviewed “all applicable, affordable options for customers facing financial difficulties.”
A bullshit statement from a bank public relations department.
Housing advocates have won reprieves for some homeowners, including Aurora MacDula, 80, in Vallejo, Calif., whose husband died last November. She said when she first contacted Wells Fargo, the servicer, to pay the mortgage, a representative refused to talk to her because she was not on the loan.
In August, with the help of her lawyer, Ms. MacDula got a temporary loan modification and is paying $1,733.21 a month. The problem, advocates say, is that most distressed widows do not have the benefit of legal aid.
Ms. Malinis, with the housing advocacy group in California, said: “We stay up thinking of the ones who we don’t know about.”
If she really wanted to advocate for seniors, she would lobby for regulations to prevent lenders from saddling seniors with so much debt. The problem is not the foreclosure, it is the debt that lead to the foreclosure.
Bankers have taken over
The more I see the results bankers have produced for America over the last several decades, the less enchanted I am with them. Since the introduction of credit cards in the 1950s — or perhaps it goes back to the founding of the federal reserve in 1913 – lenders have systematically undermined the system of saving and investment that made America great. In it’s place they created a culture of crass consumerism, Ponzi borrowing and lender dependency.
Lately, in collusion with the US government, lenders managed to pass the risk for their Ponzi loans to the US taxpayer thus encouraging neighbors to steal from neighbors. Prudent savers must now pay the bills for imprudent private borrowing. Ostensibly for the public good, the government has always taken from the productive to give to those who aren’t, but at least that was always a matter of public debate and public policy. It could be changed through elections and legislation. Now we have people who can tap the US treasury through private contracts, a form of government-sanctioned theft never before seen. Bankers make millions in fees while enabling Ponzis to loot the treasury. I am amazed at how we’ve devolved.
“The system of banking we have both equally and ever reprobated. I contemplate it as a blot left in all our Constitutions, which, if not covered, will end in their destruction, which is already hit by the gamblers in corruption, and is sweeping away in its progress the fortunes and morals of our citizens. Funding I consider as limited, rightfully, to a redemption of the debt within the lives of a majority of the generation contracting it; every generation coming equally, by the laws of the Creator of the world, to the free possession of the earth he made for their subsistence, unencumbered by their predecessors, who, like them, were but tenants for life.”
“Educate and inform the whole mass of the people… They are the only sure reliance for the preservation of our liberty.”
The high end market is still very weak
Bankers have only recently begun foreclosing on properties over $1,000,000 in price. Previously, they knew the market requiring jumbo loan financing was practically non-existent, but with recent strength in the below $1,000,000 market, lenders are starting to push out the high-end squatters who have been enjoying the free ride for the last several years. Well, the rumors of market strength appear to be greatly exaggerated. Check out the steep discount from it’s 2007 purchase price. If the market is so strong, why are lenders discounting 35% on these high-end properties?
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Proprietary OC Housing News home purchase analysis
$1,025,000 …….. Asking Price
$1,600,000 ………. Purchase Price
3/15/2007 ………. Purchase Date
($575,000) ………. Gross Gain (Loss)
($82,000) ………… Commissions and Costs at 8%
($657,000) ………. Net Gain (Loss)
-35.9% ………. Gross Percent Change
-41.1% ………. Net Percent Change
-7.7% ………… Annual Appreciation
Cost of Home Ownership
$1,025,000 …….. Asking Price
$205,000 ………… 20% Down Conventional
3.90% …………. Mortgage Interest Rate
30 ……………… Number of Years
$820,000 …….. Mortgage
$208,023 ………. Income Requirement
$3,868 ………… Monthly Mortgage Payment
$888 ………… Property Tax at 1.04%
$192 ………… Mello Roos & Special Taxes
$256 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$170 ………… Homeowners Association Fees
$5,374 ………. Monthly Cash Outlays
($995) ………. Tax Savings
($1,203) ………. Equity Hidden in Payment
$273 ………….. Lost Income to Down Payment
$148 ………….. Maintenance and Replacement Reserves
$3,598 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$11,750 ………… Furnishing and Move In at 1% + $1,500
$11,750 ………… Closing Costs at 1% + $1,500
$8,200 ………… Interest Points
$205,000 ………… Down Payment
$236,700 ………. Total Cash Costs
$55,100 ………. Emergency Cash Reserves
$291,800 ………. Total Savings Needed