President Obama has lost his mind. I guess I shouldn’t be too surprised that Obama would embrace HELOC abuse as a good idea. After all, Obama HELOCed his home in Illinios before he became president.
Personally, I find this outrageous.
Our commander-in-chief, the leader of our nation, has embraced HELOC abuse as a noble behavior that should be encouraged by a taxpayer bailout. The dipshits who lose their home from excessive borrowing should be given a pass, and everyone who chose not to participate in the madness should pay for it.
I think that sucks.
By: Diana Olick — CNBC Real Estate Reporter
As part of his “To Do List,” President Barack Obama visited Val and Paul Keller on Friday. The White House described them as “responsible” homeowners who owe more on their mortgage than their Nevada home is currently worth.
They owe $168,000 on their mortgage, but their Reno home is currently valued at $100,000.
The president is doing so to, “help demonstrate a concrete and tangible example as to why this broader push [to refinance] is so important not only for millions of Americans but for our economy,” said Shaun Donovan, secretary of Housing and Urban Development, in a conference call with reporters before the event.
These people, like the hundreds I have profiled over the years, demonstrate concrete and tangible examples as to why this broader push to refinance is so ghastly, unfair, unnecessary, and absolutely the wrong thing to do.
During that call, Donovan used the words “responsible homeowners” more than a dozen times, in describing whom the administration’s proposed refinance programs should help.
It is not the Kellers’ fault that home prices in Reno are down 52 percent from the peak, right? The Kellers bought their house 14 years ago, and they have not been late on a mortgage payment, according to Donovan. They were able to take advantage of the newly expanded government refinance program through Fannie Mae and Freddie Mac for severely underwater borrowers, and they are in fact putting some of their savings on the monthly mortgage toward paying down principal.
But were they responsible?
A “responsible homeowner” is a buyer who, if they utilized financing, did not stray from the conservative parameters set forth by lenders (prior to the bubble) and financial planners. This includes using a maximum 28% debt-to-income ratio on the mortgage, at least a 20% down payment and fixed-rate conventionally amortizing financing.
Few who fit this definition are going to lose their homes; although, some of them may chose to walk away from the debt because they are hopelessly underwater. The only ones who fit the above definition who are in danger of losing their homes are those who lose jobs; they are the truly sad casualties of the housing bubble. Unfortunately, this is becoming more common due to the financial crisis caused by all the homeowners who borrowed irresponsibly.
Responsible borrowers are not the ones defaulting on their mortgages; irresponsible homeowners are.
If “responsible homeowner” is defined as a buyer who believed they could manage their monthly payment and did so until the loan terms changed, then by this definition, many responsible homeowners are going to lose their homes.
Almost everyone who signed up for a toxic loan thought they could make the payment; most did for a while. Many were convinced they could make the payments by a predatory lender out to make a few bucks on the origination. Many more believed they could supplement their incomes with the rapid appreciation they would enjoy as their house values rose to infinity. Does ignorance to their inability to sustain their housing payments make them responsible?
In the political debate surrounding foreclosure moratoriums and homeowner bailouts, the politicians are using the latter definition of “responsible homeowner.” The ignorant and those who knowingly took excessive risk are being rewarded with a government bailout. The prudent are the ones paying the bill.
The Kellers bought their home before the height of the housing boom. The trouble I’m having understanding this whole scenario is that the median home price in Reno is actually 7 percent higher today than it was 14 years ago. If the Kellers had a “responsible” loan, that would be a 30-year fixed, in which case they should have paid at least some principal on the loan over the last 14 years. And didn’t these “responsible” borrowers, the Kellers, put some money down on the home?
We went looking: According to Washoe County records, the Kellers purchased their home in June 1998 for $127,000. So why do they have, according to the White House, a $168,000 mortgage?
So what did these “responsible” loan owners need the HELOC money for? Did they have a personal family catastrophe for which there is no insurance? What makes their borrowing okay? And if it is okay, shouldn’t the government then sponsor a similar loan programs for renters?
White House officials now confirm to CNBC that the Kellers did a cash-out refinance in 2007, when their home had appreciated to $250,000.
I hope this is a huge embarrassment for them (I know I am doing my part to make it so). Someone didn’t do their homework when researching the perfect “responsible” loan owner to pick for their bailout poster child. Perhaps, as I pointed out above, the task was made more difficult by the fact that responsible homeowners are not losing their homes.
Again, it’s not illegal, but are these the “responsible” borrowers that the administration is looking to help? They took out a $178,000 loan, using the $51,000 to pay down debt on the family construction business, so Paul could retire.
This is their justification for the loan? They were substituting one debt for another? The guy didn’t manage his business well enough to retire without debt, so he piles it on his house? What kind of dumbass takes on a huge debt as they go into retirement?
Had they not taken that money out, and continued paying on the original mortgage, they would not be underwater today.
Exactly. Responsible homeowners are not losing their homes, irresponsible loan owners are.
Think about it. If this guy had paid down his debt and enjoyed fewer entitlements, he could have paid off his house and his business loans. It’s done every day by ordinary people who really are responsible. Those people don’t need bailouts.
“This is a family, first and foremost, that has met their responsibility, remained on time with their mortgage and used their equity in their home in a way that so many Americans do, to send their kids to college, support a small business or save for retirement,” said Donovan, whom we contacted after learning of the refinance. “They deserve the chance to benefit from these record low interest rates because they have met their responsibilities.”
Just because a lot of people do it doesn’t make it right. If everyone wanted to embark on a personal Ponzi scheme and inflate a massive housing bubble which crippled the economy for a decade, would that make it right? Oh wait, we did that, didn’t we?
Another administration official familiar with the Kellers’ case says the couple were responsible because despite the incredible runup in home prices, they did not take all the equity out of the house. “She did not use her home as an ATM in the sense that we saw during the crisis, because she didn’t cash out all of the equity leaving her no cushion.”
Oh, I see. She didn’t take it all, so that makes her responsible? I can’t believe someone on the White House staff actually said something that stupid. A lot of HELOC abuse is bad, but a little is okay?
She had a 71 percent LTV (loan to value ratio), or 30 percent equity in her home. That is by almost any definition a very responsible position to be in,” he added.
If they are so responsible, why are they losing their house? It isn’t the LTV that’s the problem. The fact that the guy was retiring and giving up his source of income just prior to taking on a large debt is the issue. There are many homeowners in Orange County who couldn’t afford to take on the debt required to purchase their homes at peak prices. That’s why so many who went to the housing ATM lost their homes.
In the past, Obama has criticized borrowers, who at the peak of the housing bubble, pulled money out, referring to it as using their house as an ATM.
I hope Obama has the good sense to fire the staffer who picked this family as an example of “responsible” homeowners.
LTV, Donovan and the other administration official claim, is not a minor issue. So it seems they are defining “responsible” as a borrower who maintains an equity cushion in the house, even when that house price has nearly doubled in just eight years.
To see the truth in the importance of these definitions, we need to look no further than the astute observations on this blog. One of our frequent commenters is a responsible homeowner. He purchased near the peak, but he did so with terms that his family can afford. He meets the parameters in the first definition. He is in no danger of losing his house in foreclosure. Yes, he is annoyed that the values have dropped–who wouldn’t be–but he is not going to become a foreclosure statistic.
If you want to know what the lenders really worry about it is that guys like him may chose to go into foreclosure and walk away from the debt. There are already enough irresponsible homeowners on their way to the meat grinder. A wave of walkaways would make sausage of the entire banking industry.
The reality is responsible homeowners are not losing their homes; some may lose their houses because of a job loss, and some may chose to walk away, but very few truly responsible homeowners are endangered. The foreclosure crisis is caused by the irresponsible.
“This was truly 100 year flood, and so lots of people who had 20, 30, 40 percent equity in their homes now find themselves underwater,” says the White House official, who also commends the Kellers for not walking away from their mortgage.
There it is, their biggest fear is the walkaways yet to come.
Is this behavior really acceptable?
Am I the only one who thinks doubling a home mortgage and losing the family home is a bad idea? Is this now considered a wise idea, a sophisticated debt-management system? Are the HELOC abusers who spend all their equity merely victims of a down market? Would the virtue of their innovative and enlightened financial management become apparent if that pesky recession hadn’t intervened?
Apparently our current president does not understand what a Ponzi scheme is. The economy flourished briefly in the 00s because the growth of borrowing created a false prosperity. Politicians no longer seem to care if prosperity is durable and based on fundamentals. Any prosperity — even the completely false and unsustainable variety built on Ponzi debt — is acceptable as long as politicians get reelected.
I say no.
This is wrong. We cannot have a prosperous society built on a foundation of borrowed money. Debt is not wealth. Consumption is not production.
When it was merely borrowers stiffing lenders, the two parties to the transaction had to wrestle with the ramifications of their decisions. Borrowers experienced a fall from entitlement, and lenders experience the loss of their loaned capital. This put a natural check and balance in the system which made it function. However, once the US taxpayer got dragged into this mess in massive bailouts of both lenders and loan owners, then the vile Ponzi scheme being perpetrated became a theft of public funds. The parties to this private transaction reached into our pockets and stole our money, and there is nothing we can do to stop it.
What are we to do? If we can’t beat them, should we join them? Will our home lending system degrade into a contest to see who can steal the most from the US taxpayer? At this point, everyone has incentive to max out their debts and leave taxpayers holding the bailout bag. Why not? That policy now has Obama’s endorsement.
Perhaps they had a good reason…
The former owners of today’s featured property were very similar to the “responsible” loan owners Obama wants to bail out. They only refinanced a few times near the peak, and I’m sure they had a noble reason for pissing away their home equity.
- Today’s featured property was purchased on 6/29/1998 for $450,000. The owners used a $337,500 first mortgage and a $112,500 down payment. Very responsible.
- On 6/24/2003 they obtained a stand-alone second mortgage for $58,000. About what the “responsible” loan owners borrowed. They undoubtedly had a great reason.
- On 4/11/2005 they refinanced with a $550,000 first mortgage.
- On 6/11/2007 they refinanced with a 650,000 Option ARM.
They must have had a good reason they pulled $312,000 out of their house, didn’t they?
The renters who didn’t have access to money like this, well… they should be asked to pay back these people’s debts because… well… I guess because those homeowners were so responsible.
Rancho Santa Margarita Overview
Median home price is $366,000. Based on a rental parity value of $564,000, this market is fairly valued.
Monthly payment affordability has been improving over the last 3 month(s). Momentum suggests improving affordability.
Resale prices on a $/SF basis increased to $225/SF to $229/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates increased $83 last month from $2,283 to $2,366.
Rents have been rising for 12 month(s). Price momentum suggests rising rents over the next three months.
Market rating = 5
$599,900 …….. Asking Price
$450,000 ………. Purchase Price
6/29/1998 ………. Purchase Date
$149,900 ………. Gross Gain (Loss)
($36,000) ………… Commissions and Costs at 8%
$113,900 ………. Net Gain (Loss)
33.3% ………. Gross Percent Change
25.3% ………. Net Percent Change
2.1% ………… Annual Appreciation
Cost of Home Ownership
$599,900 …….. Asking Price
$119,980 ………… 20% Down Conventional
3.78% …………. Mortgage Interest Rate
30 ……………… Number of Years
$479,920 …….. Mortgage
$134,928 ………. Income Requirement
$2,231 ………… Monthly Mortgage Payment
$520 ………… Property Tax at 1.04%
$325 ………… Mello Roos & Special Taxes
$150 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$260 ………… Homeowners Association Fees
$3,486 ………. Monthly Cash Outlays
($356) ………. Tax Savings
($719) ………. Equity Hidden in Payment
$152 ………….. Lost Income to Down Payment
$95 ………….. Maintenance and Replacement Reserves
$2,658 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$7,499 ………… Furnishing and Move In at 1% + $1,500
$7,499 ………… Closing Costs at 1% + $1,500
$4,799 ………… Interest Points
$119,980 ………… Down Payment
$139,777 ………. Total Cash Costs
$40,700 ………. Emergency Cash Reserves
$180,477 ………. Total Savings Needed
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
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