Mar172010

Responsible Home Owners Are Hurt by Irresponsible Loan Owners

Lenders and borrowers dance with disaster. Borrowers have the lead in the amend-pretend-extend fandango, but as the economy improves, along with lender balance sheets, lenders will take the lead. As the default shuffle plays out, wallflowers who chose not to cha-cha are wilting under the economic distress caused when the music stopped. Dancers are short on chairs.

Walking One Block Damaged By The Housing Crisis

by Tamara Keithramdy_quaid

Dana Lane doesn’t look devastated.

It’s part of a California subdivision built in the late 1980s, a mix of stucco and wood siding with mismatched fences. It looks like so many working-class suburban blocks.

But since the foreclosure crisis started, Riverside County, Calif., has ranked near the top of the list for its rate of homes being taken back by banks. This is a county that has long attracted Los Angeles refugees who drove east until they could afford to buy, then had to commute hours every day. Neighborhoods are hurting. Even people who didn’t get swept up in the bubble have been hurt by the bust.

Dana Lane is one particularly hard-hit block in the city of Moreno Valley. There are hints of what its residents have been through — a broken window, for-sale signs and brown lawns.

More than two years into the housing bust, 20 percent of the homes on Dana Lane have gone into foreclosure, and residents here wonder who will be next.

It is difficult for us to relate in our elitist bubble here in Irvine, but prices have been crushed in neighborhoods where borrowers in default have been foreclosed from their homes. Many more foreclosures are yet to come.

Fall from entitlement

Anita Sandoval stopped paying her mortgage five months ago. …

The house across the street just went for $75,000 in a foreclosure sale.

“And I bought mine for $260,000, and it’s the exact same home,” Sandoval says. “I’ve been in the house. It’s the exact same home.” [Ouch!]

But that’s not why Sandoval stopped making her mortgage payments. Her savings ran out, and she was finally hit with the painful reality that she and her husband really couldn’t afford this house. They never could.

Isn’t that a textbook example of The Unceremonious Fall from Entitlement?

HELOC Abuse Riverside County Style

The Bubble Mindset

“Like everybody else, I’m in an upside-down loan,” says Brenda Moore, who owes more than $300,000 on her mortgage. This is remarkable considering she bought her house in 1989 for $80,000. A search of public records reveals that Moore, a retired nurse, has refinanced her home eight times since 1998.

The loans are from a who’s who of subprime lenders. With each loan she took out more equity, and each time the loan terms got worse.

“Hey, I had a lot of equity, so I would just go in there using it and having a lot of things done — outside and inside,” Moore says.

Please, help me with the HELOC abuse grade. Based on her statement — and the fact that she quadrupled her mortgage —  would you characterize her spending as thoughtless? She clearly rationalizes spending appreciation, so the grade is at least a D. But do you think she maintained her delusion that she was not spending her house? Or did she cross the line to earn an E?

Moore replaced a sagging fence. She put in new carpet and a tile floor in the kitchen. But that doesn’t explain where all the money went. Most of it didn’t go to tangible things;it went to raising her five grandchildren and two great-grandchildren even after she was no longer able to work.

At one point, Moore had just pulled out a chunk of equity when a family member passed away. She used the money to help pay for the burial.

“So that was a blessing because I had just — about a week [ago] — had just did the refi and was going to do some more work around the house, and that happened,” Moore says.

Who are we kidding here? She blew the money on her entitlements. Even her justifications are weak. This woman spent the money obtained from her home through mortgage equity withdrawal as if this money were earned income. She carelessly managed her finances and created a Ponzi Scheme of debt. Her theft was enabled by her victim, so it is difficult to apportion blame, but there is plenty of guilt to go around. Is that character deserving of sympathy? And your tax money? Not that you have much choice in the matter….

When it got to the point that she could no longer make her mortgage payments, Moore thought about walking away.

But she says the Lord intervened. A nonprofit group helped her get a loan modification. Her payments have been cut in half. When a reporter tells her about the Betts family down the street, she seems a little surprised that there’s anyone on the block who didn’t refinance.

She is surprised her moral bankruptcy wasn’t shared by her neighbors. Extraordinary Popular Delusions and the Madness of Crowds documents this behavior over the centuries; it’s nothing new.

The Lord is now fostering moral hazard? The Lord wanted to bail this woman out rather than see her experience the consequences of her decisions? That isn’t the Being I revere. A 50% reduction in payment means her modification is acting like an Option ARM, and this woman will be in foreclosure once banks stop dancing. I wonder if she will feel blessed then?

“So that’s good they didn’t have to,” Moore says. “But then, too, I look at it this way: You’re sitting on a bank, so if you can use it, use it because you can’t take it with you, so enjoy it while you can.”

Any of you that thought she earned a HELOC abuse grade of D rather than an E because you thought her spending was not thoughtless, do you want to rethink your grade?

My Heroes

 

peace of mind in real estate

[William and Laura Betts live on Dana Lane in the community of Moreno Valley, Calif. The couple stand out because they actually paid off their mortgage in 2005. William, who lost his job in November 2009, is glad they don’t have to worry about making payments on their house.]

The bubble mindset here was infectious, but it didn’t affect everyone.

William and Laura Betts stand out on Dana Lane. They’ve actually paid off their mortgage. They made their last payment in 2005 at the height of the refinance frenzy. It was a goal from the moment they moved in back in 1986.

This couple made paying off a mortgage a goal and a priority just as I recommend in Time to Payoff and Accelerated Amortization.

“Payment was $750, I think, and the very first payment we sent in 10 extra dollars, and they sent it back because we had to pay at least a whole month’s principle, and that was $15 or something — I forget the exact number, but it was more than we had sent in,” says William Betts.

Resisting Temptation

Every month they sent in a little extra. They are Mormon and say their faith guided them to be fiscally responsible. Sure, they got calls from mortgage brokers who were eager to help them turn their home into an ATM. But they resisted. They weren’t even tempted.

“I’d hear the commercials on the radio about OK, ‘This is the ultimate refinance.’ And then three months later, the same company and the same radio host was [saying], ‘This is the ultimate final refinance,’ ” William Betts recalls. “And you know that things just can’t keep going like they’re going without something happening. You think, this is crazy, this is insane. These people — they’re foolish.” …

It didn’t take a PhD in economics to realize the housing bubble was wrong. In fact, that is perhaps the most upsetting element of the entire injustice: anyone could have seen this coming if they chose to open their eyes.

When William Betts thinks about what’s happened to this street, he doesn’t resent his neighbors’ choices or the nice furniture and granite countertops they bought with imagined equity. He just feels bad for them.

“How do I say this?” Betts asks. “Most of our neighbors, I think, sold their inheritance for a bowl of pottage. The Jet Skis are gone, and so is their house.” …

I have stated the same many times; conspicuous consumption can be viewed with pity and astonishment rather than envy and jealousy.

Back in November, Betts lost his job. It’s the second time in four years he and his wife have had to live off of savings and unemployment. But at least they don’t have to worry about their home.

“I just remember the day that we signed the papers that the house was now ours,” Betts recalls. “You know, I’ve slept pretty good every night since then, ’cause when you own your house, you never have to worry about where you’re going to live.”

That is inner peace emanating from true financial freedom, and it is this family’s reward for showing fiscal discipline, ignoring the Joneses, and living a virtuous life. It is sad that they are getting punished for the insanity around them; worst of all, they are being forced to pay for it in taxes as well.

Home prices in this neighborhood may have bottomed — nobody knows. The Bettses’ home is now worth little more than it was when they bought it 25 years ago — not much of a reward for doing everything right.

But that’s not how the Bettses see it: “Be it ever so humble,” says William Betts, “it’s ours.”

I respect everything these people thought, said, and did.

These are financial titans worthy of much more respect than fools like the Emperor of Irvine. Net worth isn’t the value of assets you control, it’s the difference between asset value and debt. Debt subtracts from wealth. Debt does not make people rich.

More than a year ago, I wrote Responsible Homeowners are NOT Losing Their Homes. This couple proves it.

Responsible homeowners are NOT losing their homes.

To see the truth in this statement, one needs to have a clear definition of “responsible homeowner.”

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?

With so many Californians believing and acting like the irresponsible loan owners at the beginning of this profile, and with so few Californians believing and acting as our heroes, it becomes very difficult to foresee what the future holds. Contrary to popular belief that the housing bust is behind us, we are only in the 4th inning. The consequences of the bust — millions of foreclosures — have been delayed and deferred but not avoided. Will California kool aid survive the bust resulting in permanently inflated prices?