Nov092015
The emotional impact of ending loan modifications
As the loan modification entitlement is slowly rescinded by the major banks, the emotional fallout on subsidized families will be enormous.
The technical and political issues discussed daily on this blog only capture part of the loan modification issue. On a micro level, the lives of individual families are shaped in many ways, and the emotional impact of falling from entitlement is very real. Today, I want to revisit the story of a loanowner family and consider what lies in store for them. (This is an edited reprint from a 2014 post)
Some time ago, I had an extended conversation with a loanowner. He bought eight investment houses during the housing bubble in addition to his primary residence in 2005. He didn’t put any money down, and he used option arms for most of the purchases, including his primary. Like many others who participated in the mania, he felt he was the next Donald Trump.
When the bust came, he let the eight properties fall into foreclosure, and he stopped paying on his primary mortgage in order to qualify for a loan modification, which he got. Everyone else living in a primary residence as opulent as his pays about $4,000 a month for the privilege; his loan modification payment is about $2,000 per month.
Like homeowers, this loanower family is emotionally attached to their house. Even though they haven’t had a true equity stake in the property in the nine years they’ve owned it so far, they feel like they “own” it because their name is on title. They want to keep the house because they customized it to their tastes, and they consider it their family home. They don’t want to move, and if given the chance, they will stay.
One of the reasons many loanowners don’t want to sell is because they will endure the unceremonious fall from entitlement. People who can’t afford their homes are living beyond their means, as evidenced by the loanowner qualifying for a $2,000 monthly payment on their $800,000 mortgage.
If they sell and find a rental, they will be forced to live within their means in a property they can afford. For most loanowners, that means taking a step down the property ladder — and nobody wants to do that. So unless they are forced to, these loanowners won’t voluntarily sell a nice house to move into one they consider substandard. When combined with the emotional attachments of home ownership, most people will chose to struggle and fight rather than capitulate and sell.
The family reacts to a denied loan modification
The following is a fictional account of a conversation yet to take place between Entitled, the loanowner’s spouse, and Prudence, the friend whose family avoided the housing bubble. The details will be different from case to case, but variations of this conversation will play out with millions of families over the next several years as prices near the peak.
Entitled: The bank rejected our request for another loan modification. I think we are going to have to sell the house.
Prudence: That’s a shame. Those bankers are so evil.
Entitled: We’ve lived in that house for 12 years now. It’s our home, and the bankers are forcing us to leave.
Prudence has a fleeting thought about the bad choices Entitled’s husband made but chooses to remain silent.
Prudence: Well, you and your family got to live in that beautiful house for 12 years, raise your daughter, and it only cost you about $2,000 per month, right?
Entitled: It’s our house. After 12 years living there, it’s not fair that the bank can ask for more money for us to keep it.
Prudence and her family didn’t buy a house during the bubble. Instead, they rented a small two-bedroom condo and bought an affordable condo near the bottom. She and her family have been living within their means, but in much less opulent circumstances, and they’ve been paying the same monthly housing expense as Entitled. This fact enters Prudence’s thoughts, but she is there to comfort her friend, so she says nothing about it.
Prudence: Are you going to be able to sell for enough money to buy another home?
Entitled: We barely have enough equity to pay the sales commissions, and although our credit is better than it was, I don’t think we will be able to afford a nice home. We may try to buy a condo, but it’s such a step down, we won’t be happy about it.
Prudence feels the slap in the face of her friend’s sense of entitlement. She suppresses her anger, but the look on her face betrays her. Entitled catches the expression in her friend’s face and realizes what she said, but she’s so caught up in feeling sorry for herself, she can’t bring herself to apologize.
Prudence: I’m sorry the loan modification didn’t work out for you permanently, but when you get a new place you can afford, you will be able to keep it as long as you like.
Entitled: We don’t want a new place; we like the one we have. It is perfect. It has four bedrooms and a loft. We can have visitors and a play area for our daughter. It is our dream home, and the banker is making us leave it.
Prudence thinks to herself, “We’ve been living in apartments and small condos for the last 12 years because it is what we could afford. A big, beautiful house like yours would have been great, but the stress of living beyond our means wouldn’t have been worth it. But then again, Entitled got to live in that house for 12 years. I wonder if she made the better choice? Twelve years is a long time.
Prudence: Do you regret living in such a nice house for the last 12 years? It seems like the bank made you a pretty good deal, at least while it lasted.
Entitled: While it lasted? This was supposed to be our “forever house.” When we bought it, we thought we would make a fortune from appreciation to fund our retirement. We believed would be able to refinance into a low payment in a couple of years and keep that house forever. All the promises the lenders made us turned out to be lies, including the part about our loan modification being “permanent.”
I hate bankers.
Prudence thinks that she hates bankers too. They lobbied Congress for huge bailouts, taking Prudence’s money to pay themselves obscene bonuses and bail out loanowners like Entitled.
Prudence: Yea, those bankers are assholes.
Entitled: Those assholes should make our loan modification truly permanent so I can keep my house.
Prudence thinks the bankers were assholes to let Entitled keep her house as long as they did, but rather than be rude to her friend, she fakes a tight smile and nods her head in agreement with Entitled.
Is that story far fetched? I don’t think so.
Whom do you empathize more with, Prudence or Entitled?
Have any of you had similar conversations you wish to share?
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I empathize most with Family C. The family that bought a house they could reasonably afford and lost tens of thousands when selling, not short, because none of their neighbors chose to act similarly.
[…] The emotional impact of ending loan modifications People who can't afford their homes are living beyond their means, as evidenced by the loanowner qualifying for a $ 2,000 monthly payment on their $ 800,000 mortgage. If they sell and find a rental, they will be forced to live within their means in a … Read more on OC Housing News (blog) […]
Did any of you go see this project over the weekend?
5,000 expected at Marblehead grand opening
San Clemente’s Marblehead Coastal project once was the local embodiment of 2008’s global economic meltdown.
With the housing market imploding, road work on the project stalled. City officials and a neighboring mall developer threatened legal action. Then, after the collapse of financial backer Lehman Brothers, Marblehead filed for bankruptcy and everything ground to a halt.
This weekend, however, the 248-acre project is reborn with a new name – Sea Summit at Marblehead – and a dozen new model homes displaying million-dollar floorplans and priceless ocean views.
Phil Bodem, president of Taylor Morrison’s Southern California division, predicted that 5,000 people will turn out for the project’s grand opening for three of the projects four neighborhoods on Saturday and Sunday.
As of Thursday, 15 homes already sold, primarily to buyers from South Orange County, Bodem said. By December, Marblehead’s first residents will move in.
Builder Magazine reported in 2014 that Taylor Morrison likely paid between $210 million to $235 million for the blufftop site, equivalent to $680,000 to $761,000 per lot. Bodem declined to confirm those numbers.
Customers will pay from just under $1 million to around $2.5 million for Taylor Morrison’s luxury houses, plus a premium for view lots. The Spanish-style homes will range from three bedrooms and 2,200 square feet to six bedrooms and 5,500 square feet. All but six will be two-story houses.
Bodem said it likely will take until 2018 to build and sell all 309 homes.
Plans also call for construction to begin by the end of the year on Sea Summit’s community center, the Summit Club. It will include a 6,500-square-foot club house, pool, spa, outdoor kitchen and 1,000-square-foot gym, Bodem said.
Bodem noted that past developers sought to build 2,000 homes on the 248-acre property, with much of that development in the canyons and plateaus now being preserved as open space.
The project includes five parks and four miles of trails along the plateau facing the Pacific Ocean.
“One of the things that’s attracting people to Sea Summit is the open space,” Bodem said.
Pointing to the ocean filling the windows of one model, he added: “That’s just absolutely spectacular. Every time I come out here, it just blows me away.”
http://seasummit.taylormorrison.com/homes
San Francisco Election Fails to End Affordable Housing Angst
SAN FRANCISCO — San Francisco voters overwhelmingly approved a $310 million bond for affordable housing this week, acknowledging all is not well in the city marked by skyrocketing rents driven by high-paid tech workers.
But except for the bond, the election did little to clarify the direction San Francisco will head concerning its hot-button issues of housing and growth.
Voters did re-elect pro-development Mayor Ed Lee and reject two proposals seen as obstacles to his growth agenda.
However, they also elected Aaron Peskin as a city supervisor expected to tilt the Board of Supervisors away from the tech-friendly policies seen during the mayor’s five years in office.
“The electorate kind of punted until next year,” said David Latterman, a San Francisco campaign consultant. “We are going to see all these same issues come up next year.”
Long known as a diverse city that provided shelter to people of all incomes, the tech boom has turned San Francisco into a place where newcomers pay well over $3,000 for a modest one-bedroom apartment, while long-time tenants battle evictions intended to make way for new upscale housing.
Where ‘Anchor Babies’ Can Be a Lucrative Business
COSTA MESA, Calif.—Thousands of wealthy foreign women, mostly Chinese, come to America each year for the express purpose of having babies on U.S. soil. The women arrive on tourist visas and typically go home with the baby after several months.
But before the women leave with what critics have called “anchor babies,” they typically spend thousands of dollars in private hospitals, high-end shopping malls and luxury apartment complexes. That has made this practice, known as maternity or birth tourism, a lucrative business in certain areas of the U.S., including this one southeast of Los Angeles.
On a recent Sunday at the upscale South Coast Plaza in Costa Mesa, Mandarin speakers, many of them visibly pregnant, far outnumbered other shoppers at Chanel, Christian Dior, Giorgio Armani and other designer stores. Two women with protruding bellies emerged from Fendi speaking Mandarin, one of them pushing a new-looking stroller overflowing with bags. Down one mall corridor, seven women who appeared pregnant chatted in Mandarin on a bench, shopping bags at their feet.
“They see something they like, they buy it,” said Joanne Lee, one of three Mandarin-speaking salespeople out of six at a Coach shop. “They buy multiple pieces.”
The rise of Chinese birth tourism reflects the new wealth in China, and uncertainty among some of its citizens regarding the country’s long-term economic future. A child born in the U.S. automatically becomes an American citizen, and under federal law, when the child turns 21, he or she can sponsor foreign family members for a green card, and eventually citizenship.
The Center for Immigration Studies, which supports a crackdown on the practice and favors more immigration restrictions overall, estimates that 40,000 women visit the U.S. annually on birth tourism, most from China.
Birth tourists represent a fraction of the 2.2 million Chinese visitors who spent about $24 billion in the U.S. last year, according to the Commerce Department. But Chinese tourists overall were the biggest foreign spenders per capita, and the pregnant visitors typically stay much longer than the two-week average for Chinese visitors.
Though there are few hard figures on its full impact, maternity tourism has left a noticeable imprint on the regional economy here in recent years. Federal investigators, who raided several Southern California businesses that facilitate maternity tourism in March on suspicion that they had committed crimes including visa fraud and tax evasion, estimate that each woman pays $40,000 to $80,000 on packages that include accommodation, transportation to hospitals, and help getting passports for their newborns.
Karthick Ramakrishnan, a public policy professor at the University of California, Riverside, who has studied the phenomenon, estimates the women spend about $1 billion annually in the U.S., a figure that excludes discretionary spending on the likes of shopping and dining out.
“These are people of means who are not going to a county hospital to deliver their babies,” he said.
What’s the best low-down-payment mortgage?
Motley Fool is lining up the options for the best low-down-payment mortgages.
It’s an interesting comparison; do you know how the programs differ?
Here’s a quick wrap of the salient parts of the article,
The most widely known low-down-payment mortgage program is the Federal Housing Administration, or FHA, loan. Not only do FHA loans have down-payment requirements as low as 3.5%, but the down payment can also come from the seller or a gift. In addition, there are some other reasons to consider an FHA loan.
Fannie Mae’s Home Ready program allows for 3% down payments with credit scores as low as 620 — so it doesn’t exactly require great credit but is more selective than FHA financing.
Freddie Mac’s Home Possible Advantage program is similar, but there are a few minor differences. Credit requirements are slightly higher, with a 660 minimum credit score, but mortgage insurance costs are generally lower. This program can be used for purchases or refinancing. Unlike the Fannie Mae program, all borrowers must be occupants of the home.
VA and USDA are also mentioned, and it’s suggested that potential homeowners also check local lenders for options as well.