The $352,000 first mortgage was an interest-only 3/28 ARM with a start rate of 4.97%
Can I get a frozen 4.97% interest rate for the next 10 years? At those interest rates I could play some yield games and be paid to not pay down my mortgage.
Here is another complex problem with folks like this:
If the rate goes up and costs 20,000 a year more, folks like this most likely wil not even see tax savings from the additional interest cost.
For the folks in traditional arms who put down 20% or more, when the rate goes up they are upset, but justify it since uncle same is paying almost 40%.
So--let's add more complexity to it.
With the pending bailout, we (taxpayers) wil be bailing out those who are not paying tax and could not afford the houses.
For my dollar, I prefer to give my money directly to my children.
You get the borrowers you deserve in this business.
...and if you don't get 'em, you can always create 'em. How much do you want to bet that Michael and Suzanne's delusional views originated with their loan officer?
Sorry, I was referring to the "Teaser Freezer" proposal on the table. They should have waited.
So my question is, is 5.25 the rate "everyone" would buy at?
If I could get a 5.25% interest only mortgage for 10 years I'd be the first in line. There are 5 year CDs in my area paying 5.7%. Factor in the tax savings and my mortgage would be paying me with ZERO risk.
Nahh. CFC didn't roll out the 40-year amorts on these 'til 2006.
You know, much as I like to stick to the economics, I have to say, I am blown away by Ms. Hornbeeks sense of entitlement...
We understood the situation with loan adjustments to be that after our first three years, our low rate would increase to the rate that everyone else is buying at right now,
I gotta go get a big rubberband to hold my jaw up.
Surely the house will be worth what they paid for it before they have to start making principal payments. Surely they will be making more money by that time. Nope, "vee get you now, or vee get you later. Vee are here to pump you up."
The home owners with negative equity and the failing banks are believing in magical thinking. Michael and Suzanne should have walked from the home and rented some underwater investor's property for half the monthly amount.
i read a story a few weeks ago about a guy who couldn't afford his new payments, so he attempted to rob the bank his loan was with to pay off his loan!
It offered low "teaser" Fed Funds rates from 2001 to 2004, and this couple bit.
As far as I can tell, the 30-year conforming fixed rate in mid-September 2004 was around 5.75%. So the rate they ended up with is even better than a "mulligan" rate.
Translation: CFC really really really doesn't want to own that condo.
You missed the real story, which is the ability of the media and Countrywide PR to spin a "feel good" story without giving all the facts.
This couple did get a sweetheart interest rate reduction. But they probably will pay for it in either a longer mortgage payment period or a higher principal amount (or both) on one or both mortgages. Those details weren't included.
They weren't threatening to walk away into foreclosure. In that case, there's no free lunch on a renegotiation. It's just restructuring the liabilities to give breathing room. This is mostly what banks like Countrywide will be doing, and only enough to keep the PR mill churning.
Michael and Suzanne should have walked from the home and rented some underwater investor's property for half the monthly amount.
Yes, but Michael and Suzanne are clearly not the "ruthless" borrowers for whom "the put" makes rational sense.
As far as I can tell, they have zero rationality about their own finances (they clearly haven't thought much about anyone else's finances, since they expect other people to do what they will not or cannot do).
I think they are perfect poster children for the "Ownership Society." It's not about which option would cost them less in the near or far term; it's about which option maintains the illusion that they own something.
With Hugo gone I am sure Iran president Ahmadinejad is pacing the floors this morning in his feety Pj's...very interesting times we live in to say the least...goos day to Short Crude...yes it is.
Translation: CFC really really really doesn't want to own that condo.
from the article: "In addition to their primary mortgage, the Hornbeeks had taken out a second mortgage with Chase for $85,750 at a fixed rate of 8 percent. Barrett and the Hornbeeks have already contacted Chase to pursue similar negotiations to lower the interest rate for that mortgage."
Surveys have shown that less than half of homebuyers know whether they have a fixed or variable rate loan.In my own informal questioning most people consider a hybrid loan a fixed loan.Ignorance or stupidity?
So I'm with Dr. Wu, you?...or are you actually weighing every little thing that is said by everybody and stickin yer neck out only so far as the herd's neck? (possibly led by Dr Wu...possibly not)
Assuming Suzanne, 38, is not postin her IQ with this submission, does she not at least present us with a view of the under belly of the ploblem: there is a segment of the population so gullible, so tender, ...so 38, that, without regulations, will present irresistible temptations for the lamb chasers?
So the President's current plan would freeze their rate at 4.97% then? Damn I wish I had been that bold before I did the dumb thing and signed a 30 year fixed. I could have saved over a full percentage point.
If you borrowed the money to buy the house with, where would you get the money to put into a CD?
Extracting the equity in my current house..
When I bought my current house I had to make the decision between a big down payment and a manageable mortgage payment and playing the "interest rate arbitrage game".
Interest rate arbitrage is my name for the game that a few financial planners in our area suggest. Extract every bit of equity in your house and invest it in the market.
So far, they've been right.
But, all of it involved some risk. I didn't buy a lottery ticket so I can't win the lottery. I can deal with that.
But, at 5.25% there is ZERO risk. Even I would buy lottery tickets if every ticket was a winner.
Ya know, I'm getting tired of the BS comments by people that roll the dice and get burned instead of taking a smart historically low fixed rate. Everyone today wants a "do-over" for their stupidity and greed. I don't buy at all her story that she thought they would get ".. the rate that everyone else is buying at right now,, but it is convenient.
HousingPANIC had a great video on the site which could very well be Suzanne.
But they probably will pay for it in either a longer mortgage payment period or a higher principal amount (or both) on one or both mortgages.
That is not what the article says.
CFC would have increased the principal only to tack on past-due payments, and there don't seem to be any here. And the article implies that they have 22-24 years after the IO period expires, which suggests to me that the term wasn't extended.
And of course they were "threatening" the lender. Nobody modifies loans just because borrowers want lower payments. CFC knew that if it didn't do a mod, it would be doing a short sale, short refi, or FC sooner or later.
I didn't "miss the point." A point is, certainly, that CFC thought the mod was a better deal for it than any alternative. That suggests to me that CFC just doesn't want to own that condo any time soon, and will take a negative interest margin on this particular loan to avoid it.
But of course, my post was looking at another of the points, which is the borrower's odd understanding of what a loan is.
So, if you actually bought a reasonable amount of house and have a decent income, you can "afford" the reset, and then you get no help. And in response to someone's comment above, a borrower in this situation may not be able to refi, because they don't meet LTV requirements.
The borrowers who got in way over their heads and cannot afford the reset, get their "teaser" frozen at a below market rate.
The really prudent who took out a fixed get no help etiher.
The whole thing just sounds absolutely nuts to me. What invester would buy adjustable loans when the government can just step in and tell them they have to freeze the start rate- or the servicer just starts freezing start rates. The whole point of an ARM for the lender is that the rate goes up in the future. Or, did these borrowers think they were getting this great start rate out of the kindness of the lender's heart?
there is a segment of the population so gullible, so tender, ...so 38, that, without regulations, will present irresistible temptations for the lamb chasers?
As this is the segment of the population that votes for you, there can't be many politicians wanting to see them become less gullible.
It's possible that Suzanne would have swallowed any spiel any lender gave her, and so it's just unfortunate luck of the draw that she got one with a bad spiel. Perhaps if she had stumbled on Tanta's Retro Mortgage, she'd have recited the CR gospel.
I rather doubt that.
My take is that Michael and Suzanne are "us," nice respectable middle-class white people with cute babies, and we're all subprime now. They just got an underpriced high-risk modification instead of an underpriced high-risk refi that they would have gotten if the subprime industry were still answering its phones. Bubble vive!
With Hugo gone I am sure Iran president Ahmadinejad is pacing the floors this morning in his feety Pj's...very interesting times we live in to say the least...goos day to Short Crude...yes it is.
borkafatty | 12.03.07 - 9:59 am
I hate to burst your bubble but Chavez has five years remaining on his current term as President. The vote was on a referendum to change the Venezuelan Constitution.
there is a segment of the population so gullible, so tender, ...so 38
how about "unable to relate to the basics of life vs the bling" ? from where I sit, it is almost like they have subscribed to the concept that bling is the norm: Everyone has it, and so should they (nevermind the work involved to get it).
They may be very hardworking individuals, but merely saying "we work hard, we deserve this" without the numbers making sense is nuts. Then again, maybe they are just sharks.
Any data on how many of these teaser rates are going to be frozen at below today's (or even yesterdays) prime rates?
I think I'm going to blow a gasket if I find out there is a secret window at the banks giving below market loans to financially reckless individuals.
I'm sure there are a few class action lawyers who are trying to figure out a basis for a lawsuit. I'm also betting that the secret refi window isn't nearly as color-blind as the front door. There are probably more than a few minority homeowners who could have avoided foreclosures if they would have known these kind of deals were available.
Maybe "savers" can be officially classified as a minority with the next census.
I told a relative in the Bay area that RE was in a bubble before Katrina. I suggested they sell one of their two investment properties. Use the proceeds to pay off the other property and live in it, instead of renting a third property.
What they did instead was sell one and buy another $1M property, one with a mold problem.
They had lived through the SoCal deflation of the
early nineties, being upside down on a property in Riverside.
RE only goes up, after all. So much for financial literacy.
Ray, did you catch the quote from Suzanne later in the article?
This is almost a no-win situation for us, Suzanne said. If we refinance, we're spending $40,000 to keep the place, or we spend $40,000 to lose the place in a short sale. Ideally, we need to stay where we're at, but we don't know how to make that happen.
"Ideally, we need to" is, um, an odd formulation. I don't think it requires Dr. Freud to understand something about Suzanne's mental closet.
You're just guessing what the article didn't say, the same as me and everyone else. In terms of what PR mills don't choose to reveal, we're all equally blind.
Of course Countrywide modified one or both mortgages to compensate for the rate reduction. They're not giving out free money, and this case isn't even a real hardship.
In addition to their primary mortgage, the Hornbeeks had taken out a second mortgage with Chase for $85,750 at a fixed rate of 8 percent.
I read brokers outpost for fun and I'm amazed at how easily already lax LTV limits are dodged. So Company A has a LTV limit of 95%. But you have no money. What you do is get ANOTHER company to loan you 5%, UNSECURED, and then the first company is totally happy, and you move into your home without having to spend a penny.
WTF? How was this ok for company A? a couple with no savings track record at all can bring someone other idiots cash along and that makes things ok? houses don't diminish by more than 5%? And what was company B thinking?
They had lived through the SoCal deflation of the
early nineties, being upside down on a property in Riverside.
RE only goes up, after all. So much for financial literacy.
Of course what they "learned" from that is, if you just don't cut and run in the down cycles, it's a sure thing. Many others have "learned" this, and I suspect that it's one reason why in this cycle prices in CA have been bid up to far, far higher price:income ratios than at the peak that preceded that bust.
Money quote from US ISM Manufacturing Index article on Bloomberg's (from 50.9 to 50.8):
The group's gauge of prices paid rose to 67.5 from 63. Economists surveyed by Bloomberg had expected the measure to rise to 66.
The decline reflected decreases in employment and inventories. The inventory index fell to 46.9 from 47.2. Figures less than 50 mean manufacturers are reducing stockpiles. The ISM's employment measure fell to 47.8, the lowest since September 2003, from 52 in October.
When I bought my current house I had to make the decision between a big down payment and a manageable mortgage payment and playing the "interest rate arbitrage game". I am retired and did the same thing when I refinanced 3 years ago @5.25%, 30 year fixed. After the tax effect, even investing in CD's produces zero cost housing.
By the way, I saw that Soros had put some money into CFC recently. Whether it is still there I cannot say. But evidently he sees some value in it and must be sure it isn't going belly up, right?
As you know, what Tripleplay is referring to is the carry-trade, something many of us are predicting in the near future. To hold up all asset values, the FED and all FCB's are going to trash cash and lower interest rates to two or three percent. Your house or asset collects six, you pay two and carry the four.
If a house can CAP at six or seven in a desirable area, it is a safe play.
You cant say "Can you service a debt that is much more than 3x income." without saying what the interest rate is. At a 10% rate maybe, at a 15% rate probably not, and at a 4% rate - hell yes!
You cant say "Can you service a debt that is much more than 3x income." without saying what the interest rate is. At a 10% rate maybe, at a 15% rate probably not, and at a 4% rate - hell yes!
M-F | Homepage | 12.03.07 - 1:09 pm | #
Which is the root cause of our problems. When rates go down, prices can go up. When rates go up, prices can go down.
Countrywide has been chugging along with almost exactly 100 foreclosures a week showing up on its REO site for the last few months (just for California). What are the odds that they have a huge backlog in addition to the overpriced real estate they're trying to sell? They really really don't want this condo.
Sorry, that should be huge HUGE backlog.
that's exactly what I'm basing it on: History as the guide to what a balanced market looks like. Gigantic homes are worth more? Not if you can't find a buyer. The luxury product does not fit the needs of the over-indebted market. Those gigantic houses will eventually be 4 unit condos or apartments.
Marcus Aurelius | 12.03.07 - 12:46 pm | #
This seems unlikely to me. We will however see a return to affordability at all income levels. The most expensive 10% of homes will be affordable for the richest 10% etc.
The maintenance costs alone on a big house make it impossible to keep unless you have spare cash to just go into keeping it the way it was for no profit at all.
Plus not many better off people want to live in an enormous house only a few feet away from the next guy
Many of these big houses in nowhere places will be moved to other sites and/or recycled to produce smaller houses
If I'm reading it correctly, interest on amounts over $100,000 + current home acquisition mortgage balance is treated as personal interest - ie. not deductible - unless the proceeds were used for investment, business or other deductible purposes (in which cases the interest would be deducted elsewhere on your tax returns.)
Key section -
Home equity debt limit. There is a limit on the amount of debt that can be treated as home equity debt. The total home equity debt on your main home and second home is limited to the smaller of:
*
$100,000 ($50,000 if married filing separately), or
*
The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home.
...
Debt higher than limit. Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 - $15,000] in the preceding example) generally is treated as personal interest and is not deductible. But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest.
Now, maybe if you are talking about a 950 sq ft shack with no central air and one bathroom, maybe 3 x gross is fair for that... but houses today are much fancier than in years past.
thing is, the DIRT that house is sitting on hasn't changed, and the bulk of housing costs in the bubbly areas are the SITE VALUES . . . plenty of room to fall in that area.
My question is why the UT reporter finds it compelling, [duzhe?] and my guess is because many, many people [those B the tender ones...and the tenderizing ones?] find this compelling. In other words, we're still pretty far into denial about how our economy works if we find these people's justifications to make much sense.
and the way it works...looking at the past, see, is that a few can chase the many tender...but it gums up pretty fast when weall do the fleecerama.
And what greater inducement to fleece when your wages mean you have to game something somewhere to meet your basic needs of shelter?
Uh, it's been over 100 comments, but not one has raised the Math Question:
How do you rationalise: "he couple accepted a $352,000 interest-only mortgage at 4.97 percent" (or the new rate of 5.25%), with "$2,900 monthly mortgage payment, including taxes and homeowners association dues."
An interest-only payment at 5.25% on $352K is $1,540. (352e3*.0525/12). If the other ca. $1,360 is taxes and dues, then it's really the equivalent to an $800K house.
According to my spreadsheet, they are going to see their mortgage go up by $1,882 a month in three to five years, making their total housing expense (net of the JPMC line) about $4,800/month.
They're royally fckd then, and CFC knows it. The latter is just hoping the market comes back in the next three to five years.
quartz - I don't have the details on the second mortgage (though I would give you odds it started as a HELOC, probably with a ten-year term).
That gives two scenarios: the optimistic (the JPMC loan matures in three to five years, is then fully paid off, and was included in the $2,900/month) and the pessimistic (that loan goes longer, leaving a few months to a few years where the $1800+ increase is not ameliorated anywhere else).
Let's be optimistic. We know that:
$2,900 = IO to CFC + 8% to JPMC + dues + property taxes on a $400K property.
the IO = $1,540. (see above) So they are spending $1,360 per month on the combination of dues, property taxes, and the other loan.
Property taxes are approximately 1.2% of the purchase price (see here p.a., or in this case about $5,280 per year or $440/month.
So the dues and the other loan are $920/month.
The initial payment on an 8% fixed rate loan to pay interest only is just over $570. Even if there were NO condo dues, the payoff for the fixed loan at $920/month would be just over 12 years.
If we're optimistic, the dues is half the taxes, and the fixed rate loan would be paid off in just over 21 years--19 years from now, and well after they are foreclosed by CFC.
So I'm not forgetting the 8% JPMC loan, I'm just ignoring it as a factor that will go away any time soon--certainly not before the $1,800+ increase in their monthly mortgage payment kicks in.
To put it in no uncertain terms: they were fckd by their "Financial Advisor" and CFC is betting on a recovery (or being acquired and making this someone else's problem) in the next three to five years, when the death knell of Hornbeek's "home ownership" delusion will sound, without the U-T around to hear it.
Tanta/CR: Maybe it's not sexy to write about it, but what about people like me? No debt except a 50 % LTV fixed mortgage. Buy a new car every 10 years and pay all CC balances in full every month. The people I know all do the same, pretty much. Your blog and Greek chorus think they know everything, but they know nothing about me and the millions like me. You won't know us by our fancy cars and expensive clothes, but we are there. Read "The Millionaire Next Dorr"- I am he. But I guess that's just to boring for you to think about, eh?
I'm sorry I'm so late to this thread, but something stikes me as odd. If the first mortgage held by Countrywide is for $358,000 and the house can still be sold for $400,000, why would Countrywide foreclose? The probability is they would get their money out of the deal and the second lien holder would be screwed. This seems to me to be a more sensible strategy than to modify the loan at neutral to negative carry.
Can you provide the rationale why Countrywide would want to stay on the hook in such a bad situation?
Please pray tell someone explain the logic behind this modification. Are these people expected to live another 27 years?:
Like many homeowners, they refinanced repeatedly, sometimes to pay off credit-card debts and once to participate in an unsuccessful campground business venture.
"I had 27 credit cards at one time. I can't get one now," Phyllis said.
Donald is 70, and Phyllis is 68. Their income is fixed at $4,439 a month. Their mortgage payments, insurance and property taxes exceeded $3,300 a month.
They kept trying to stay current as their mortgage payments adjusted higher and higher.
Donald called Option One, ranting that the payments were impossibly high.
The foreclosure notice came exactly 30 years to the month after they bought the house.
Instead of burning their mortgage, the Gilpatricks braced for an auction Dec. 12. But last month, they got a surprise. Option One called with an offer to change their home loan and cancel the foreclosure.
The offer, which they accepted Wednesday, allows them to postpone payment on $150,000 of the principal until 2034 and lowers their monthly mortgage payment to a fixed $1,664."
This plan sounds like a lot of smoke and mirrors. It will not help a whole lot unless. We lower lending standards again to allow people to be able to afford todays prices. So houses will still fall and people will continue to walk.
This fake borrow and spend economy has stalled and can't be restarted with silly little plans like this.
I guess I am not alone on this the market isn't buying it either.
Surveys have shown that less than half of homebuyers know whether they have a fixed or variable rate loan.In my own informal questioning most people consider a hybrid loan a fixed loan.Ignorance or stupidity?
I think they are perfect poster children for the "Ownership Society." It's not about which option would cost them less in the near or far term; it's about which option maintains the illusion that they own something.
When I drive down the street and see all the cars I wonder how many are owned by the driver of the car without any debt.
Well, I don't know if there's a San Diego market for $440k condos at a 30y fixed of 5.25%, but what I want to know is this:
How the heck can I get that? I mean, I got a 30 year fixed at 6.125 with 20% of my own skin in the game, and my purchasing power was significantly limited by the size of the downpayment I could afford, in order to get the lower rate of a fixed 30 year. These irresponsible jack-a**es are being rewarded with a better rate than I got for having a good FICO and following sane practices. It just really PO's me.
"Suzanne used to work as a hair stylist but had to quit a year ago when she was diagnosed with an autoimmune condition. The condition, which requires her to live in dry, warm climates,.."
So - I feel sorry for anyone with any sickness, but I have to ask: Is she receiving social security disability? If not, and she can not work, why not? Or can she work, but chooses not to?
This story is just sad in so many ways. The financial ignorance goes past "outrageous" to "sad", in my view. I would have loved to hear the details on that car loan.... no mention it was a 'modest' car loan. Anyone else think it is a $800.00 per month payment on a brand new SUV?
These irresponsible jack-a**es are being rewarded with a better rate than I got for having a good FICO and following sane practices. It just really PO's me.
Scott | 12.03.07 - 11:06 am | #
Hey when it all breaks down and it's everybody for himself, odd things happen. You didn't think a mortgage meltdown+real estate meltdown+credit meltdown would treat everybody "fairly", did you?
Dec. 3 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson said the government and banks will soon'' announce a plan to keep subprime mortgage borrowerswith steady incomes and relatively clean payment histories'' from losing their homes.
[snip]
He did propose a plan that, if enacted by Congress, would let state and local governments ``temporarily broaden their tax- exempt bond programs to include mortgage refinancings.'
sterlingerl's link to the Bloomberg article on Florida's state run investment account has some gems.
[T]he trustees rejected a plan by [executive director Coleman] Stipanovich to solve the problem internally, using pension-fund money.
We're fiduciaries, we're investment professionals, we know what we're doing,'' Stipanovich said Nov. 29.The commercial paper defaulted, but the collateral is different,'' he said, describing it as AAA.
I translate 'solving the problem internally using pension find money' to mean they wanted someone's retirement account to buy the underlying crap at par.
Heaven help us if more pension funds are run by 'investment professionals' like this, so sure they 'know what they are doing'.
So, housing prices only go up, and prices no longer matter, BUT ARMS are good since you're just going to be paying the same rate as everyone else in the future - the same future in which prices only go up, income vs. prices don't matter, etc.
If I missed someone else's comment on this matter forgive me....
But it seems to me that the big news of this article is that people making $100 - $120 grand a year can't REALLY afford a loan in the $400 grand arena!!!!
That is rock bottom entry level condo territory.
i.e., if we actually impose this "affordability standard" thingy, who is gonna buy these neighborhoods full of single family homes?
There are neighborhoods that stretch as far as the eye can see full of $700,000+ homes sold to people who make this much and less. Builders are still building houses who would drool at the thought of a bunch of $100,000 earners comming in to see their $800,000+ homes.
How many people pulling in 80 grand, feeling good in their $650,000 loan just went "Uh Oh"?
A lot of folks seem to be convinced that Michael and Suzanne are examples of ignorance in action. Perhaps they are. OTOH, perhaps they are behaving perfectly rationally.
They got in over their heads with the idea they'd flip out of the house or refi, since that's been the rat-wheel for the last several years. When the debt market fell apart that enabled that behavor, government steps up to the plate in an election year and proposes to bail out homeowners who stand to lose their homes as ARM adjustments hit. Those pooor homeowners.
Against that backdrop, Suzanne comes up with, "...our low rate would increase to the rate that everyone else is buying at right now". Fits perfectly with the behavior I've seen in many anecdotal examples. How would one prove that's not what she thought?
Well, you could try loan docs, but who the heck wants to bother with that kind of detail. Sad.
Gareth G asked, 'How much liquidity has the Federal Reserve pumped into the $12.7 trillion U.S. banking system since March 2007?'
Great post Gareth. That's the heart of the real problem here. It's not losses directly related to subprime and cynical, cheesy borrowers, house flippers, banks or mortgage brokers trying to figure out how to wriggle off the hook. It's about parties not having any faith in the lending/borrowing mechanism and the logical destruction of capital that follows.
If the market's ability to force transparency, disclosure, and true economic cost of previous excesses continues to be delayed or thwarted, then the risk is going to be a situation where the Fed and Treasury can't print money as fast as capital is being destroyed.
The big news is that Countrywide has a PR mill spinning that is transparent as hell, yet it's managed to drag most of the (usually smart) commentators on this board into the spin.
Ask yourself the most basic question: How did this reporter happen to find this wholesome couple with two cute kids to photograph, a medical condition for sob appeal, and a great "feel good" story that shows how benevolent Countrywide really is?
The answer is: Countrywide's PR firm.
This whole story was engineered by Countrywide's PR firm. It's not even real. It's what a big-ticket PR firm is good at and wants you to believe.
Tanta is correct, (natch) that this couple bought this condo with No Money Down in Dec 2004, at $440,000. What's interesting is that the person who previously owned it, had bought it, less than 18 mos prior, for $273,000. That's a pretty healthy 61% return in 17.5 months.
They started out with a 2nd with Wells and then refi'd it with Chase...so we'd have to expect an appraisal, or at least an AVM was performed in Sept 2005. Plus, the 2nd was probably a stated income, as Chase was big on those.
(I looked all of this up on county ownerships files that are public record)
It would be nice if someday people realize that "free markets" are based on differemtiated skill sets, which be definition imply NO transparency into the details.
Translation - you must maintain a culture of honesty.
The entire basis of this problem is that a set of dishonest people dis-intermediated between source lenders and final borrowers.
Source lenders were told that their money was in safe investments.
Final borrowers were sold a set of goods that could only work for a short period of time.
The idea that a more "free market" would work better contradicts how a free market works.
"the rate that everyone else is buying at right now" What she didn't realize is that the now current rate wouldn't support the price that she paid.
I think they are perfect poster children for the "Ownership Society." It's not about which option would cost them less in the near or far term; it's about which option maintains the illusion that they own something.
And it's this irrational behavior that many economists don't handle well in their modeling of market behavior.
Who is taking the finanial hit here? CFC? The holders of paper in small towns in Norway? China?
Aren't those downstream paper holders the ones who should be making the determination whether to freeze the rates on their paper? They bought the mortgage on certain assumptions which were undoubtedly memorialized in iron-clad legalese, and that language sure as hell won't provide for a 5-year freeze at the teaser rates.
So if Uncle Ben isn't making up the difference, who is?
I keep telling my developer friends (who hate to hear what I'm saying) that housing will return to normal (by "normal", I mean pre-bubble) trends as soon as the average home costs 3x the purchaser's gross yearly income (with 20% down and a historically valid fixed interest rate),
They keep responding that this scenario will never happen.This gives me the opportunity to flaunt my fiscal uberconservatism (I am widely perceived to be the liberal archetype due to my social liberalism).
We are now dealing with the results of the wholesale liberalization of our monetary/financial system. People made a lot of money by gambling (speculating), until the fundamental forces of the market demanded a correction.
What my friends refuse to acknowledge is that the fundamentals don't change, and that they did not get wealthy because they were better businessmen, or smarter, or better than anyone else; and for the same reason, they won't survive the downturn, financially. They are all looking for the next financial trick (again, ignoring the fundamentals), that will return them to the days of the boom.
This seems to be what everyone is waiting for, but the fundamentals won't allow it. Reality sucks.
No, I realize life is not fair, and honestly, this is on a second home, purchase in '06, and I was already a 'bubblehead' and was able to significantly bargain down the price (15%+6% for the RE). PR stunt or not, these folks really have no business being there (not that I'd trade places with them).
Marcus Aurelius: "as soon as the average home costs 3x the purchaser's gross yearly income"
I think you are wrong on this... 3x gross yearly income in 6% rate environment is a steal.
Now, maybe if you are talking about a 950 sq ft shack with no central air and one bathroom, maybe 3 x gross is fair for that... but houses today are much fancier than in years past.
So if you are basing that prediction on some sort of 100 year historical average, I think it doesn't work.
I just don't think any useful purpose is served by elliding the difference between "rationality" and "psychology."
What we are finding out is that a lot of people did something that turned out to look pretty darned rational: they bought with no money of their own at risk. If the party had continued, they would have pocketed the appreciation. When the party stopped, they were able to present their lender with a bad choice: restructure the loan back to party-like terms, or take DIL/short sale/short refi/FC. Rich's imagination aside, that is the only reason lenders agree to mods like this one.
So what was "irrational" about their strategy? Sure, it pisses off people who didn't play the game that way--and why not?--but that was the problem with the game.
I highlighted this article because I was fascinated by the psychology in play: the stories people like this tell themselves to avoid the implications of their behavior. They want a heads-I-win, tails-you-lose deal, and they got one, but they have to couch it in self-pitying, financial-fantasy language because, like most people, they just don't want to own up to their own sense of entitlement.
I don't happen to care about that in any specific sense: all kinds of people delude themselves into believing all kinds of shit all day long, and the world continues. I am interested in it to the extent that the UT reporter, and presumably a lot of other people, find that kind of language compelling.
I am not making any claim that these folks are "better off" than they would be if they just mailed the keys in and found a rental. Nor do I find them particularly sympathetic or unsympathetic people. But I do have the impression that Suzanne realizes that she "should" be pitiable, because otherwise her story would sound like simple gaming of the system. So the article piles on with the unspecified illness and the "we didn't realize" language that kind of implies that it was the original lender's fault for not making things clear.
Well, of bloody course people are going to tell self-serving stories about why they're doing what they're doing. What else does anyone expect?
My question is why the UT reporter finds it compelling, and my guess is because many, many people find this compelling. In other words, we're still pretty far into denial about how our economy works if we find these people's justifications to make much sense.
They bet on a horserace and they're trying to extend the race so their horse can catch up.
We have an economy in which Tripleplay can borrow money from a bank and then give it back to the bank and (apparently) collect a spread in there. Whatever, doods.
"I think they are perfect poster children for the "Ownership Society." It's not about which option would cost them less in the near or far term; it's about which option maintains the illusion that they own something."
My thoughts exactly. Approximately one year ago "The Decider" had this to say (for a 2nd time, the 1st was right after the events of 9/11) - "Go shopping more"
"President Bush held a news conference where he discussed the way forward for the economy in 2007. Renowned Morgan Stanley economist Steven Roach says the the odds of the U.S. economy tipping into recession are about 40 to 45 per cent. New York Times columnist Paul Krugman notes that the odds are very good maybe 2 to 1, that the U.S. will teeter toward a recession in 2007. Bushs solution? Go shopping more."
I think 3x income is not something that changes with the value or cost of the home. It's an economic question. Can you service a debt that is much more than 3x income. Any changes to this formula can only come from changes in the term of the loan and are wholly independat on what you got the loan to buy.
Well, Brad Pitt is going to build houses in New Orleans according to CNN. Just what we need, more houses. Myself it would seem rational perhaps instead of building more homes underwater (as in below the natural water level) maybe it would be better to reuse some of the underwater (as in a value below the debt level) homes to shelter the displaced.
No, I wasn't saying that their decision to PURCHSE was irrational. I was saying that their current decision to do almost anything to stay in a house that they are currently underwater and losing equity every day is irrational. But hopless optimists and gamblers are the the people who bought at bubbletop. They'll double or nothing until the house (mortgage lending industry) takes their dice away.
tripleplay, I believe that claiming that interest deduction on your taxes is tax fraud.
You're flat out wrong....
I can have enough money in the bank to pay off my mortgage in full and still take a 100% LTV loan and get a full write-off on the interest. In fact, it's one of the few deductions that isn't penalized by AMT.
If my incomes high enough, I'll get a 30% deduction on my interest. So, my 5% loan becomes a 3.55% loan when taxes are factored in.
You can get better returns than that in a bank CD right now with absolutely no risk since they are FDIC insured. With a 5.7% CD and a 3.55% loan you'll make $2200 in additional income per year, per 100K
Direct tax subsidy and the higher your income the better it gets.
Even the first 100K of interest from a HELOC of deductible if you can avoid AMT.
The only thing that isn't deductible in if you take your 3.55% money and then put it into a tax exempt muni fund. But, that's easy to get around.
After a brief scan, it doesn't look like anyone's sent you a link to this. I think you'll have a good laugh over what showed up in the LATimes today: Foreclosure proof homes
So if you are basing that prediction on some sort of 100 year historical average, I think it doesn't work.
M-F | Homepage | 12.03.07 - 11:52 am | #
that's exactly what I'm basing it on: History as the guide to what a balanced market looks like. Gigantic homes are worth more? Not if you can't find a buyer. The luxury product does not fit the needs of the over-indebted market. Those gigantic houses will eventually be 4 unit condos or apartments.
My question is why the UT reporter finds it compelling, and my guess is because many, many people find this compelling.
You bet your ass they do.
As anyone who has watched just about any daytime talk show in the last 10 years knows, we live in a blame-free culture.
While we were developing this culture, two other things were happening:
The real estate bubble was being inflated by a generation of borrowers who had never known price declines on a national basis.
The mortgage origination process went from: A big, fussy, ordeal which required not only a big chunk of 'cash money' but also a financial colonoscopy...to....mortgage origination becoming a 'sales process' wherein the product was sold with a focus on monthly payment - not dissimilar to a late-model Ford Explorer with low miles.
Now, our blameless masses are ready to eat this Hornbeek shit up.
The $352,000 first mortgage was an interest-only 3/28 ARM with a start rate of 4.97%
Can I get a frozen 4.97% interest rate for the next 10 years? At those interest rates I could play some yield games and be paid to not pay down my mortgage.
Here is another complex problem with folks like this:
If the rate goes up and costs 20,000 a year more, folks like this most likely wil not even see tax savings from the additional interest cost.
For the folks in traditional arms who put down 20% or more, when the rate goes up they are upset, but justify it since uncle same is paying almost 40%.
So--let's add more complexity to it.
With the pending bailout, we (taxpayers) wil be bailing out those who are not paying tax and could not afford the houses.
For my dollar, I prefer to give my money directly to my children.
The rate they actually got "frozen" at was 5.25%.
So my question is, is 5.25 the rate "everyone" would buy at?
Would there be a booming market in Poway condos at $440,000 if borrowers could get 5.25 fixed?
That's a 3/27
You get the borrowers you deserve in this business.
...and if you don't get 'em, you can always create 'em. How much do you want to bet that Michael and Suzanne's delusional views originated with their loan officer?
That's a 3/27
OH NOES! I gave these people a 31 year term!
Now, if CFC had done that, they probably could have afforded their loan!
end stupid
Actually, for all I know it was a 3/37.
If all you bears hadn't created this media nightmare, that condo would have been worth $800,000 right now.
They would have had no problem refinancing. They might have even took some cash out to spend this holiday season, to support the economy.
No mortgage mess, no housing mess, and the economy would be in great shape.
Shame on you all.
Countrywide has an ad in my local sunday paper for a 3 mo. cd at 5.3%.
....Michael and Suzanne did not have $40,000 for a down payment in 2004 and they still don't have $40,000 for a down payment.....
I like the new meaning of "down" payment--the cost to exit when underwater.
The rate they actually got "frozen" at was 5.25%.
Sorry, I was referring to the "Teaser Freezer" proposal on the table. They should have waited.
So my question is, is 5.25 the rate "everyone" would buy at?
If I could get a 5.25% interest only mortgage for 10 years I'd be the first in line. There are 5 year CDs in my area paying 5.7%. Factor in the tax savings and my mortgage would be paying me with ZERO risk.
Nahh. CFC didn't roll out the 40-year amorts on these 'til 2006.
You know, much as I like to stick to the economics, I have to say, I am blown away by Ms. Hornbeeks sense of entitlement...
We understood the situation with loan adjustments to be that after our first three years, our low rate would increase to the rate that everyone else is buying at right now,
I gotta go get a big rubberband to hold my jaw up.
More on Florida's state run investment account...
Florida Says Unfreezing Fund Would Spark `Fire Sale' (Update1) - Bloomberg.com
There are 5 year CDs in my area paying 5.7%.
Certificates of deposit usually require you to make the deposit in a lump sum.
If you borrowed the money to buy the house with, where would you get the money to put into a CD?
Who caused these San Diegan's to be let down?
Why the Fed of course. It offered low "teaser" Fed Funds rates from 2001 to 2004, and this couple bit.
So of course, the solution is to freeze those low teaser rates. Yes indeed, freeze them at 2004 levels so these people can refi again.
Freeze the Fed Funds Teasers!
Surely the house will be worth what they paid for it before they have to start making principal payments. Surely they will be making more money by that time. Nope, "vee get you now, or vee get you later. Vee are here to pump you up."
The home owners with negative equity and the failing banks are believing in magical thinking. Michael and Suzanne should have walked from the home and rented some underwater investor's property for half the monthly amount.
i read a story a few weeks ago about a guy who couldn't afford his new payments, so he attempted to rob the bank his loan was with to pay off his loan!
Countrywide has an ad in my local sunday paper for a 3 mo. cd at 5.3%.
I think the Florida LGIP may have/had a few of those...
COUNTRYWIDE BANK FSB 22238YTL7 4.717500 02/05/08 200,000,000.000000
COUNTRYWIDE BANK FSB 22238YUB7 5.121250 03/17/08 200,000,000.000000
COUNTRYWIDE BANK FSB 22238YWY5 4.882500 06/25/08 150,000,000.000000
COUNTRYWIDE BANK FSB 22238YXS7 5.221880 02/08/08 100,000,000.000000
Pop Quiz
How much liquidity has the Federal Reserve pumped into the $12.7 trillion U.S. banking system since March 2007?
a) $1.2 trillion, which banks have used to firm up their balance sheets
b) $600 billion, which banks can now use to make new loans
c) $16 billion, all of which has been drawn out of the banking system as currency in circulation
Professor Hussman has the answer:
Hussman Funds - Weekly Market Comment: An Irrelevant Fed - Thimbles of Water in a Forest Fire - December 4, 2007
Shame on you all.
grim | Homepage | 12.03.07 - 9:43 am | #
The truth is an evil, shameful thing.
It offered low "teaser" Fed Funds rates from 2001 to 2004, and this couple bit.
As far as I can tell, the 30-year conforming fixed rate in mid-September 2004 was around 5.75%. So the rate they ended up with is even better than a "mulligan" rate.
Translation: CFC really really really doesn't want to own that condo.
Tanta,
You missed the real story, which is the ability of the media and Countrywide PR to spin a "feel good" story without giving all the facts.
This couple did get a sweetheart interest rate reduction. But they probably will pay for it in either a longer mortgage payment period or a higher principal amount (or both) on one or both mortgages. Those details weren't included.
They weren't threatening to walk away into foreclosure. In that case, there's no free lunch on a renegotiation. It's just restructuring the liabilities to give breathing room. This is mostly what banks like Countrywide will be doing, and only enough to keep the PR mill churning.
Michael and Suzanne should have walked from the home and rented some underwater investor's property for half the monthly amount.
Yes, but Michael and Suzanne are clearly not the "ruthless" borrowers for whom "the put" makes rational sense.
As far as I can tell, they have zero rationality about their own finances (they clearly haven't thought much about anyone else's finances, since they expect other people to do what they will not or cannot do).
I think they are perfect poster children for the "Ownership Society." It's not about which option would cost them less in the near or far term; it's about which option maintains the illusion that they own something.
With Hugo gone I am sure Iran president Ahmadinejad is pacing the floors this morning in his feety Pj's...very interesting times we live in to say the least...goos day to Short Crude...yes it is.
Translation: CFC really really really doesn't want to own that condo.
from the article: "In addition to their primary mortgage, the Hornbeeks had taken out a second mortgage with Chase for $85,750 at a fixed rate of 8 percent. Barrett and the Hornbeeks have already contacted Chase to pursue similar negotiations to lower the interest rate for that mortgage."
...ditto for Jimmy Dimo
Surveys have shown that less than half of homebuyers know whether they have a fixed or variable rate loan.In my own informal questioning most people consider a hybrid loan a fixed loan.Ignorance or stupidity?
So I'm with Dr. Wu, you?...or are you actually weighing every little thing that is said by everybody and stickin yer neck out only so far as the herd's neck? (possibly led by Dr Wu...possibly not)
Assuming Suzanne, 38, is not postin her IQ with this submission, does she not at least present us with a view of the under belly of the ploblem: there is a segment of the population so gullible, so tender, ...so 38, that, without regulations, will present irresistible temptations for the lamb chasers?
So the President's current plan would freeze their rate at 4.97% then? Damn I wish I had been that bold before I did the dumb thing and signed a 30 year fixed. I could have saved over a full percentage point.
If you borrowed the money to buy the house with, where would you get the money to put into a CD?
Extracting the equity in my current house..
When I bought my current house I had to make the decision between a big down payment and a manageable mortgage payment and playing the "interest rate arbitrage game".
Interest rate arbitrage is my name for the game that a few financial planners in our area suggest. Extract every bit of equity in your house and invest it in the market.
So far, they've been right.
But, all of it involved some risk. I didn't buy a lottery ticket so I can't win the lottery. I can deal with that.
But, at 5.25% there is ZERO risk. Even I would buy lottery tickets if every ticket was a winner.
Ya know, I'm getting tired of the BS comments by people that roll the dice and get burned instead of taking a smart historically low fixed rate. Everyone today wants a "do-over" for their stupidity and greed. I don't buy at all her story that she thought they would get ".. the rate that everyone else is buying at right now,, but it is convenient.
HousingPANIC had a great video on the site which could very well be Suzanne.
YouTube - Suzanne Researched This Commercial
Didnt Suzanne research this?
But they probably will pay for it in either a longer mortgage payment period or a higher principal amount (or both) on one or both mortgages.
That is not what the article says.
CFC would have increased the principal only to tack on past-due payments, and there don't seem to be any here. And the article implies that they have 22-24 years after the IO period expires, which suggests to me that the term wasn't extended.
And of course they were "threatening" the lender. Nobody modifies loans just because borrowers want lower payments. CFC knew that if it didn't do a mod, it would be doing a short sale, short refi, or FC sooner or later.
I didn't "miss the point." A point is, certainly, that CFC thought the mod was a better deal for it than any alternative. That suggests to me that CFC just doesn't want to own that condo any time soon, and will take a negative interest margin on this particular loan to avoid it.
But of course, my post was looking at another of the points, which is the borrower's odd understanding of what a loan is.
It seems the teaser rate is followed by the taser rate.
So, if you actually bought a reasonable amount of house and have a decent income, you can "afford" the reset, and then you get no help. And in response to someone's comment above, a borrower in this situation may not be able to refi, because they don't meet LTV requirements.
The borrowers who got in way over their heads and cannot afford the reset, get their "teaser" frozen at a below market rate.
The really prudent who took out a fixed get no help etiher.
The whole thing just sounds absolutely nuts to me. What invester would buy adjustable loans when the government can just step in and tell them they have to freeze the start rate- or the servicer just starts freezing start rates. The whole point of an ARM for the lender is that the rate goes up in the future. Or, did these borrowers think they were getting this great start rate out of the kindness of the lender's heart?
It seems the teaser rate is followed by the taser rate.
jm | 12.03.07 - 10:09 am | #
LOL!
They should have thrown the bums out.
there is a segment of the population so gullible, so tender, ...so 38, that, without regulations, will present irresistible temptations for the lamb chasers?
As this is the segment of the population that votes for you, there can't be many politicians wanting to see them become less gullible.
It's possible that Suzanne would have swallowed any spiel any lender gave her, and so it's just unfortunate luck of the draw that she got one with a bad spiel. Perhaps if she had stumbled on Tanta's Retro Mortgage, she'd have recited the CR gospel.
I rather doubt that.
My take is that Michael and Suzanne are "us," nice respectable middle-class white people with cute babies, and we're all subprime now. They just got an underpriced high-risk modification instead of an underpriced high-risk refi that they would have gotten if the subprime industry were still answering its phones. Bubble vive!
With Hugo gone I am sure Iran president Ahmadinejad is pacing the floors this morning in his feety Pj's...very interesting times we live in to say the least...goos day to Short Crude...yes it is.
borkafatty | 12.03.07 - 9:59 am
I hate to burst your bubble but Chavez has five years remaining on his current term as President. The vote was on a referendum to change the Venezuelan Constitution.
Yes my mistake! thank you
there is a segment of the population so gullible, so tender, ...so 38
how about "unable to relate to the basics of life vs the bling" ? from where I sit, it is almost like they have subscribed to the concept that bling is the norm: Everyone has it, and so should they (nevermind the work involved to get it).
They may be very hardworking individuals, but merely saying "we work hard, we deserve this" without the numbers making sense is nuts. Then again, maybe they are just sharks.
Tanta,
Any data on how many of these teaser rates are going to be frozen at below today's (or even yesterdays) prime rates?
I think I'm going to blow a gasket if I find out there is a secret window at the banks giving below market loans to financially reckless individuals.
I'm sure there are a few class action lawyers who are trying to figure out a basis for a lawsuit. I'm also betting that the secret refi window isn't nearly as color-blind as the front door. There are probably more than a few minority homeowners who could have avoided foreclosures if they would have known these kind of deals were available.
Maybe "savers" can be officially classified as a minority with the next census.
"the rate that everyone else is buying at right now"
With this comment she deserve the Darwin award.
I told a relative in the Bay area that RE was in a bubble before Katrina. I suggested they sell one of their two investment properties. Use the proceeds to pay off the other property and live in it, instead of renting a third property.
What they did instead was sell one and buy another $1M property, one with a mold problem.
They had lived through the SoCal deflation of the
early nineties, being upside down on a property in Riverside.
RE only goes up, after all. So much for financial literacy.
Ray, did you catch the quote from Suzanne later in the article?
This is almost a no-win situation for us, Suzanne said. If we refinance, we're spending $40,000 to keep the place, or we spend $40,000 to lose the place in a short sale. Ideally, we need to stay where we're at, but we don't know how to make that happen.
"Ideally, we need to" is, um, an odd formulation. I don't think it requires Dr. Freud to understand something about Suzanne's mental closet.
In the Seattle paper, CFC offers its 3 month CD at 5.45.
Hugo gone? Not by a long shot.
This vote will be found to have been illegal and unconstitutional.
Hugo is numero uno not only in Venezuela but also in Ecuador, Nicarauga and CUBA!
Ownership society? Looks a lot more like a debtors society.
Dude, it's pronounced "Koo-ba".
Tanta,
You're just guessing what the article didn't say, the same as me and everyone else. In terms of what PR mills don't choose to reveal, we're all equally blind.
Of course Countrywide modified one or both mortgages to compensate for the rate reduction. They're not giving out free money, and this case isn't even a real hardship.
Where was Jeb in the Fl investment fund?
Where Was Jeb? - Forbes.com
Oh, there he is transferring wealth to the wealthy.
In addition to their primary mortgage, the Hornbeeks had taken out a second mortgage with Chase for $85,750 at a fixed rate of 8 percent.
I read brokers outpost for fun and I'm amazed at how easily already lax LTV limits are dodged. So Company A has a LTV limit of 95%. But you have no money. What you do is get ANOTHER company to loan you 5%, UNSECURED, and then the first company is totally happy, and you move into your home without having to spend a penny.
WTF? How was this ok for company A? a couple with no savings track record at all can bring someone other idiots cash along and that makes things ok? houses don't diminish by more than 5%? And what was company B thinking?
They had lived through the SoCal deflation of the
early nineties, being upside down on a property in Riverside.
RE only goes up, after all. So much for financial literacy.
Of course what they "learned" from that is, if you just don't cut and run in the down cycles, it's a sure thing. Many others have "learned" this, and I suspect that it's one reason why in this cycle prices in CA have been bid up to far, far higher price:income ratios than at the peak that preceded that bust.
You're just guessing what the article didn't say, the same as me and everyone else.
Therefore, when you state as a certainty that modifications other than the rate where made, your certainty is based on a better guess than mine?
Remind me what your original point was, will you?
"¿Por qué no te callas?"
OT,
Money quote from US ISM Manufacturing Index article on Bloomberg's (from 50.9 to 50.8):
The group's gauge of prices paid rose to 67.5 from 63. Economists surveyed by Bloomberg had expected the measure to rise to 66.
The decline reflected decreases in employment and inventories. The inventory index fell to 46.9 from 47.2. Figures less than 50 mean manufacturers are reducing stockpiles. The ISM's employment measure fell to 47.8, the lowest since September 2003, from 52 in October.
When I bought my current house I had to make the decision between a big down payment and a manageable mortgage payment and playing the "interest rate arbitrage game". I am retired and did the same thing when I refinanced 3 years ago @5.25%, 30 year fixed. After the tax effect, even investing in CD's produces zero cost housing.
By the way, I saw that Soros had put some money into CFC recently. Whether it is still there I cannot say. But evidently he sees some value in it and must be sure it isn't going belly up, right?
triple-
So you don't pay taxes on the interest you earn from the bank?
On the original topic, I'd like to know the details of that refi back in 2005. That would probably add a bit of flavor to the story
Tanta-
As you know, what Tripleplay is referring to is the carry-trade, something many of us are predicting in the near future. To hold up all asset values, the FED and all FCB's are going to trash cash and lower interest rates to two or three percent. Your house or asset collects six, you pay two and carry the four.
If a house can CAP at six or seven in a desirable area, it is a safe play.
You cant say "Can you service a debt that is much more than 3x income." without saying what the interest rate is. At a 10% rate maybe, at a 15% rate probably not, and at a 4% rate - hell yes!
You cant say "Can you service a debt that is much more than 3x income." without saying what the interest rate is. At a 10% rate maybe, at a 15% rate probably not, and at a 4% rate - hell yes!
M-F | Homepage | 12.03.07 - 1:09 pm | #
Which is the root cause of our problems. When rates go down, prices can go up. When rates go up, prices can go down.
What really disturbs me is that Mike and Suzy actually had a professional help driving their new "bargain."
"financial planner Kevin Barrett" needs to get his head out of his a$$ and start giving his clients realistic advice about their best interest...
Countrywide has been chugging along with almost exactly 100 foreclosures a week showing up on its REO site for the last few months (just for California). What are the odds that they have a huge backlog in addition to the overpriced real estate they're trying to sell? They really really don't want this condo.
Sorry, that should be huge HUGE backlog.
that's exactly what I'm basing it on: History as the guide to what a balanced market looks like. Gigantic homes are worth more? Not if you can't find a buyer. The luxury product does not fit the needs of the over-indebted market. Those gigantic houses will eventually be 4 unit condos or apartments.
Marcus Aurelius | 12.03.07 - 12:46 pm | #
This seems unlikely to me. We will however see a return to affordability at all income levels. The most expensive 10% of homes will be affordable for the richest 10% etc.
The maintenance costs alone on a big house make it impossible to keep unless you have spare cash to just go into keeping it the way it was for no profit at all.
Plus not many better off people want to live in an enormous house only a few feet away from the next guy
Many of these big houses in nowhere places will be moved to other sites and/or recycled to produce smaller houses
OT IRS on deductibility of home mortgage interest...
Publication 936 (2008), Home Mortgage Interest Deduction
If I'm reading it correctly, interest on amounts over $100,000 + current home acquisition mortgage balance is treated as personal interest - ie. not deductible - unless the proceeds were used for investment, business or other deductible purposes (in which cases the interest would be deducted elsewhere on your tax returns.)
Key section -
Home equity debt limit. There is a limit on the amount of debt that can be treated as home equity debt. The total home equity debt on your main home and second home is limited to the smaller of:
*
$100,000 ($50,000 if married filing separately), or
*
The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home.
...
Debt higher than limit. Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 - $15,000] in the preceding example) generally is treated as personal interest and is not deductible. But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest.
Now, maybe if you are talking about a 950 sq ft shack with no central air and one bathroom, maybe 3 x gross is fair for that... but houses today are much fancier than in years past.
thing is, the DIRT that house is sitting on hasn't changed, and the bulk of housing costs in the bubbly areas are the SITE VALUES . . . plenty of room to fall in that area.
My question is why the UT reporter finds it compelling, [duzhe?] and my guess is because many, many people [those B the tender ones...and the tenderizing ones?] find this compelling. In other words, we're still pretty far into denial about how our economy works if we find these people's justifications to make much sense.
and the way it works...looking at the past, see, is that a few can chase the many tender...but it gums up pretty fast when weall do the fleecerama.
And what greater inducement to fleece when your wages mean you have to game something somewhere to meet your basic needs of shelter?
Simple reason for borrowing 300K:
Even before the housing downturn, the increase in value of my house was less than 3% a year. (I live in SE Michigan........no Detroit jokes please).
I borrowed at 4% on a illiquid asset at the risk of earning a greater return over the term of the mortgage.
Uh, it's been over 100 comments, but not one has raised the Math Question:
How do you rationalise: "he couple accepted a $352,000 interest-only mortgage at 4.97 percent" (or the new rate of 5.25%), with "$2,900 monthly mortgage payment, including taxes and homeowners association dues."
An interest-only payment at 5.25% on $352K is $1,540. (352e3*.0525/12). If the other ca. $1,360 is taxes and dues, then it's really the equivalent to an $800K house.
According to my spreadsheet, they are going to see their mortgage go up by $1,882 a month in three to five years, making their total housing expense (net of the JPMC line) about $4,800/month.
They're royally fckd then, and CFC knows it. The latter is just hoping the market comes back in the next three to five years.
More "victims"...
Examining the subprime-lending crisis
Ken,
I think you are forgetting the second 8% mortgage.
quartz - I don't have the details on the second mortgage (though I would give you odds it started as a HELOC, probably with a ten-year term).
That gives two scenarios: the optimistic (the JPMC loan matures in three to five years, is then fully paid off, and was included in the $2,900/month) and the pessimistic (that loan goes longer, leaving a few months to a few years where the $1800+ increase is not ameliorated anywhere else).
Let's be optimistic. We know that:
$2,900 = IO to CFC + 8% to JPMC + dues + property taxes on a $400K property.
the IO = $1,540. (see above) So they are spending $1,360 per month on the combination of dues, property taxes, and the other loan.
Property taxes are approximately 1.2% of the purchase price (see here p.a., or in this case about $5,280 per year or $440/month.
So the dues and the other loan are $920/month.
The initial payment on an 8% fixed rate loan to pay interest only is just over $570. Even if there were NO condo dues, the payoff for the fixed loan at $920/month would be just over 12 years.
If we're optimistic, the dues is half the taxes, and the fixed rate loan would be paid off in just over 21 years--19 years from now, and well after they are foreclosed by CFC.
So I'm not forgetting the 8% JPMC loan, I'm just ignoring it as a factor that will go away any time soon--certainly not before the $1,800+ increase in their monthly mortgage payment kicks in.
To put it in no uncertain terms: they were fckd by their "Financial Advisor" and CFC is betting on a recovery (or being acquired and making this someone else's problem) in the next three to five years, when the death knell of Hornbeek's "home ownership" delusion will sound, without the U-T around to hear it.
I keep reading about people like this, but I never read about people like me. Only debt is a mortgage of
Tanta/CR: Maybe it's not sexy to write about it, but what about people like me? No debt except a 50 % LTV fixed mortgage. Buy a new car every 10 years and pay all CC balances in full every month. The people I know all do the same, pretty much. Your blog and Greek chorus think they know everything, but they know nothing about me and the millions like me. You won't know us by our fancy cars and expensive clothes, but we are there. Read "The Millionaire Next Dorr"- I am he. But I guess that's just to boring for you to think about, eh?
Tanta,
I'm sorry I'm so late to this thread, but something stikes me as odd. If the first mortgage held by Countrywide is for $358,000 and the house can still be sold for $400,000, why would Countrywide foreclose? The probability is they would get their money out of the deal and the second lien holder would be screwed. This seems to me to be a more sensible strategy than to modify the loan at neutral to negative carry.
Can you provide the rationale why Countrywide would want to stay on the hook in such a bad situation?
Suzanne - you ignorant slut!!
But good job negotiating with CFC.
Please pray tell someone explain the logic behind this modification. Are these people expected to live another 27 years?:
Like many homeowners, they refinanced repeatedly, sometimes to pay off credit-card debts and once to participate in an unsuccessful campground business venture.
"I had 27 credit cards at one time. I can't get one now," Phyllis said.
Donald is 70, and Phyllis is 68. Their income is fixed at $4,439 a month. Their mortgage payments, insurance and property taxes exceeded $3,300 a month.
They kept trying to stay current as their mortgage payments adjusted higher and higher.
Donald called Option One, ranting that the payments were impossibly high.
The foreclosure notice came exactly 30 years to the month after they bought the house.
Instead of burning their mortgage, the Gilpatricks braced for an auction Dec. 12. But last month, they got a surprise. Option One called with an offer to change their home loan and cancel the foreclosure.
The offer, which they accepted Wednesday, allows them to postpone payment on $150,000 of the principal until 2034 and lowers their monthly mortgage payment to a fixed $1,664."
Examining the subprime-lending crisis - The Denver Post
This plan sounds like a lot of smoke and mirrors. It will not help a whole lot unless. We lower lending standards again to allow people to be able to afford todays prices. So houses will still fall and people will continue to walk.
This fake borrow and spend economy has stalled and can't be restarted with silly little plans like this.
I guess I am not alone on this the market isn't buying it either.
Surveys have shown that less than half of homebuyers know whether they have a fixed or variable rate loan.In my own informal questioning most people consider a hybrid loan a fixed loan.Ignorance or stupidity?
Yes.
I think they are perfect poster children for the "Ownership Society." It's not about which option would cost them less in the near or far term; it's about which option maintains the illusion that they own something.
When I drive down the street and see all the cars I wonder how many are owned by the driver of the car without any debt.
Same with driving by all the 3000 sq. ft houses.
Tanta sed...
The rate they actually got "frozen" at was 5.25%.
Well, I don't know if there's a San Diego market for $440k condos at a 30y fixed of 5.25%, but what I want to know is this:
How the heck can I get that? I mean, I got a 30 year fixed at 6.125 with 20% of my own skin in the game, and my purchasing power was significantly limited by the size of the downpayment I could afford, in order to get the lower rate of a fixed 30 year. These irresponsible jack-a**es are being rewarded with a better rate than I got for having a good FICO and following sane practices. It just really PO's me.
"Suzanne used to work as a hair stylist but had to quit a year ago when she was diagnosed with an autoimmune condition. The condition, which requires her to live in dry, warm climates,.."
So - I feel sorry for anyone with any sickness, but I have to ask: Is she receiving social security disability? If not, and she can not work, why not? Or can she work, but chooses not to?
This story is just sad in so many ways. The financial ignorance goes past "outrageous" to "sad", in my view. I would have loved to hear the details on that car loan.... no mention it was a 'modest' car loan. Anyone else think it is a $800.00 per month payment on a brand new SUV?
These irresponsible jack-a**es are being rewarded with a better rate than I got for having a good FICO and following sane practices. It just really PO's me.
Scott | 12.03.07 - 11:06 am | #
Hey when it all breaks down and it's everybody for himself, odd things happen. You didn't think a mortgage meltdown+real estate meltdown+credit meltdown would treat everybody "fairly", did you?
Mozzillo on CNBC with Maria B now.
OK please read this bit on the Paulson plan...the bold emphasis added...umm what do you all think about that?
Paulson Says Subprime Mortgage Plan Will Lessen Economy Risks
By John Brinsley
Dec. 3 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson said the government and banks will soon'' announce a plan to keep subprime mortgage borrowerswith steady incomes and relatively clean payment histories'' from losing their homes.
[snip]
He did propose a plan that, if enacted by Congress, would let state and local governments ``temporarily broaden their tax- exempt bond programs to include mortgage refinancings.'
[snip]
After the tax effect, even investing in CD's produces zero cost housing.
Is today National Crazy People Day, and nobody told me?
they clearly haven't thought much about anyone else's finances, since they expect other people to do what they will not or cannot do
Isn't this the definition of a "free market"?
That is, differentiated labor?
Mozzillo on CNBC with Maria B now.
Hey you can always rely on Maria B to get to the bottom of things, can't you?
hmmm 216 visitors, things might get interesting today per that leading indicator...
sterlingerl's link to the Bloomberg article on Florida's state run investment account has some gems.
[T]he trustees rejected a plan by [executive director Coleman] Stipanovich to solve the problem internally, using pension-fund money.
We're fiduciaries, we're investment professionals, we know what we're doing,'' Stipanovich said Nov. 29.The commercial paper defaulted, but the collateral is different,'' he said, describing it as AAA.
I translate 'solving the problem internally using pension find money' to mean they wanted someone's retirement account to buy the underlying crap at par.
Heaven help us if more pension funds are run by 'investment professionals' like this, so sure they 'know what they are doing'.
Hahaha...
So, housing prices only go up, and prices no longer matter, BUT ARMS are good since you're just going to be paying the same rate as everyone else in the future - the same future in which prices only go up, income vs. prices don't matter, etc.
Wow!
If I missed someone else's comment on this matter forgive me....
But it seems to me that the big news of this article is that people making $100 - $120 grand a year can't REALLY afford a loan in the $400 grand arena!!!!
That is rock bottom entry level condo territory.
i.e., if we actually impose this "affordability standard" thingy, who is gonna buy these neighborhoods full of single family homes?
There are neighborhoods that stretch as far as the eye can see full of $700,000+ homes sold to people who make this much and less. Builders are still building houses who would drool at the thought of a bunch of $100,000 earners comming in to see their $800,000+ homes.
How many people pulling in 80 grand, feeling good in their $650,000 loan just went "Uh Oh"?
A lot of folks seem to be convinced that Michael and Suzanne are examples of ignorance in action. Perhaps they are. OTOH, perhaps they are behaving perfectly rationally.
They got in over their heads with the idea they'd flip out of the house or refi, since that's been the rat-wheel for the last several years. When the debt market fell apart that enabled that behavor, government steps up to the plate in an election year and proposes to bail out homeowners who stand to lose their homes as ARM adjustments hit. Those pooor homeowners.
Against that backdrop, Suzanne comes up with, "...our low rate would increase to the rate that everyone else is buying at right now". Fits perfectly with the behavior I've seen in many anecdotal examples. How would one prove that's not what she thought?
Well, you could try loan docs, but who the heck wants to bother with that kind of detail. Sad.
Gareth G asked, 'How much liquidity has the Federal Reserve pumped into the $12.7 trillion U.S. banking system since March 2007?'
Great post Gareth. That's the heart of the real problem here. It's not losses directly related to subprime and cynical, cheesy borrowers, house flippers, banks or mortgage brokers trying to figure out how to wriggle off the hook. It's about parties not having any faith in the lending/borrowing mechanism and the logical destruction of capital that follows.
If the market's ability to force transparency, disclosure, and true economic cost of previous excesses continues to be delayed or thwarted, then the risk is going to be a situation where the Fed and Treasury can't print money as fast as capital is being destroyed.
The big news is that Countrywide has a PR mill spinning that is transparent as hell, yet it's managed to drag most of the (usually smart) commentators on this board into the spin.
Ask yourself the most basic question: How did this reporter happen to find this wholesome couple with two cute kids to photograph, a medical condition for sob appeal, and a great "feel good" story that shows how benevolent Countrywide really is?
The answer is: Countrywide's PR firm.
This whole story was engineered by Countrywide's PR firm. It's not even real. It's what a big-ticket PR firm is good at and wants you to believe.
Tanta is correct, (natch) that this couple bought this condo with No Money Down in Dec 2004, at $440,000. What's interesting is that the person who previously owned it, had bought it, less than 18 mos prior, for $273,000. That's a pretty healthy 61% return in 17.5 months.
They started out with a 2nd with Wells and then refi'd it with Chase...so we'd have to expect an appraisal, or at least an AVM was performed in Sept 2005. Plus, the 2nd was probably a stated income, as Chase was big on those.
(I looked all of this up on county ownerships files that are public record)
Yesterday at BMIT, I recommended they follow Rob Dawg's advice on seconds:
Stop paying the second.
It would be nice if someday people realize that "free markets" are based on differemtiated skill sets, which be definition imply NO transparency into the details.
Translation - you must maintain a culture of honesty.
The entire basis of this problem is that a set of dishonest people dis-intermediated between source lenders and final borrowers.
Source lenders were told that their money was in safe investments.
Final borrowers were sold a set of goods that could only work for a short period of time.
The idea that a more "free market" would work better contradicts how a free market works.
"the rate that everyone else is buying at right now" What she didn't realize is that the now current rate wouldn't support the price that she paid.
I think they are perfect poster children for the "Ownership Society." It's not about which option would cost them less in the near or far term; it's about which option maintains the illusion that they own something.
And it's this irrational behavior that many economists don't handle well in their modeling of market behavior.
Tanta said
Is today National Crazy People Day, and nobody told me?
When I retired, I borrowed 300K on a mortgage at an effective rate of 4%. I can invest it a higher rate than that.
Makes more sense to me than investing 300K in my house.
tripleplay, I believe that claiming that interest deduction on your taxes is tax fraud.
a tax lawyer or accountant can correct me, but if you get audited you will be penalized.
Who is taking the finanial hit here? CFC? The holders of paper in small towns in Norway? China?
Aren't those downstream paper holders the ones who should be making the determination whether to freeze the rates on their paper? They bought the mortgage on certain assumptions which were undoubtedly memorialized in iron-clad legalese, and that language sure as hell won't provide for a 5-year freeze at the teaser rates.
So if Uncle Ben isn't making up the difference, who is?
I keep telling my developer friends (who hate to hear what I'm saying) that housing will return to normal (by "normal", I mean pre-bubble) trends as soon as the average home costs 3x the purchaser's gross yearly income (with 20% down and a historically valid fixed interest rate),
They keep responding that this scenario will never happen.This gives me the opportunity to flaunt my fiscal uberconservatism (I am widely perceived to be the liberal archetype due to my social liberalism).
We are now dealing with the results of the wholesale liberalization of our monetary/financial system. People made a lot of money by gambling (speculating), until the fundamental forces of the market demanded a correction.
What my friends refuse to acknowledge is that the fundamentals don't change, and that they did not get wealthy because they were better businessmen, or smarter, or better than anyone else; and for the same reason, they won't survive the downturn, financially. They are all looking for the next financial trick (again, ignoring the fundamentals), that will return them to the days of the boom.
This seems to be what everyone is waiting for, but the fundamentals won't allow it. Reality sucks.
James -
No, I realize life is not fair, and honestly, this is on a second home, purchase in '06, and I was already a 'bubblehead' and was able to significantly bargain down the price (15%+6% for the RE). PR stunt or not, these folks really have no business being there (not that I'd trade places with them).
S.
Insane.
Someone is going to foot the bill, and since it isn't the taxpayers (or so he says), it will be holders of the paper.
As far as I can tell, those people aren't actually in on this "deal". So how does our esteemed secretary propose to negate their contracts?
Even C Students from Yale should be able to do better than this.
Marcus Aurelius: "as soon as the average home costs 3x the purchaser's gross yearly income"
I think you are wrong on this... 3x gross yearly income in 6% rate environment is a steal.
Now, maybe if you are talking about a 950 sq ft shack with no central air and one bathroom, maybe 3 x gross is fair for that... but houses today are much fancier than in years past.
So if you are basing that prediction on some sort of 100 year historical average, I think it doesn't work.
And it's this irrational behavior
I just don't think any useful purpose is served by elliding the difference between "rationality" and "psychology."
What we are finding out is that a lot of people did something that turned out to look pretty darned rational: they bought with no money of their own at risk. If the party had continued, they would have pocketed the appreciation. When the party stopped, they were able to present their lender with a bad choice: restructure the loan back to party-like terms, or take DIL/short sale/short refi/FC. Rich's imagination aside, that is the only reason lenders agree to mods like this one.
So what was "irrational" about their strategy? Sure, it pisses off people who didn't play the game that way--and why not?--but that was the problem with the game.
I highlighted this article because I was fascinated by the psychology in play: the stories people like this tell themselves to avoid the implications of their behavior. They want a heads-I-win, tails-you-lose deal, and they got one, but they have to couch it in self-pitying, financial-fantasy language because, like most people, they just don't want to own up to their own sense of entitlement.
I don't happen to care about that in any specific sense: all kinds of people delude themselves into believing all kinds of shit all day long, and the world continues. I am interested in it to the extent that the UT reporter, and presumably a lot of other people, find that kind of language compelling.
I am not making any claim that these folks are "better off" than they would be if they just mailed the keys in and found a rental. Nor do I find them particularly sympathetic or unsympathetic people. But I do have the impression that Suzanne realizes that she "should" be pitiable, because otherwise her story would sound like simple gaming of the system. So the article piles on with the unspecified illness and the "we didn't realize" language that kind of implies that it was the original lender's fault for not making things clear.
Well, of bloody course people are going to tell self-serving stories about why they're doing what they're doing. What else does anyone expect?
My question is why the UT reporter finds it compelling, and my guess is because many, many people find this compelling. In other words, we're still pretty far into denial about how our economy works if we find these people's justifications to make much sense.
They bet on a horserace and they're trying to extend the race so their horse can catch up.
We have an economy in which Tripleplay can borrow money from a bank and then give it back to the bank and (apparently) collect a spread in there. Whatever, doods.
Can we have a little less info on what the stupid people were/are doing, and a little more on what the wise people were/are doing?
Because really, this is all starting to sound like "Dinosaurs: The Soap Opera." Not a big ratings future for that show.
"I think they are perfect poster children for the "Ownership Society." It's not about which option would cost them less in the near or far term; it's about which option maintains the illusion that they own something."
My thoughts exactly. Approximately one year ago "The Decider" had this to say (for a 2nd time, the 1st was right after the events of 9/11) - "Go shopping more"
"President Bush held a news conference where he discussed the way forward for the economy in 2007. Renowned Morgan Stanley economist Steven Roach says the the odds of the U.S. economy tipping into recession are about 40 to 45 per cent. New York Times columnist Paul Krugman notes that the odds are very good maybe 2 to 1, that the U.S. will teeter toward a recession in 2007. Bushs solution? Go shopping more."
Sourced (for rerun pleasure, or not as the case may be) - Think Progress » With Recession Looming, Bush Tells America To ‘Go Shopping More’
M-F
I think 3x income is not something that changes with the value or cost of the home. It's an economic question. Can you service a debt that is much more than 3x income. Any changes to this formula can only come from changes in the term of the loan and are wholly independat on what you got the loan to buy.
Yeah, really dumb, but...wouldn't you like to know what happened to the equity on the sale of the home in Buffalo?
Armageddon in the housing market. I got a subprime loan when I did not need one.
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"but...wouldn't you like to know what happened to the equity on the sale of the home in Buffalo?"
It's a no-brainer, they went "shopping".
Well, Brad Pitt is going to build houses in New Orleans according to CNN. Just what we need, more houses. Myself it would seem rational perhaps instead of building more homes underwater (as in below the natural water level) maybe it would be better to reuse some of the underwater (as in a value below the debt level) homes to shelter the displaced.
CNBS Breaking News:
"Paulson says US needs affordable mortgages."
Hey Larry, Curly and Moe...how about the US needs "affordable housing"?
No, I wasn't saying that their decision to PURCHSE was irrational. I was saying that their current decision to do almost anything to stay in a house that they are currently underwater and losing equity every day is irrational. But hopless optimists and gamblers are the the people who bought at bubbletop. They'll double or nothing until the house (mortgage lending industry) takes their dice away.
tripleplay, I believe that claiming that interest deduction on your taxes is tax fraud.
You're flat out wrong....
I can have enough money in the bank to pay off my mortgage in full and still take a 100% LTV loan and get a full write-off on the interest. In fact, it's one of the few deductions that isn't penalized by AMT.
If my incomes high enough, I'll get a 30% deduction on my interest. So, my 5% loan becomes a 3.55% loan when taxes are factored in.
You can get better returns than that in a bank CD right now with absolutely no risk since they are FDIC insured. With a 5.7% CD and a 3.55% loan you'll make $2200 in additional income per year, per 100K
Direct tax subsidy and the higher your income the better it gets.
Even the first 100K of interest from a HELOC of deductible if you can avoid AMT.
The only thing that isn't deductible in if you take your 3.55% money and then put it into a tax exempt muni fund. But, that's easy to get around.
Average Joe,
That is it exactly, it's about the DSCR of the buyer for the mortgage, period.
covered,
Bingo!
Hi Tanta,
After a brief scan, it doesn't look like anyone's sent you a link to this. I think you'll have a good laugh over what showed up in the LATimes today: Foreclosure proof homes
Foreclosure-proof homes? -- latimes.com
So if you are basing that prediction on some sort of 100 year historical average, I think it doesn't work.
M-F | Homepage | 12.03.07 - 11:52 am | #
that's exactly what I'm basing it on: History as the guide to what a balanced market looks like. Gigantic homes are worth more? Not if you can't find a buyer. The luxury product does not fit the needs of the over-indebted market. Those gigantic houses will eventually be 4 unit condos or apartments.
My question is why the UT reporter finds it compelling, and my guess is because many, many people find this compelling.
You bet your ass they do.
As anyone who has watched just about any daytime talk show in the last 10 years knows, we live in a blame-free culture.
While we were developing this culture, two other things were happening:
The real estate bubble was being inflated by a generation of borrowers who had never known price declines on a national basis.
The mortgage origination process went from: A big, fussy, ordeal which required not only a big chunk of 'cash money' but also a financial colonoscopy...to....mortgage origination becoming a 'sales process' wherein the product was sold with a focus on monthly payment - not dissimilar to a late-model Ford Explorer with low miles.
Now, our blameless masses are ready to eat this Hornbeek shit up.