Foreclosure tale: Five Refis in Corona

Good morning again. How do you buy a house for $148,000, live in it for a decade while its value rises to more than $400,000, and still lose it to foreclosure?  Five simple words: refinance, refinance, refinance, refinance, refinance.

That's the tale David Streitfeld tells here of a foreclosure in Corona. The buyers refi'd five times -- 2000, 2001, 2003, 2004, 2005. They took out cash, did some remodeling, and watched their $148,000 mortgage turn into a $447,500 debt. They bought a house in Texas and tried to sell the Coronoa house for $480,000 and couldn't; the bank foreclosed, then the bank tried to sell the house for $445,000 this spring, and couldn't. The house still hasn't sold. It's now listed for $395,000.

Our take: Situations like this one help explain the vehement opposition we see on this blog to the idea of direct financial aid to homeowners at risk of foreclosure, aka a "bailout." Why help someone who has cashed out five times?  Why help a speculator who put no money down in hopes of a quick flip and got stuck holding the bag? Why help those who put nothing down on big houses they couldn't afford, and still can't afford?

We understand the larger argument for slowing the foreclosure process -- that the mortgage process is confusing, that waves of foreclosures can destroy neighborhoods, further depress home values, and thus harm families that are actually paying their mortgages. But to sell that argument, somebody has to address the choices made by those now in trouble.

"We made some bad decisions," says Theodore Judice, the Corona homeowner who refi'd five times. "No one ever came to our house and forced us to do anything."

Comments? Thoughts? Email story tips to lalandblog@yahoo.com

Comments

[Randy Adams]

It IS infuriating to read about someone who takes a perfectly affordable house and turns it into a disaster. But ignoring the larger consequences of the mass of people who have done something like this will just pull the rest of us down.

I'll use my own example. I don't like debt so I bought a house I could afford (during the last property slump, in 1993) and then paid it off in ten years. Since paying it off, I've put the money I used to put on paying off the mortgage into cash savings. The hope was to buy an income property for my retirement. But where is my savings? In financial institutions that are now struggling with their growing inventories of repossessed properties. Yes, I have kept below the FICA limit in each account. But if savings accounts have to be rescued by FICA that will mean pumping a lot of new money into the system and the value of those FICA dollars will be much less. So my savings declines no matter what.

What I'm saying is that a total meltdown of the housing market can also pull down the financial system and there is not one of us who will be able to escape the consequences of that. And that, sadly, is why we have to think about some sort of ameliorative action for all the jerks who contributed to this problem.

[Stephen M.]

A bail out could take this shape.

1. Only to bona full time residents. No "second homers" or speculators
2. Banks accept interest only for 5 or 10 years.
3. "Bail-out" becomes a homeowner tax credit for a portion of the interest payment over the same time period.

This will save the lending institution, save the homeowner, and stabalize the housing market.

Only giveaway is the tax break but a giveaway is insevitable somewhere and this seems to be the fairest way to administer it.;

[BetterVillage]

"Churning" should be fairly easy to prove, but probably difficult to prosecute. During the boom, lenders and brokers would call up their borrowers and refinance them as often as allowed (I think sometimes every 3 months or as soon as the previous loan would record). The borrowers loved this as they would be promised cash in their pocket, $5,000 or more each time. Some folks would call me up and ask me to do this, so I imagine that the aggressive originators wouldn't even need to push this on the borrowers -- the word had spread and borrowers were already conditioned for this behaviour. Just go back and look at the assessor info as to those who did frequent refis.

[Tex]

This sounds like a certain house I saw in the Leimert Park area. The house had nice bones, but is in abysmal shape because it has not been kept up. Still the owners have it listed for about $640K. Apparently the owner inherited the house free and clear several years ago, but then proceeded to re-finance 3 times, for $400K, $499K, and $586K, all within an 18-month period. Who knows where that money went -- it certainly was not on renovations! When the house first went on the market in February, the listing agent said it was in pre-foreclosure. I don't know if the lender ever foreclosed, but the house is still for sale and the sellers refuse to drop the price -- even though houses down the street in turn-key condition are selling for $15K-30K less than their asking price!

The moral of the story is that the phenomenon described in this article is NOT limited to the Inland Empire. When will people learn?!

[Kaye Thomas]

One of the difficulties with "cheap" money is that too many people have used their homes as ATM machines.. not realizing that the cash they get is money they will have to pay back.. but it is not where the majority of problems are.

The biggest foreclosure problems are with those who took out loans they couldn't afford to buy property they couldn't qualify for.. You can't always fix "dumb".. and neither banks nor buyers used good judgement.

We bailed out the banks in the 80's and they didn't learn from that mess which is why I'm not in favor of the gov't stepping in.. it's about money and profits and as long as financial markets figure out ways to make money they will continue risky behavior believing the gov't will bail them out..They might be more prudent in the future if they had to live with their bad choices.

[LA-renter]

Curious how a current landowner want the government to forestall the POTENTIAL consequences of the souring mortgage situation. From Randy Adams, "... ignoring the larger consequences of the mass of people who have done something like this will just pull the rest of us down".

Where were the Randy Adamses when prices and their perceived wealth were grossly escalating? Where was the outcry for government oversight/regulation of lending practices or cheap money on the way up? Even back then, it seemed obvious that the bubble and excess consumption could pose POTENTIAL problems.

Now that housing prices are absurd, our homeowner wants the government to come in an stabilize the unsustainable.

For the Randy Adamses, please consider the possibility that the mass of "bad" people are just pulling you back to earth.

[AnotherWay]

We all knew the "strong economy" during the reign of GWB was a house of cards. Anyone could see that the frenetic debting on the part of individuals AND the federal government was going to lead to collapse. It was obvious.

[Tollhousetim]

Sympathy for these particular homeowners? Little. But the first time buyers that were watching the possibility of a house fade as prices rose that were suckered in by a teaser 2% rate ARM? Lots of understanding. Which person was supposed to give them unbiased information about the risks? The RE Broker? Universal laughter please. How about the Lender/Loan Broker? Falling down laughter. Maybe the Escrow Company that scheduled the "close" at 3:30 pm, with hundredsof little flags "initial here." Screaming laughter! What about a 10 day window before closing for the buyers to seek advice? No way, the price for the loan "lock" would be too high, probably. Maybe prospective home buyers should be required to attend and pass a course on the Risks and Myths of Homebuying? Ben B says "more disclosure." Right, more little flags to initial. Our culture doesn't provide any safety net. Why? Because all the foregoing make lots of money! Let's have some legislative solutions, befor the next one.

[pugtv]

Stephen M.

Housing prices are returning to their historical prices based on fundamentals. The spike in home prices to income ratio over the last few years was caused by massive liquidity injected into the system (though subprime, Alt-A, no money down, loosening of loan standards, fraud, etc ...).

Now the liquidity is being pulled out of the system. Those prices are going to force itself back to it's historical norm.

A bailout you're proposing only prolongs the process of this re-alignment. It burdens taxpayers while these homeowners enjoy inflated life styles for an additional few years. At the end of the bailout, prices will continue to re-adjust to historical norms and these people will be forced off anyway. In light of this, how can you ask taxpayers to provide any kind of bailout money to these homeowners?

If these homeowners want money, I suggest a class action lawsuit against groups like the National Assocaition of Realtors. Used Car Salesman like Lawrence Yun gave rosy price appreciation forecasts in their bid to get people to buy. Now that they've caused havoc on people's finances with these irresponsible forecasts (forecasts bordering on outright lies), they should share in the pain and give back some of that money.

To conculde -
1. No to a bailout of any Kind
2. Sue the National Association of Realtors if these homeowners want to recover a part of their losses

[vultur]

Very few of the foreclosed are true victims and NONE are deserving of a government bailout unless fraud can be proven. This is capitalist america, after all.

[Randy Adams]

To LA-renter: I'm a little puzzled by your comment about being pulled back to earth. I'm as on earth as they come, possibly pathologically so. I paid mortgage and cleared it ahead of time. I've been saving cash so that I can buy an income property that I can actually afford, so that I can retire (because like most people nowadays I'm stuck with a 401K program which will never support retirement unless I work till I'm 120 years old). There is no "back to earth" here.

I don't care about the value of my own house. I live in it. I care about the value of my savings because that will determine whether or not I will be able to ever buy another property to earn rent from. If you are saving up money too, then you have the exact same issue, my friend. If you are not saving up money, well then I guess we don't really have anything to talk about.

Stephen M's ideas are interesting and I think well-conceived. They made me think of something too. Refinance loans do not enjoy the anti-deficiency protection that purchase money loans have. Perhaps the way for the government to step into this and spread the hurt around but keep most of it where it belongs is to buy a lot of these bad mortgages at a discount from the lenders and then go after the defaulting borrowers, never allowing them bankruptcy protection. The lenders take it in shorts by having to accept less than full recovery and that IS what they deserve for their sloppy practices. And people who drain all the value out of a property and then walk away from it only to move to another state and buy another place are the sorts of people who should be hounded to pay their debts back and only the government can do it in a way that can't be avoided. And hopefully the government gets enough money back to repay it and also cover the collection costs.

[albert]

He was not aware of the consequences of refi ! He is the victim and should be bailed out by goverment.
Hillary will tale care of people like him. LOL.

[J White]

AnotherWay:
I totally agree, why are people surprised? I don't get it. It's been so obvious ever since GWB asked people to go shopping after 9/11 instead of sacrificing for their county. Well, they sure did go shopping. Now who is going to pay? Sad. Everything about this administration is SAD.

[michelle]

In response to LA-renter, I have been warning all of my friends, co-workers and anyone who would listen, this was destined for collapse. But I was seen as a naysaying, "sky is falling," nutter who was just scared to jump in the market. I wasn't scared, but darned realistic. A friend with an MBA from Duke deigned to draw me, what she considered a graph (a right angle with a diagonal line going from bottom left to top right), preaching that history dictates that real estate always goes up and we all have to buy RIGHT NOW! (this was in 2004 and already prices in my ghetto neighborhood had doubled). Fast forward to a few months ago...she changed offices, was tired of a 80 mile r/t commute and wanted to sell her condo. Her exact words: "I just hope I can break even."

I have one acquaintance who bought a tiny fixer upper in Highland Park in late 2005 with an ARM that he couldn't afford, took out equity to build a mid-century deck and a "really modern" fence around the property, yet in January he confided that if he couldn't re-fi soon they'd lose the house. Oh yeah, in December he took out a loan for a luxury car and their kid is in private school. This from a couple who, mere months before they bought their house, had their landline and cell phones cut off because they couldn't pay them. Nor do they have ANY savings, so I know they put zero down and haven't put a penny away for their kid's education.

Even though I've known these people for 8 years and even like them, they don't need bailing out...they need a reality check. If it doesn't teach them anything, it will hopefully make an impression on their son about responsibility just as my own mother's financial stupidity made a lasting impression on me!

[Jack]

Wow, am I glad I just sold my house and am I glad I never refinanced. I bought in 1997 and my house closed escrow last week for almost three times what I paid for it. At the market peak, I probably could've gotten 3.5 times what I paid, but that was then, this is now. I had almost all equity in my house, having paid off much of the mortgage with triple payments and never refinancing, so I could afford to undercut the price somewhat, compared to other houses for sale in my neighborhood. (I relocated to the East Coast.) Reading all this stuff in the Times today (I miss LA), I'm glad I got out. I was a bit worried last week that maybe I had accepted less than I could have had I waited a month or two more, but now I think I got out at the last possible minute. The market seems to be worsening markedly as each week goes by.

[russell]

Why does it look like gas prices are bankrupting homeowners? Temecula, Murrieta, Lancaster etc. which are all lengthy commutes and are now topping the list in number of foreclosures. Is this really unexpected?

[la voce bella]

Hi, folks...I've been renting in the Palm Springs, Rancho Mirage, Palm Desert area since retiring 2 years ago after selling my LA home in late 2005. I have no debt, an average of 800 on my credit score and really want to finally get "settled." Even though there are REO's coming on the market in this area, all listing prices continue to be stubbornly high...e.g., a house purchased for $350,000 in 2004 is now asking $750,000 or more.

If anyone has any knowledge about ths area of California, I'd surely appreciate opinions as to whether it might be wiser to wait another year or start making offers in the winter-spring of 2008. Thank you for any thoughts any of you may have.

[LA Expat in Arkansas]

I like the part where they bought a home in Austin, TX after walking away from the mess they made in Corona. Does this mean they keep the Austin home and get off scott-free from paying back the money they re-fied (read stoled)? I wish I had maxed out my equity and walked away -- 'cause we know who's really gonna end up paying for it: us taxpayers and our kids. Grrrrr. Isn't Texas one of those states where your home is protected if you file bankruptcy? Let's see, who's from that State? GWB...and home of Enron.

[T]

In a way the people in the article sort of sold their house while they were still living in it. Then they walked away having sucked all the equity out of it already. I bet they get off scott free because they already have a new house so dinged credit isn't such a big deal.

Anyway I say no way bailout! Let the market do its work.

[silverfern]

When I lived in LA from 2004 to 2006, I did some research on average incomes (per the census records) and the average housing price. (I'm talking off the top of my head, so I will claim these figures are in the ballpark, not exact.)

Average income in the city of Los Angeles, year 2000 (census): $43,000
Average housing price in the city of Los Angeles, year 2000: ~$275,000
(Or, around 6x the average salary.)

Average income in the city of Los Angeles, assuming 4% annual raises, 2005: ~$52,000
Average housing price in the city of Los Angeles, year 2005: $450,000
(or, around 8.5x the average salary.)

That's a pretty big jump within 5 years in terms of average housing price in terms of ratio per salary average, even for a large metropolitan city. What this told me, non-economist that I am, is that most people were financing way more than they can afford, AND not putting down 20% on the mortgage loan. In other words, the problem would become evident in just a few years. And it has.

in early 2006, NPR had a show about interest rates and the banks, vs. housing prices. The gist of it is that while interest rates were lower than a few years earlier, b/c of the jump in the housing prices, the banks were making more money off of the (over-) priced market with low interest rates, than they did on higher interest rates with (then) lower (reasonably-) prices houses. No surprise there; but few people seemed to think about the low interest rates and high housing prices in that light (a profit maker and disaster in the making) Looking at the whole picture, I decided to go the old-fashioned route, and save up while I rent. I also kept telling my friends not to believe the hype. Some did, some didn't.

I feel sorry for people on a human level, but I don't believe in a bail out, for anyone. The banks and other businesses want a free market until there is self-caused pain; like someone said above, let the banks, et al (and the rest of us) pay the piper on the disaster that is unfolding before our eyes. Otherwise, the banks will just do it again in another generation. Taxpayers are not to be used for the criminal behavior and stupidity of banks, real estate agents, and the buyers themselves.

[Tejano]

At least 11 states including Texas and California have some form of Homestead protection to prevent injustices that arose out of sharp lending practices during the Depression. The people that moved to Austin must first own their home (and up to 200 acres) clear to use the exemption.

Some of my favorite users of the Texas Homestead Act include the late Governor John Connelly and good old Billy Sol Estes.

.

[AnnS]

(1) “and stabalize the housing market.Posted by: Stephen M. “
Stabilize? Prop up the current inflated values and prices? WHY? Why on earth would anyone want to keep the artificially high prices n place and ‘stable’?

The median priced house should be affordable by the median income. It is not. Prices must go down or there will be a far greater crisis when the majority of households are priced out of buying or even renting if the exaggerated prices remain in effect. The median income household won’t even be able to rent anything more than tiny apartment in a rabbit warren if prices continued they way they were – remember, the rent has to cover the mortgage, the insurance, the taxes AND show a profit.

We are seeing that problem with rental properties in my area now. Sellers of 2 and 4 flat units have these delusions that their properties are worth so much more than when they purchased them. Problem is that at their asking prices, the rents won’t pay all the costs of the buildings (mortgage, taxes, insurance, etc.) and forget a profit. Raising the rents are not an option as the median incomes of households have not been increasing enough to begin to pay even enough to break even at the sellers’ delusional prices.

(2) Those in trouble on their mortgages did one or more of the following:

(a) refied themselves in to a mess by treating the house as an ATM where they didn’t have to deposit any money and gambled on appreciation to cover future repayment of their borrowing

(b) got greedy and voracious with the ‘gotta have’ and went in over their heads gambling that a miracle would happen and the money would fall from the sky (usually through appreciation) and that somehow when the payment came due, there would be a way to work it out.

(c ) were willfully ignorant of what they were doing. You would have to be pretty stupid not to wonder what “adjustable rate” meant when told that was the terms of the loan and then deliberately choose to remain ignorant by not asking. ARMs have been around for over 20 years – scared me to death in 1985 and still do since one can not predict the future. They choose to play dumb and not ask and broke the basic rule of ‘if it sounds too good to be true, it is.’

I suspect that the number of those who were deliberately lied to by the mortgage lender and told that the documents meant something different than what they did are very very very few. Memories can get very selective when the person in question has to own up to being too lazy to ask the details, too greedy to get what they want to ask the details, and have to admit to gambling on the chance that it would work out.

(3) “But the first time buyers that were watching the possibility of a house fade as prices rose that were suckered in by a teaser 2% rate ARM? Lots of understanding. Which person was supposed to give them unbiased information about the risks? Posted by: Tollhousetim”

Yes there was but they would have had to have spent $100 –200 for unbiased information about the legal meaning of their proposed loan contract. All they had to do was take the whole transaction (real estate purchase contract and loan terms) to a lawyer and had them explain it to them.

They were too cheap, too lazy and too greedy for ‘gotta have it’ to do that. I suspect that they didn’t really want to know what were the bugs in their ‘too good to be true’ deals.

[David Yen]

How to bail out the people who were victims without bailing out the greedy or willfully clueless? One part of a solution would be to target loans that are highly likely to have involved abuse or deception - such as loans where there was a yield spread premium. Any loan where there was a yield spread premium should have a presumption of unfair or deceptive practices, and this should extend to anyone who holds the mortgage, regardless of what buffers they have set up so that they can pretend that they didn't know. If we decide not to bail out a homeowner who should have known better, we should apply the same standard to those on the other side of the transaction. The loan broker who put the borrower into a higher rate loan because he or she got what is, let's face it, a kickback by another name. The lender who paid the kickback. The downstream investor who bought the loan that was a deal because even though it had a higher rate, the borrower had a good credit rating.

The presumption of fraud would make a borrower who is truly a victim a more attractive client for a lawyer, but wouldn't automatically bail out all borrowers.

I saw a news item about some proposals made by Chris Dodd, no doubt made with his presidential campaign in mind. (Senator) "Dodd in a statement called for banning a practice known as yield spread premium, in which mortgage brokers are eligible to receive fees from lenders for issuing a loan with a higher interest rate than the minimum rate the borrower could have qualified for. "

Banning it in the future is a good idea, but it smacks of locking the barn door after the horses have gone.

[LA Expat in Arkansas]

"Abuse of the homestead exemption is not uncommon. Several years ago, a General Accounting Office study estimated that each year, 400 homeowners in Florida and Texas, all with over $100,000 in home equity, profited from unlimited homestead exemptions. While living in luxury, these homeowners wrote off an estimated $120 million owed to honest creditors."

While it's hard to feel sorry for the lenders, I do resent this gov't sanctioned white-collar thievery. Oh, look, Florida - under Jeb Bush, Texas under George Bush. Hmmm. Wonder how many of their friends and family benefited from this Shell game.

[chris]

well, i'm sure glad i didn't pull all the equity out of my house. i moved out of my house the 1st of the year and relocated out of state. i've since put 10 grand into fixing it up and have now rented it with good renters. the monthly rent i receive is all going back into the house to modernize it with engergy efficient complements like LOW E GLASS windows and upgrades to the kitchen. what's nice is that the monthly rent is allowing me to upgrade the house and make it nicer than its ever been while not costing me anymore money out of pocket. the house is sentimental to me so i'm not going to let it go. instead i pay for it and just let time and rent money make it the nice home i always wanted it to be.

at the moment i'm in the process of reducing debt. i'm about to pay off my 2nd car and gift it to my oldest daughter because she's getting her license soon. this to be completed by october this year. the combination of tax returns and my employment income will be used to further eliminate debt on my house. 30k is what i owe on my 2nd mortgage. i plan to have it paid off by the end of next year. the child support i pay for my oldest daughter will be finished in the summer of 2010.

this is my 3 year plan of debt reduction and i'm well on my way to seeing it happen. once those debts are paid (CAR, 2ND MORTGAGE, and CHILD SUPPORT) i'll have a total of $1,400 monthly available for the purchase of a 2nd home. the one i'm renting out now will be my home in the future and the next house i buy will be an income property.

HOW DO I DO THIS???

I LIVE WITHIN MY MEANS AND I PAY MY BILLS WITH MONEY I ACTUALLY EARN WORKING!!!

those who have all these problems losing their houses need to take responsibility for their actions. IF I CAN DO IT ANYONE CAN DO IT!!!

the market can take its time in readjusting. i missed out on the opportunities of the late 90's. i won't miss out this next time!!!