Thursday, July 13, 2006

Pop

Tell me this doesn't look like a bubble.

Whatever you do, do not refinance.

Original loans, considered purchase money, are non-recourse loans that limit lenders to recovering only what they can get when they sell the house. They can't go after the owner to pay any difference between the foreclosure sales price and the loan balance.

But in California, refinanced loans, second trust deeds and home equity lines of credit are generally considered recourse loans. In these cases, a lender can file suit and go after almost any of the borrower's assets once they obtain a court judgment.


I believe it's the same in Massachusetts. (Tom, care to correct me if I'm wrong?)

Even if homeowners can make their payments the increase in forclosure rates signals the alarming possibility of a cascade of declining property values such that even solvent mortgagees may find themselves with a grossly inverted equity position on their homes. The good news is that unlike the stock market there will be no margin call, the banks cannot demand a sudden payment to correct for negative equity (this doesn't take into account ARMs, those people are screwed.) The bad news is that these individuals will end up regional prisoners forced to remain in a home that they would otherwise have to pay out their own money in order to sell. The only question being how many mortgage payments will it take for them to lose the least amount of money at closing? Many will hold on not caring how much money they'll lose in their lifetime if the property is comfortable enough to call 'home'. They may even find success at renting the property out if they do find their life situation demanding a relocation.

However, there is one method* of getting out from under a bad mortgage. I expect to see more of these double fires where the insurance covers the mortgage and the homeowners can walk away with the sale of the land.


* The interesting bit from the article:
The FDNY and the Brooklyn District Attorney’s office is taking that idea seriously, too: There have already been indictments for mortgage fraud involving one of the burnt buildings.


More 'second fire' links:

one
two
three

6 Comments:

Blogger coffeesnob3 said...

Our condo has BOTH an ARM and a home equity line.
Neither us, nor our Realtor (I think you know her), knew this was the case until the day of the closing.
There is a cap on the adjustment - can't go up (or down, ha ha) more than 5%, but that doen't help me sleep any better at night. The rate has already gone up once, and we just passed the one-year mark.

I'm going to walk down to the packie and buy a lottery ticket now.
Sigh.

(No, I don't want a speech about how foolish it is to dream about lottery winnings. Without hope I'm nothing.)

Jul 12, 2006, 6:42:00 PM  
Blogger Dean ASC said...

Trust me you're in tons better shape the the poor souls she's meeting with tonight. They're basically the inspiration behind this post. Besides, you didn't buy hoping to flip, you had the doggies to think about.

You can rest easy in the knowledge that you'll probably be the folks I described living comfortably while the mortgage gets paid.

Jul 12, 2006, 7:02:00 PM  
Blogger TommyOkktane said...

Yeah, those people are screwed, Dean. The sad thing is, we've tried so hard to give them sound financial advice but they were too stubborn to take it. Ah well.

BTW...don't quote me, but I think you're right about the recourse loans.

It's times like this that I'm glad I rent. If anything, the rental market is the one that's taking it on the chin the most; empty space means loss of revenue stream. No revenue means missing mortgage payments. Potential renters have the rental industry over a barrel now.

Jul 13, 2006, 2:03:00 PM  
Blogger Dean ASC said...

When you say 'We' you mean the banking industry and by 'sound financial advice' you mean your industry packages and advertises loans by what the monthy payment will be until the baloon payment is due. That's no different then the bait and switch 0% apr on balance transfers*.
















































6 months only then prime + 20. This offer not valid in Wisconsin.

Jul 13, 2006, 9:29:00 PM  
Blogger TommyOkktane said...

No, I mean 'we' as in 'friends'.

Jul 13, 2006, 11:07:00 PM  
Blogger RicketyFunk said...

That sounds like a great offer. Prime + 20... sign me up... oh wait, I'm in Wisconsin.

Jul 14, 2006, 2:53:00 PM  

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