Study Finds Underwater Borrowers Drowned Themselves with Refinancing

[Liberal_in_LA]

Source: http://blogs.wsj.com/developments/2009/07/28/study-finds-underwater-borrowers-drowned-themselves-wit

By Nick Timiraos

Why are so many homeowners underwater on their mortgages?

In crafting programs to prevent foreclosures, policymakers have assumed that the primary reason homeowners owe more on their home than it is worth is that they bought at the top of the market. In other words, they’ve lost equity primarily through forces beyond their control.

A new study challenges this premise and finds that excessive borrowing may have played as great a role.

Michael LaCour-Little, a finance professor at California State University at Fullerton, looked at 4,000 foreclosures in Southern California from 2006-08. He found that, at least in Southern California, borrowers who defaulted on their mortgages didn’t purchase their homes at the top of the market. Instead, the average acquisition was made in 2002 and many homes lost to foreclosure were bought in the 1990s. More than half of all borrowers who lost their homes had already refinanced at least once, and four out of five had a second mortgage.

The original loan-to-value ratio for these borrowers stood at a reasonable 84%, but second and third liens left homeowners with a combined loan-to-value ratio of about 150% by the time of the foreclosure sale date.

Borrowers, meanwhile, took out around $2 billion in equity from their homes, or nearly eight times the $262 million that they put into their homes. Lenders lost around four times as much as borrowers, seeing $1 billion in losses.

Read more: Wall Street Journal

[Cronus Protagonist]

1. Like, duh!

I hope no one paid for that. I would have told them this for half the costs!

[Tangerine LaBamba]

3. This is news?

How did anyone not understand that this was the case?

Talk about restating the obvious..........................

[Cronus Protagonist]

4. Sometimes I wonder how out of touch our countrie's elite really are

The financial waters were BOILING with refi contracts for a decade and it took a study to find this out! hahaha!

[Tangerine LaBamba]

6. Not just our "elite" -

someone at DU found it newsworthy enough to post.

How many are out of touch?

Uninformed?

[Liberal_in_LA]

10. Oooh, here comes Tangerine with her/his big brain. Into ignore you go

[shireen]

16. well, it's a good thing someone posted it

because new people are wandering into DU every day, and they would find this article useful.

Besides, i find repetition of facts useful since my brain is such a mess. :silly:

[Liberal_in_LA]

21. Thanks.

:hi:

[daninthemoon]

2. credit cards may prove to be the biggest villain driving the whole mess.

[DBoon]

9. a refi is just a credit card with a low interest rate

nt

[Donnachaidh]

35. the whole notion of easy credit is driving the whole mess.

As a former SoCal realtor, I know that the home prices are blown WAY out of proportion, even with the hit they've taken in the last year. And people get conned to buy these overpriced boxes, find themselves in trouble with a job loss, and the solution (screamed at them from billboards and TV's everywhere) is RE-FINANCE.

Ridiculous. Blame the consumer for the avalanche of mis-information, or outright lies, about home ownership. Tell them they CAN afford something they can't, just find a little *creative financing* for them to do so. What does the banker or broker care? They get their fees, and can walk away.

And now, of course, you'll have the especially nasty little wankers who think it's a *great time to pick up bargains* - of course those *bargains* used to be someone else's home. But hey, flip it for a few bucks, and sell it to the next poor slob....

[chollybocker]

5. This is what it sounds like when duhs cry.

[bobshin]

7. In cases I've seen, it was more about the rise in taxes.

But then, as a Democrat, I'm not supposed to say that.

I have friends who borrowed responsibly against their homes. Many purchased in the mid 90's and remortgaged and took out equity loans, never higher than 50% of the value. Most of them who are in default are there because their taxes rose, in some cases, 300% over those years.

The real fallout's going to come when all these devalued properties need to be revalued/reassessed to true fallen values and taxes are going to skyrocket to make up for the losses further damaging the market.

[Old and In the Way]

11. Wouldn't taxes follow rising property values?

If your tax rate is, say $20/1000, and your house was worth $50K initially, your tax bill would be $1000. If your property valuation went from $50K to $150K over the past decade, due to local market conditions, your rate rate would be $3000 unless the valuation rate was changed.

Of course, while the economy was floating along on mortgage refinancing, the federal gov. was busy giving trillions to the top 1% and more trillions fighting an illegal war in the ME. So, there was a lot less money going back to the states (and, in turn, cities) - so we, the middle class taxpayer, got stuck with the bill.

[DissedByBush]

15. Rising property values don't put cash in your pocket

But rising property taxes take it right out.

[JDPriestly]

24. Not in California. Your taxes are figured from your purchase price

and go up only by a certain percentage (I think maybe 2% per year).

[Xithras]

39. Unless you refi the first loan, which many did.

A refinance of the first loan is logged as a sale, and you're taxed at the new rate. The banks, in their gleeful push to get people to refi their $100k mortgage balances into $200k, $300k, or $400k primaries to "renovate" or "live their dream lifestyle" often failed to mention that the homeowners property value on the tax role would reindex to whatever new amount the first became.

I ran into that one myself (but my borrowing was genuinely to fund renovations and repairs).

[Donnachaidh]

36. and many took out home equity loans when their values went up.

So basically it does put money in your pocket. And it's the reason so many are losing their homes, because someone talked them into those loans. They were told it was their money -- they *deserved* it.

[OhioBlue]

12. so what is the cause of the higher property taxes?

Were local levies passed? Was it increase market value/assesment by the County Auditor? what?

[cosmicone]

19. Tax rates are small and never even come close to the

interest payments on the properties. Taxes are not to blame here at all. Besides, the counties don't foreclose for not paying taxes for a lot longer than not paying the mortgage.

You sound like a freeper in disguise to me. A real democrat won't try so hard by typing, "But then, as a Democrat, I'm not supposed to say that."

[Robb]

26. I'm a real Democrat, and I agree.

My folks' taxes went through the freakin' roof. They're retired. They have health care costs.

You better believe they took the liar's loan refi when they could to pay for it. And the new payment was smaller.

Don't call someone a freeper because their views don't fit yours. It's rude.

[JDPriestly]

23. Are you talking about taxes rising 300% in Southern California?

I have difficulty believing that. Or are you talking about other states? We have Prop. 13, and the property taxes rise only something like maybe 2% per year. I'm not sure of the exact percentage, but it isn't that high.

[slackmaster]

28. 2% per year is correct - plus people can vote in local assessments

Typically for school bonds.

[barb162]

8. I'm glad the study was done.

It looks like more than half of the people just dug their own graves and it's important to put the whole foreclosure crisis in perspective. I've read story after story of how many people used their homes as giant piggybanks, pulling out equity to finance lamebrained vacations, SUVs, other wild purchases, etc.

("More than half of all borrowers who lost their homes had already refinanced at least once, and four out of five had a second mortgage.")

[JDPriestly]

25. Wages did not rise. Jobs were lost. And people did not want to accept

that they had to live a less prosperous lifestyle. Eating out, socializing, buying stuff. It's hard to tighten your belt when you are being assured that the economy is fine. You think it is just you and just temporary.

[Robb]

27. Eating out, socializing, getting that operation...

...Don't automatically assume everyone wanted flat-screen TVs. Some wanted a new heart valve.

[WriteDown]

32. Like people really need fancy new heart valves....

Those people are fatcats. :rofl:

[PSPS]

13. Gee, it took a "study" to realize this?

I swear, these eggheads must live in another universe. Almost everyone was doing it. Make $40K/year? No problem! Buy that $750K McMansion with the liar's option-ARM loan with "pick-a-pay" because, before it recasts, you can "flip" it or refinance it anyway! Then take out a second using an inflated appraisal and populate the property with all the customary accessories: SUV, Mercedes, boat, etc. And don't forget about that around-the-world cruise and the new cars for the kids and the boob job for the wife.

People were using their houses as de-facto ATM machines, regardless of ability to assume the debt. After all, property just keeps going up, right? Right?

[PassingFair]

31. You forgot to mention that "all this" will cost LESS than renting in a poorer school district.

For people whose credit was already shot,
the whole shebang was CHEAPER than the
$1,000/month rent on a 2 or 3 bedroom place.

At the end of the line, if they had saved
the $500/month they were saving on the rent,
they would still walk away ahead, even after
"walking away" from the mammoth house.

We didn't do it, but if my credit had
ALREADY been effed up, I might have considered
it.

[Alcibiades]

14. My stepbrother did this in Socal

Sold a house in Northern California and used the proceeds, plus a loan, to buy a house for $750,000. Took out a second mortgage to do some improvements he didn't really need just to pump up the value of the house, which was reappraised at $1.5 million. Then he borrowed up to the full value of the house to make more improvements and to subsidize his yuppie lifestyle.

So now he has a $1.5 million debt on a house no one has ever paid that much for, and it is likely no one ever will. He has the goofy idea that the government will bail him out. I really hope that folks who did this will not get bailed out in any way, shape or form: your house is to live in, it's not a balloon to be pumped up so you can borrow more money.

[grasswire]

17. I can top that

My family lived in a rental home until last week. The home will be sold on the steps of the courthouse soon. The landlady-owner hasn't paid on the mortgage for nine months, despite collecting $1750 per month each month.

It gets worse.

She and her partner/husband own multiple rental properties that are in foreclosure. Same thing. Pocketed the money, stopped paying mortgages.

It gets worse.

She has been evicting tenants on 30-day no-fault terminations. This means the tenants cannot stay in the dwelling and negotiate with the new owner or bank to keep renting. Why is she doing this? Perhaps to re-rent and get new deposits from new tenants (who will get a very big surprise in just weeks).

It gets worse.

All this time, for almost eight months, she told her tenants that she was just trying to recalculate her loan and had put all these monies into escrow so she could "cure" the loan at any time. Not so. Big fat lie.

A local newspaper is doing an investigative story, with which we have been cooperating. The reporter says that the landlady told her that it wasn't her fault that families are being evicted; she was "tricked."

Read it and weep. These people bought properties with toxic mortgages, did a little fixup and new appraisal and sucked money out, and are now just walking away with all that rent money and equity, leaving families displaced and poorer.

[Liberal_in_LA]

22. What a crook! Hope the paper 'outs' her

[murielm99]

20. My brother did this in Illinois.

Every time they got a little equity, he borrowed on it. He ended up making huge payments on a house that was aging and badly in need of repairs. They never seemed to be able to keep up with the repairs because the house payments were so large.

They lost the house. It was purchased by a company that bought it and tore it down. A huge McMansion that is too big for the lot is on the property now.

[WriteDown]

33. If only he had sold when it was at 1.5M...

He would have made a fortune. Doesn't sound too bright though. No offense to your family.

[diane in sf]

18. I read that as "underwear borrowers"

[Doctor_J]

29. My Hanes continue to depreciate

have almost no equity at this point

[Lance_Boyle]

30. sort of shoots a big hole in the "through no fault fo their own" nonsense I read here

all the time. These poor deceived borrowers! They are losing their HOMES because... they borrowed too much to fund granite countertops and swimming pools. No sympathy for those greedy devils.

[LeFleur1]

38. The Posts Point Out Exactly What Happened.

Some people were allowed to buy homes at inflated prices that they couldn't afford.

Fault? Lenders (who will suggest buyers lie about income, talk about rising wages (that never happen) and make it all seem so easy, so right, and Buyers (who can't figure out how much they have coming in and how much they spend each month, THEN assess how much they can afford for a house).

Okay, so they get the house they can't afford. They begin to borrow inflated equity to live their lifestyle. They refinance at a lower interest rate, fighting to get the payments within a range that they can pay. Now they borrow more equity to make house payments..???

The house value falls. They now owe more than the house is worth. They can't borrow any more. They are doomed unless they get a better paying job or put the kids to work. Then the greedy guts running the country begin to lay people off. Now there is no hope at all for that buyer...and the lender? The government pays another bank to buy the lender out, or take over the bank/lender.

This equals the mess we have today.
There was just a whole bunch of ...well...stoopidity.

[Gormy Cuss]

34. A study limited to So Cal owners isn't generalizable because of the peculiar rate of appreciation

in CA during the 1990s-early 2000s. People had houses doubling in value every 5 years or so. I'm not excusing the behavior of people who refi'ed their way out of equity, just noting that these are unusual markets compared to much of the country.

[shanti]

37. yes, and

the people i know who have lost their homes did so because of re-fi's. one i know of cashed out the equity on her home and bought a $40,000 acura, as well as other frivolous purchases. she is employed as a low level clerk. the ones who still have their homes re-fi'd wisely, paying off bills and shoveling the money back into the house. different situation than those that bought at the top of the market.