They probably bought the house for 600k, and mortaged it for the “assessed” value of $800 k, pocketing 200k and living the high life for the past couple years, until they spent all the money.
Now they are “victims”. That is they type of scam that has been going on all across the country, thanks to the “community re-investment act” and the “ACORN- Fanny Mae-Freddy mac” scam of bundling up all these mortgages and selling them on world wide bond markets as A-one long term investments that many insurance companies, pension plan management c’s bought into.
Well, you could be right, but the article does say that she bought it for $800K, not that she mortgaged up to $800K.
Either way, it's difficult for me to see how she and her husband ever thought they'd be able to afford the place. This is sort of basic arithmetic. If both her husband and she are working, perhaps they're grossing $120,000 or even somewhat more.
I don't know what her rate is, or her taxes, but assuming optimistically that she's at 5% or even a little less, she's got about $5,000 per month in mortgage payment. At the old standard of 28% of income for one's mortgage, that requires household income of over $210,000 per year. Unless her husband is making well over $100K himself, it's unlikely that they were anywhere near that.
That said, not everyone in difficult straits quite deserves what they're getting. I live in the Washington, DC area, and housing is pretty expensive here, and in some places, got pretty crazy up until a couple of years ago. But a lot of folks have white-collar jobs, and it's not unusual for two-income families to exceed $100K per year, or even $200K per year. Thus, a lot of families afforded decent homes because both spouses made good incomes.
But as layoffs ripple through the region (and we don't have it as bad as many), folks find themselves losing 30% or 40% of their household income, and that $3K or $4K mortgage that was doable when household income was $150K or more now looks a lot uglier with only $90K or $110K.
So, what's the family to do? Well, they could downsize...
...Except that house that they paid $500K (and that was a 30 year-old, 2,000 sq ft fixer-upper in a decent, but not great neighborhood, not a new McMansion) with 20% down (that's 100 grand) and roughly $15K in closing costs (pretty typical in Maryland - one of the one or two states with the highest residential real estate closing costs) is now worth $375K. Or even less. If they can sell it. And the realtor doesn't work for free. And it's a buyer's market, so they'll have to go half on the closing costs. Meaning that there will be roughly $345K to pay off a $400K mortgage. Ouch.
Here, it makes sense to try to persuade lenders to lower interest rates, as for many of these families, a couple of percent or so on the mortgage may very well be the difference between enabling a family to stabilize their financial situation at a lower income level and foreclosure.
I have a friend in just about this position. His ex-wife (who shares the mortgage payment and the house with him, as they have children) lost her job, and thus her ability to share the mortgage payment. She has found new work, but for substantially less money. And that's likely how things will remain until times get better. It was a tough fight, but they got their lender to reduce their interest rate by 3%, which will save them probably around a thousand dollars per month.
And the lender won't have to foreclose, won't have another piece of REO, won't lose all interest (and home value through deterioration of the property) for the year or so it would take to sell it, and will likely lose none of the principal that they'd have lost if they'd have foreclosed and had to sell.
The problem is that the actions of some people who have been very irresponsible have hurt other people who HAVE been responsible. Anyone can lose their job. In ordinary times, if it came to it, a family could sell their house and downsize. But with home values down by 20%, 30% and more in some markets, even responsible folks are getting it in the neck.
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