More homeowners selling houses for less than they owe

Seattle Times ^ | October 7, 2003 | Kristina Shevory

[sarcasm]

After years of borrowing in a sizzling housing market, more homeowners are finding themselves upside down on mortgages.

They borrowed more to buy or fix up homes than they can now afford, and a growing number are turning to short sales — selling homes for less than they owe — to unload high payments and avoid foreclosure or bankruptcy.

No organization tracks short sales, but real-estate agents, housing counselors and mortgage companies say they have been seeing more of them since the economy tanked and employers began laying off workers.

Most are the end result of delinquent mortgages — those not paid for more than 90 days — which have risen dramatically in the Seattle-Tacoma area the past three years. The number of delinquent mortgages rose 50 percent between June 2000 and July 2003, according to Loan Performance, a San Francisco firm that tracks mortgage data monthly.

For GVE, the increase in mortgage trouble is good news. GVE, in Covington, is one of the few companies in the area that brokers short sales, and business is up 70 percent in the past nine months, founder Joanne Anderson said.

She has been working 16-hour days, six or seven days a week, to keep up with demand, she said, and plans to hire 10 employees in the next year.

In the late 1990s, people were encouraged by rising stock portfolios and a robust economy. They took out large mortgages and tacked on home-equity debt with the help of looser loan-qualifying rules.

But low down payments, subprime loans (high-rate home loans aimed at buyers with terrible credit), and predatory mortgages (loans for people who often shouldn't have one), have gotten more people into homes they can't pay for.

"We're seeing tons of short sales and foreclosures because people are in over their heads," said Debra Snoey, branch manager at Windermere's Federal Way office, who works with Anderson on short sales. "It's refreshing when a buyer has equity now."

Although some lenders say buyers should max themselves out for a mortgage, being more practical is safer.

"(People) are buying more expensive homes because they want one bigger, newer and better," Anderson said. "But they don't realize that if they bought a home for $20,000 less and saved up $5,000 for a down payment, they'd be sitting so much better."

Some homeowners find themselves in trouble when they least expect it.

An Issaquah woman who recently sold her house for $30,000 less than she owed on it never thought she'd be in that position.

The woman, who didn't want her name used because she's embarrassed, said she and her husband earned more than $200,000 a year, lived in a 3,200-square-foot custom-built home on an acre, and bought a new car every year.

Then her husband took a pay cut to save his job, and they couldn't keep up with the bills. The couple divorced, and he filed for bankruptcy, leaving her with three kids and two mortgages.

To make it, she put the family's home on the market, reducing the price four times in six months. In May, it finally sold, but at a loss.

"It's awful and embarrassing to do a short sale and admit you're a deadbeat," she said. "(But) people make mistakes. This can happen to anyone."

Sellers lose a lot in a short sale, but buyers can make out because the homes usually are worth more than they cost.

Hal Bancroft and his partner bought a 3,330-square-foot house in Everett last year from a couple who could no longer make their payments. The former owners had taken out a second mortgage to buy a motor home, but the man lost his job at Boeing and his wife broke her back. They sold the home for $205,000 — $30,000 less than they owed.

The deal had strings, though. Short sales can take several months to close because lenders take longer to approve them.

"It took four months to close what should have been a 30-day transaction," Bancroft said. "The byword with short sales is patience."

For real-estate agents, short sales aren't so good. Adnan Othman, with John L. Scott Real Estate in Lynnwood, said he usually receives a reduced commission of 1 to 1.5 percent and sometimes doesn't get one at all — agents typically get 3 percent on a regular sale — but he keeps handling them. Othman is working on four now.

"There's a lot of sadness when you see this," Othman said. "You want to throw a life preserver to them and see if you can help."

[ctonious]

It's unbelievable how people are blind to cyclical forces. "Can't happen..because it hasn't happened" characterizes a lot of the "thinking" of the "bubble" heads hot after the latest trend.

Even people that should know better. Had a rather heated argument with my sister, who's a higher-up at FreddieMac - who are the Supreme Beings of the housing market.

I told her if jobs don't return - housing prices will go into the toilet and people will go upside down on their mortgages. She said no - this "cram-down" effect won't happen because FreddieMac won't let it. I countered that institutions can't stop a tide - and she countered that FreddieMac had the power and treasury of the Federal government to back it up. And I said - "well then, the Feds will go down with it."

She snorted at my ignorance. And maybe she's right, I don't know anything about the real estate market and government meddling in it. All I do know is basic economics, and that prices go where market forces direct them, and that even the power of the Federal government is limited in jacking up prices when people don't have the jobs and stupid money to prop up inflated top-of-the-bubble prices.

Here's the thinking as I see it: "The consequences are unthinkable. Therefore, it cannot happen. Therefore...let's not think about it."

[AntiGuv]

I see. So, is it safe to extrapolate that your anecdotal finances are no more representative than are the anecdotal finances of any other given person?

If so, I would agree. The nationwide statistics (record high personal debt loads and record low personal savings rate - in other words, incredibly poor money mismanagement on a national level) are much more meaningful and informative...

[Poohbah]

Fine. I'll weather the storm (if any does come).

But I can safely castigate these idiots, because if I had been earning 200 large at any point in my career, I'd be ready to retire now.

[Area51]

The list of forclosures just in my local rag is unbeleivable. Some weeks it takes 3-4 pages. And the largest City in the area is only about 12,000 people.

These folks are buying at the max loan limits and then a new car,couple of jet skis, or snow mobiles, them when they hit a financial snag they let the house and all the toys go back.

This year the state is also experiencing a record bankruptcy filings.

[toothless]

bump for later reading.

[AntiGuv]

I safely castigate such idiots as well, but I choose to do so in the course of trying to encourage an overall reduction in fiscal idiocy, not to the purpose of obscuring the facts and making everything look A-OK when it's not...

[Hammerhead]

It's obvious.

How can housing keep going up at 10-20% every year when most raises are at 2-4%???

Right now in the suburbs of DC you're looking at $350K for a 1200 sq. ft rambler built in 1950.

It's just ridiculous.

If you didn't own a house before 3 years ago, and you make average income 50-60K per year, 100-130K per family, forget it, you are out of the market unless you want to drive an hour to work every day. But then, you have the problem with the public schools raising your kids.

Something's gotta give and we are getting the hell out of here.

[petercooper]

"this "cram-down" effect won't happen because FreddieMac won't let it." Freddie and Fannie are trillion dollar houses of cards waitng to collapse.

here's a snippet from an article I had - can't find the link though>>

The first and simplest form of lending is the primary mortgage loan. The second form is that involving Fannie Mae: A mortgage-lending financial institution makes a mortgage loan, but instead of holding onto it, it sells it to Fannie Mae, and uses the cash to make a second loan. It can repeat the process, of selling the second loan to Fannie Mae, and make a third, fourth, and so on, loan. In this manner, a mortgage-lending financial institution could make five loans for $150,000. It sells the first four loans to Fannie Mae (which buys them with proceeds from the issuance of its bonds) and keeps the fifth loan. At the end of the process, the mortgage-lending institution has one loan totalling $150,000 on its books, and Fannie Mae has loans totalling $600,000 on its books.
These were the only two types of lending up to 1979-81, when the third type was introduced: Fannie Mae began creating Mortgage-Backed Securities. As the risk on the MBS became greater, the risk that Fannie Mae had became greater. But this is part and parcel of how the mortgage market, and thus the mortgage-bubble, expanded.
The Mortgage-Backed Security-
In the case of the MBS, Fannie Mae gathers its purchased mortgages from different mortgage-lending institutions, and pools them together. For example, Fannie Mae may bundle a thousand 30-year fixed-interest mortgages, each worth roughly $100,000, and pool them together into a $100 million Mortgage-Backed Security. Fannie Mae puts a loan guarantee on the MBS, for which it earns a fee. Fannie Mae promises that in case there is a default on the MBS, Fannie Mae will pay the interest and principal "fully and in a timely fashion." The MBS, once it has Fannie Mae's guarantee on it, is sold to outside investors in denominations of $1,000 and up. The insurance funds, pension funds, and so forth, become the owners of the MBS, but if anything goes wrong, Fannie Mae is responsible.
From the standpoint of those building the mortgage bubble, the MBS taps into a broader layer of funds to be used for housing, on the order of additional trillions of dollars. The sources of funds that can support the housing bubble have been extended very far into the U.S.—and international—financial markets.

[petercooper]

found the link>>

http://www.larouchepub.com/other/2002/2924fannie_mae.html

I'm waiting for the bubble to pop in the NY metro area

[lewislynn]

not to the purpose of obscuring the facts and making everything look A-OK when it's not...

Everything's OK here. If it's not OK for you, I suggest you stop wringing your hands and do something besides meddle on other peoples affairs.

[AntiGuv]

You seem to have missed the opening of my statement. More importantly, I'd suggest you find yourself a point before you go trying to pretend you made one.

[Space Wrangler]

The woman, who didn't want her name used because she's embarrassed, said she and her husband earned more than $200,000 a year, lived in a 3,200-square-foot custom-built home on an acre, and bought a new car every year.

More of that high-end living. That says it all. These stories never cease to amaze me because they all have one thing in common: it's the economy's fault. Anyone who makes $200K a year that winds up in bankruptcy doesn't get too may tears from me.

[Centurion2000]

interesting .... wonder if I should buy my house now (3000+ sq ft, 160K) or wait a few years and watch the market collapse.

[shhrubbery!]

"It's awful and embarrassing to do a short sale and admit you're a deadbeat," she said. "(But) people make mistakes. This can happen to anyone."

Hmmmm. I feel sorry for this woman, but she's wrong. Her plight doesn't happen to just "anyone." It happens to those who've foolishly overextended themselves.

[shhrubbery!]

Re post 15: You must be the recipient of a clandestinely leaked Democrap scriptbook!

[RightWingMama]

bump

[Mr. Jeeves]

interesting .... wonder if I should buy my house now (3000+ sq ft, 160K) or wait a few years and watch the market collapse.

Unless you absolutely need to own a house for some reason, just wait a few years. The "American Dream of Home Ownership" is the single greatest scam ever perpetrated on the public by the financial services industry - P.T. Barnum would be compelled to tip his hat to this bunch.

[WVNan]

It's amazing how poorly people manage their finances. We bought a 3,000 Sq ft home 10 years ago for $48,000. It is a more than solid 1920s built house which was livable inside and needed siding on the outside. We have put maybe $20,000 into remodeling and have a beautiful home. We have refinanced it twice and now have a 5% fixed interest rate. We borrowed more on the last financing to pay down some high interest debt. We used the house as collateral to pay off another building in full. We still owe just about what we paid for it, but we own a downtown building and we have put nothing at risk because we have enough savings to pay off the house if need be. It's on a ten year finance plan. I think young people are missing a lot sense of accomplishment when they try to start out with a $100,000 house instead of looking for older fixer-uppers. We have done this all our lives and have made lots of money on houses.

[kevao]

The "American Dream of Home Ownership" is the single greatest scam ever perpetrated on the public by the financial services industry

Huh? We bought our first house a couple of years ago. Our monthly mortgage payment is essentially what we were paying for renting our apartment. We lived in that apartment for ten years, and in the end had nothing to show for it. The difference now is that a percentage of our monthly payment becomes equity.

Home ownership is a forced savings plan, which is good. And, if you plan correctly, you'll have a paid-off home by the time you retire -- a huge advantage when you're living on a fixed income.

So what's the scam?