Proof points on the path to the "New Road to Serfdom"

[c1ue]

Very nice article series from the San Francisco Chronicle - following 4 families faced with losing their homes.

1) Easy come, easy go

http://www.sfgate.com/cgi-bin/articl.../MNQCU302G.DTL

Ever since Cil bought the house in 2005, the payments exceeded his income, in fact. They started out at $2,900 a month plus taxes and insurance.

...

In some ways, the move to Oakland will help the family. The rent on their two-bedroom apartment is $1,200.

House: Three-bedroom in Vallejo, purchased in 2005 for $450,000.

Then: In July, Cil thought he would qualify for a refinance through a nonprofit community group.

Now: The refinance fell through. In September the mortgage reset to $4,500, and Cil put it on the market without attracting any interest. This month, the lender agreed to take the house back as a "deed in lieu of foreclosure," which is less harmful to a borrower's credit rating.

2) The House ATM is empty

http://www.sfgate.com/cgi-bin/articl.../MNQCU321T.DTL

House: Two-bedroom, Oakland, purchased in 1954 for $11,500. After many refinances, there is no more equity in the home, which is probably worth about $310,000. Mortgage payments of $3,007 plus $355 for taxes and insurance exceed the household income of $3,144.

Then: In July the Gardners were eight months in arrears. A foreclosure auction was scheduled twice and then postponed at the last minute.

Now: The family continues to live in the home without making payments. The mortgage has been transferred to a new servicer, which said it is willing to see if the loan can be modified to be affordable for the Gardners. In addition, the family has been trying to find an investor to buy the home and rent it back.

3) Another winner in the Grand Mortgage Freeze Scheme (?)

http://www.sfgate.com/cgi-bin/articl.../MN1RU2F8L.DTL

When Pitts bought the run-down house for $429,950 with 100 percent financing in 2005, his interest rate on the larger of his two loans from Chase was fixed at 7.2 percent for two years and then could reset to as high as 10.026 percent. New increases could come every six months. Now Chase has agreed to lock the rate at 6.75 percent for the 28 years remaining on the loan and has made similar modifications to the second mortgage.

...

Pitts' monthly mortgage will now be just shy of $2,800. Property taxes and insurance add another $700 a month. The $3,500 monthly total is still quite steep for a man whose base income is about $4,000 a month, although he can earn another $1,000 or so through overtime.

House: Three-bedroom, Oakland, purchased in 2005 for $429,950; recently appraised at $330,000
Then: In July, Pitts had just caught up on some missed mortgage payments but was worried about a huge jump in his payments due in October.
Now: Pitts negotiated a loan modification, which fixed his interest rate at 6.75 percent for the remaining 28 years of his loan. His monthly payments of $2,800 plus $700 taxes and insurance still take most of his base income of $4,000. He is bringing in extra money by working frequent overtime.

4) Walk and work

http://www.sfgate.com/cgi-bin/articl.../MNPIU0NNT.DTL

Hahn and his wife, Vanessa, walked away from the house this summer because the $5,000 monthly payments were as much as their take-home pay. They put it on the market and moved to Los Angeles, where Hahn had a good job lined up.

...

They started off listing it for sale at $575,000, then dropped the price steadily over several months without attracting any buyers. "The last time I talked to our Realtor, her best advice was to try to sell it for around $350,000 to $400,000," Hahn said. "I've talked to friends who still live up there; there are six or seven houses just like mine for sale in my neighborhood from people in foreclosure."

...

Hahn bought the four-bedroom Colonial in 2004 for $495,000. He later took out a home equity loan to help finance his business of importing high-end auto parts. His adjustable-rate mortgage jumped from $2,200 a month to $3,700 last September.
The couple used credit cards to make the mortgage payments while they tried to refinance. Several loans fell through because of various technicalities. In March, the Hahns finally were approved for a refinance at $570,000 with an interest rate of 10.5 percent . But they never made a payment. Jeff Hahn said they accepted the pricey loan because they were desperate to salvage their credit rating and hoped to sell the house quickly.

House: Four-bedroom, Fairfield, purchased in 2004 for $495,000; after home-equity loan and cash-out refinancing, the total owed was $570,000.
Then: In July the Hahns were several months behind on payments and had the house on the market for $555,000. They were in the process of moving to Los Angeles where Jeff Hahn had a job offer.
Now: No buyers expressed interest even after several drops in the asking price. No payments were made on the mortgage. House was sold at a foreclosure auction Dec. 17, reverting to the lender for $474,750.

Proof points of the "New Road to Serfdom"

http://www.itulip.com/forums/showthread.php?t=966

[c1ue]

Re: Proof points on the path to the "New Road to Serfdom"

Just for an academic exercise, how much cash did these houses absorb to date vs. lender's losses?

Summary:

Original house price (at time of purchase or highest loan amount):

$450,000 + $429,500 + $454,000 + $570,000 = $1,903,500

Net change to lenders: minus $160,500 plus multiple servicing and new loan costs = 8.4% losses. This is assuming the houses sell for estimated present value and there are no further management/sales costs. Also assuming the redoubtable case 3) doesn't eventually foreclose later on (divorce, sickness, sanity check)

Net change to lenders without the 'freeze': minus $231,200 vs. $1,449,500 in loans = 16% losses. Also assuming houses sell for estimated present value without further management/sales costs.

All losses would be straight to capital - multipled by leverage (how much, not if any)

Further note: payments to date have been mostly interest. Theoretical capital losses would therefore exclude most of the payments to date as this interest would already have been paid out as opposed to retained as capital.

Why does this matter? If the loans in question were retained by the bank, then it is possible the payments could be applied to the bank's portfolio. If the loans were securitized into an MBS, however, the interest would have been paid out as a coupon to MBS tranche holders.

-------------------------------------------------------

Case 1) $2,900/month - 24 months paid = $69,600 paid to lendor.

House bought for $450,000, wouldn't sell at $350,000.

Net change to lender: at least $30,400 plus various fees along the way (servicing cost, securitization fee, etc)

Case 2) Payments not known.

Total owed: $454,000

House worth: Perhaps $300,000

No payments for a year. Assume $40,000 paid over the years.

Net change to lender: minus $110,000 plus multiple refi fees, et al

Case 3) $2,900/month for 24 months, now reset adjustable to slightly lower fixed rate. Net paid to seller: $69,600.

House appraises for $100,000 less than original price.

Net change to lender: $69,600 minus fees (as above) plus 28 years of 6.75% loan. 3 months back payments also rolled into loan.

Case 4) $2,200/month - roughly 36 months = $79,200 paid to lendor plus unknown amount of 2nd mortgage payments.

Total owed on house: $570,000

Realtor recommendation: sell at $350,000 to $400,000.

Net change to lender: minus $90,800 plus various fees, minus second mortgage payments.

[grapejelly]

Re: Proof points on the path to the "New Road to Serfdom"

and watch massive numbers of negative equity homeowners with GOOD credit do short sales, or walk away...in 2008 and 2009...

[Spartacus]

Re: Proof points on the path to the "New Road to Serfdom"

What are your reasons for thinking large numbers of debtors with "good" credit risk profiles will default?

1. many are only rated "good" because they've not been stressed (no serious recession since 1990)

2. even prudent borrowers (the damn few that there were) got taken in and paid way too much - the price, even of the house that would have been appropriate for their income 6 years ago was overpriced by the bubble

3. FIRE job losses will hit big time in 2008

and watch massive numbers of negative equity homeowners with GOOD credit do short sales, or walk away...in 2008 and 2009...