July 21, 2007

The Foreclosure Story: What does the Process Look Like?


We all know that foreclosures are on the rise throughout the nation. Most people realize that a foreclosure means that you will lose your home. But how does this process look like? In reality, the foreclosure process is a drawn out and lengthy ordeal. It is a gut wrenching and personal nightmare for most folks. So this article is a story about a couple. A couple who is the poster representation of the housing boom and now bust. In this article, we will examine their profession, income, and monthly budget. Amazingly, folks are very upfront when they are making lots of money but go into clandestine mode when they are having financial difficulties. Below is the couple’s profile:
Joe and Mary
Ages: 29 and 28
Professions: Joe - Senior Account Executive (lender), Mary - Real Estate Agent
Location: Orange County
Yearly Income Combined: $130,000 Gross
Net Monthly Income (After Taxes): $8,200
Automobiles: Mercedes E350 Sedan ($599/33 month Lease), GL 450 Suv Purchase ($56,000)
Monthly Auto Fuel Cost (Filling up Once Per Week): $350
Home Purchase: Costa Mesa 4/2 Home, Bought Late 2004 for $675,000
Credit Card Debt: $25,000
Monthly Food Budget (Including Dining Out): $700
So this should give you a nice snapshot of the couple. Since they were sophisticated investors in the know, they decided to jump into the home with a 2/28 loan, interest only with no money down. After all, someone making $130,000 a year can clearly sustain pretty much anything right? And as we all know, no money down was no longer simply a thing of late night infomercials but a mainstream way of buying a home. Here is the monthly budget below with the teaser rate loan (they had it for 2.75%):
2004 Budget
House Payment (PITI – at 2.75% interest only/2 years): $2,249
Auto Cost (monthly payment/lease/loan/fuel): $1,749
Dining: $700
Credit Card Payment: $500
Total: $5,198
Monthly Net: $8,200
Disposable income: $3,002
Keep in mind we are not factoring in medical insurance, cell phone cost, utility bills, retirement accounts, and many other items. These are things that I am aware regarding their budget since I was privy to the information. Well, more like them showing off to me, but I made mental notes on these items as I would with a past client showing me their monthly budget. So even with that said, $3,002 a month in disposable income is a pretty nice chunk of change to pay the remaining monthly items. But again, this was a teaser 2/28 loan. Unfortunately, they didn’t factor in one of them losing their job, a rate reset, and a slumping housing market. Let us take a look at the late 2006 monthly budget:
2006 Budget
House Payment (PITI – amortized fully over 28 years/full rate of 6.25%): $4,962
Auto Cost (monthly payment/lease/loan/fuel): $1,749
Dining: $700
Credit Card Payment: $500
Total: $7,911
Monthly Net: $8,200
Disposable income: $289
Suddenly the jump in the rate creates a crunch on the household income. Keep in mind the above still doesn’t factor in other monthly cost. In addition, this was in late 2006 before, Joe lost his Senior Account job because the company went under. They were already feeling the pinch since the housing industry was already showing signs of weakness and their income being variable with commissions, was also taking a hit. Joe jumped to another mortgage outfit but they were only able to give him $30,000 a year base plus any commissions. Of course with the tightening of the housing market business is not going so well since both of their careers are tied directly to the housing industry. Their combined income is no longer $130,000 a year but approximately $80,000 a year. So let us run the numbers again with the new household income:
2007 Budget
House Payment (PITI – amortized fully over 28 years/full rate of 6.25%): $4,962
Auto Cost (monthly payment/lease/loan/fuel): $1,749
Dining: $700
Credit Card Payment: $500
Total: $7,911
Monthly Net: $5,804
Disposable income: $-2,107
Now we are running massive monthly budget deficits. It may come to a shock to many people that a household earning $130,000 a year actually may have financial difficulties. But looking above, you can see how easy and quickly someone can go into financial ruin. Statistically, this couple was in the top 10 percent of household incomes in the country. Yet they spent way beyond their means. California living is very expensive. You’ll also notice that being in the industry they are in, they felt that they needed symbols of affluence to keep up with the Joneses. So now that you can see that not only folks that make $14,000 a year purchasing $720,000 go into mortgage trouble, even those that are considered the most affluent also have financial problems. The next phase of this case study is the foreclosure process.

How Does Foreclosure Really Look Like?
Foreclosure has been a somewhat unheard of novel thing in California for the past decade. Any homeowner in trouble was able to put their home up for sale and it would sell quickly before the entire process ran its course. The market was so hot that it covered financial irresponsibility by letting folks off the hook. This all ended last year. Suddenly, the market is declining yet rates are still resetting. Folks are realizing that they are unable to make the payments, sell for their asking price, and losing their homes. So how did Joe and Mary lose their home? This is the next stage of the foreclosure story and a sad one.
The psychology of running massive monthly deficits is a hard one. For one, you are probably wondering about the incredibly high car cost. This is Southern California and having a new model is somewhat common practice. The worst depreciating item you can own is a vehicle. Regardless, they purchased one of the two Mercedes and after a year or so, if they decided to sell they would be selling at a loss. So after Joe lost his job, they decided to put their home up for sale knowing they would be unable to make the payments. At first, they thought that they would be able to make a nice profit on the home. This was not the case. This is how the following months looked like:
Month 1-6 – (Pre-Foreclosure)
Joe and Mary miss one payment. They have their home listed at $790,000 on the MLS. No bites. The bank sends a late notice to their home. Since they’ve been in the industry, they have seen homes sell even before landing on the MLS. They are certain that they will sell the home.
Total Monthly Payment Behind: $4,962
Late Payment: $40
Total to Cure Account: $5,002
Another month goes by and no offers. They lower the price to $775,000 to generate some interest. Nothing. They start getting a bit anxious. They get another payment from the bank but this time, they will need to make two payments. At this point, they make a conscious decision not to pay the mortgage and put in a clause for a future buyer to cure the account when they buy:
Total Monthly Payment behind: $9924
Late Payment: $40 x 2
Total to Cure Account: $10,004
At this point the bank tries to make contact with Joe and Mary. If they couldn’t pay $5,002 how are they going to pay double that? A third month comes along and they lower the home price to $750,000. Still the market is dry and silent. At this point the couple receives letters from the bank and attorney. They now start receiving formal letters:
Total Monthly Payment behind: $14,886
Late Payment: $40 x 3
Legal Fees: $75
Total to Cure Account: $15,081
Forth month comes along:
Total Monthly Payment behind: $19,848
Late Payment: $40 x 4
Legal Fees: $75 x 2
Total to Cure Account: $20,158
Fifth Month:
Total Monthly Payment behind: $24,810
Late Payment: $40 x 5
Legal Fees: $75 x 3
Total to Cure Account: $25,160
The bank issues a demand for full payment including full balance, back interest, plus late charges, and legal fees all at once. The legal notices start. Joe and Mary now have their home listed at $715,000. Still no bites. They did have some people come by but the deals didn’t materialize. Now they need $25,160 to cure the account but the bank has legally informed them that they will accept no payments except a full balance payment on their original $675,000 note. Keep in mind the bank is no place for negotiations. Can you imagine calling up your local Mercedes dealer and saying, “Hello Mercedes? Yeah, I’m not going to be able to afford the $600 this month but would you be willing to take $300 plus a free Dodger ticket?” The bank now sends a certified letter of notice of intent to foreclose. Joe and Mary realize they will not sell their home. The notice and waiting period begins. They stay in the place two more months. Now it will cost $35,000+ to bring the account current plus a full payment on the balance. Of course this will never happen given the circumstances of their finances. No payments are arranged and the house is sold at auction and of course, the bank reclaims the home as REO since they are on the sheets for $675,000.

The home is now officially REO and get this, they have it listed for $750,000! The bank is delusional. Joe and Mary now have a foreclosure on their credit record and rent a much smaller home. They managed to break the lease on the Mercedes but are on the hook for the purchased SUV. You’ll notice how things spiral out of control when you spend more than you earn. I can only imagine households with $60,000 getting into this mess. If anything, it will accelerate ten times faster. They are considering bankruptcy but the new laws are now more stringent in terms of letting people completely off the hook, especially a couple that makes nearly twice the median US income.

Hopefully this article gives you an inside look at the story of foreclosure and how it can happen to anyone. I've seen many blogs talk about foreclosures and the numbers but haven't seen a post detailing the entire process and how it impacts a home owner's bottom line. Not only that, but you should get an understanding that we are in a bubble so large, that missing one payment puts you in arrears for $10,000, or the down payment of a modest home in many states of the US. If this is what happening at stage one of the bubble, what do you see happening in the latter stages?

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40 Comments:

Steve said...

I'm curious about the lingering effects of foreclosure. I think a lot of folks think they can just drop the keys off at the bank on the way out of town...

Gotta be hard to get a high paying job with a foreclosure and there must be tax implications...

I'm guessing that 30 somethings with a 600-700K foreclosure just added 10-15 years to their working lives.

Oso said...

Dr HB,
Sad story. And it's easy for so many of us to point fingers at their mistakes, but this just reinforces how easy it is for unanticipated financial hits to turn lives upside down. Recently we had some medical expenses which used to be covered but our coverage had changed and I failed to read the fine print. Relatively minor and savings bailed us out, but several aquaintances were highly critical saying how they would have not been caught unaware like I was. Hindsight is 20-20. BTW, posting as Oso since there is another joe posting here. Now if there's another Oso I guess we'll both just have to live with it.
Take care

Dr Housing Bubble said...

@steve,

What we are seeing is the growth in short sales. Meaning the bank is willing to allow the owner to sell the home for less than is owed. For example, you owe $400,000 on the mortgage and the home is sold for $350,000. A 1099 would show this difference, including cost incurred by selling, as income generated. Since we in the early stages of this mess, I expect to see banks issue deficiency judgments going after homeowners. But good luck trying to squeeze blood out of a turnip.

Sometimes banks will waive the deficiency judgment because they know full well they will be unable to collect the funds. They are trying to get out with as little damage as possible.

@oso,

The only sad thing is we will see more of this. What will be even more depressing, is if these same folks return to their same behavior of conspicuous consumption. I'm not sure I have sympathy for this couple. I told them to save during the good times and they had amble opportunity to do so. Now, they are left with massive debt and the only way out may be to file bankruptcy.

We are in the early stages of this bubble bursting and it will go on for a few years. Summer is supposedly the hottest selling season. Doesn't seem that way in 2007.

In addition, we have so many people in the housing industry complex that will face a double whammy. Before, down markets in real estate were headed by job losses normally in other industries. This time, we are seeing job losses in real estate because of real estate. Try following that circular argument.

Lumbergh said...

This example is a real shame, but not unexpected given the credit / housing bubble we have been living in.

$1749/m for autos? YGTBSM! $25k in revolving CC debt? Ouch!

My wife and I live below our means, and have a relatively hefty income (in the top 5%+ bracket). We drive used cars and avoid consumption pits like Nordstrom. We pay ourselves first, max out our retirement savings, and are debt free aside from our mortgage.

Living on the West Coast (not SoCal), we have watched our neighbors and friends consume mass quantities on an epic scale.

Frequently my spouse would ask me how our neighbors could afford brand new BMWs, full furniture setups from Ethan Allen ( and the like), gee whiz landscaping and so on (I could go on for a long while about the positively crazy consumption I see...). I always remind her, they own very little. Its all a credit facade. Goods on credit, leased autos, HELOCs.

While researching a possible move to SoCal, I found this site. Your insight I find profound, though in the end its so much common sense (which seems in short supply these days financially).

People have been feasting at the credit trough and justifying things with the old bubble adages like, "This time its different" or "Everyone wants to live in XXX", or "They aren't making any more land".

We drove through Temecula and Murrieta a few months ago. OMFG that place is imploding. For Sale signs EVERYWHERE, it seemed like every 3 houses.

The OC is coming. We have friends there. They are in total denial. They say all the cliches' too. I tell them to read patrick.net or this site. Spend a little time on redfin.com and enlighten yourself. $200k houses listing for $850k. Its totally insane. These are RSM and MV, not waterfront in Newport or Laguna!

I sleep at night with money in the bank. Trying to live like the morons from People or In Style magazine is insane.

There is a big difference between the asset class and the paycheck class. Unfortunately too many people don't get it and fall victim to the relentless pressure to consume in this country.

Musnbny said...
This comment has been removed by the author.
Edgar said...

They made more money in three years than I will earn in a lifetime. They deserve worse than they will get. In California being a mortgage deadbeat is considered a good thing. I hope they all rot because they are destroying the entire country and the value of my money with their high living and financial shenanigans. Bring back debtors prisons for these two.

Liberal said...

oso... how easy it is for unanticipated financial hits to turn lives upside down....
What "unanticipated financial hits"?
They turned their life upside down with the "Southern California disease", called Moronismn and a case of "wannabe-ism"..
Thank you Dr. HB not showing a lot of sympathy for these people. We have the same story over and over in our circle of acquittance's and it's pathetic. People who actually make way above middle class income behaving like complete uneducated, stupid retards.
I tried to mentor these kind of people in the past but I gave up long time ago because I was looked at as "cheap" and below THEIR class because I use coupons and shop at Marshall's.
Yeah right, let's see who sleeps better.

Oso said...

Liberal,
I didn't explain myself well, because I'm in general accord with what you say. In my case health issues were unanticipated financial hits that savings and reasonable payments took care of. In Joe/Mary's case job loss and "It can't happen to me-itis" caused their downfall. I agree they aren't very sympathetic. Probably a better way to sum up what I was trying to say is, How quickly things can turn to sh*t.
later

elprofe said...

Dr HB-

You really gave me chills with this post. My wife and I were in a very similar situation back in 2004.

We had the same CC debt, we also had two car notes (although we both drive Honda's not Mercedes), same fuel cost, current ages of 24/25, but the big difference is that we are both teachers and not tied to RE. Last year we had the same income they had in 2004. We were going to buy a house but we decided to pay off all our debt first and so for the past three years we paid our CC debt and both of our cars (about 50K). Now we are debt free!

Last year we were going to purchase a new KB home out in Corona. I did my HW and tried educating myself a bit. My wife and I were 23/24 so we really didnt know much. We decide on a house and go to contract. We were going with a 30 yr fixed and were looking at a payment of 4000K a month which included payments on a first and second, PMI, tax, and insurance (This was the primary reason we later canceled the contract). I went with my gut feeling and told my wife "if we make a bit over six figures and we can barely afford to buy who else is buying?" Now I know who.

We sat and signed so many damn documents that it took us well over an hour. The very last one we signed was one that said something like this. By signing here you are acknowledging that anything the salesperson said holds no truth/meaning but rather what you signed. So my understanding was that this salesperson could have lied her a$$ off telling me anything to get me to sign and it could potentially be false? Before we sat there I asked for all the documents we were going to sign before hand and actually read them! Get this she was upset telling me "you’re the first person that has actually read them (which brings up a completely new question of who can make sense of those damn contracts? I am fairly well educated and I could barely do it.)." I had a long list of questions for her and apparently since I made her work for her money she was pissed off at me. She really did a good job in making it seem like I was a headache. I guess they love them stupid and hate the ones that make any attempt to question anything. Two days later I canceled and got all my money back.

This was back in Nov 06. Since then I have discovered your site and others. I know 10 times more what I use to and want to sincerely thank you for all the stress you have saved my wife and me.

We have not bought a house yet and we will continue to wait. Our rent right now is $800 for a 1000 sf 2 bd apt. Those 4K we were planning to pay to rent that house we were "buying" we are now saving. This post really put me in a position to see where my wife and I could have been. Although we have more stable jobs it is still scary to know the amount of debt we would have right now and letting go of so much money each month for a depreciating house.

BTW the house I was going to buy is in a zip code that made the list for the top foreclosure in CA.

Lenny Tumbarello said...

This is a situation that will occur all too much over the next couple of years.

My father and my father in law always told us that housing costs should never exceed twenty-five per cent of your take home pay.

We tried it both ways. They are right. Everything always seems to fit better when you're paying no more than twenty-five per cent for housing costs.

Does this mean you should consider downsizing if yours is higher than that?

Yes.

Ken said...

There were a lot of warnings about this housing bubble in 2004, but people laughed at these "gloom and doom" warnings. So, foresight was 20/20, but people were blinded by
greed. No sympathy here.

formul8 said...

Ouch. This is happening in records numbers for people in my age group (I'm 32). I have no idea why my peers need to buy the big house and the fancy cars. Been there, done that and got out before I buried myself.

Just makes me feel better about doing the right stuff.

Brian B said...

Elprofe:

I have to disagree with one thing you said: "My wife and I were 23/24 so we really didn't know much."

After reading your story, I would say you know more that 90% of the people who bought a house over the past few years. Congrats on following your gut and being smart in your decision making.

R said...

Everyone keeps talking about ARM resetting causing a flood of foreclosures. Do you think these will be accompanied by higher interest rates?

Since 2001, I've been carrying a mortgage of $150k for my parent's home which is worth $300k. I'm been thinking about taking out a 2nd mortgage of 150k at 6.5-7% and parking it, in anticipation of higher interest rates. I figured that if rates ever exceeded 6.5 to 7%, I made $$ off the difference. Curious for your thoughts.

JimG said...

And who says there is no justice in this world?

What I would really like to know is how many other people this wanker put into a 2/28 ARM that are now in the same boat as him?

I also think the writer of the article is stretching it a bit by calling these two "sophisticated investors in the know". I think two unsophisticated investors in the dark would be more appropriate based on the facts presented.

powayseller said...

Under the surface, how many people are suffering behind their closed doors, as their real estate dependent income is shrinking?

Think of anyone in real estate, lending, title and escrow, home inspectors, appraisers (I know one going to dental hygienist school), retail, construction, materials suppliers, architects, drivers, nurseries and landscapers, pool people, and on and on.

Eventually, these job losses will ripple up to engineers, lawyers, medical personnel, government, teaching losing jobs too.

tpir said...

I have no sympathy for the people in the article. If they couldn't see that coming then they got what they deserved. I could have stretched myself to get all the things I wanted also but instead just used common sense and hopefully some day I can have that stuff and sleep at night as well.

I just hope we don't get a ton of government programs to help bail people out who needed everything now or took a chance to get rich quick.

Dr Housing Bubble said...

No love for this couple making $80,000 a year? I mean I didn’t feel sorry when they had two new Mercedes but when they lost one, well that’s where I pour my heart and soul out to them. After all, every family is entitled to two exotic foreign automobiles. I get the impression that the majority of people that peruse housing blogs are either interested in prudently managing their finances or trying to get a pulse on the general market. My sense is most are frugal at heart even though they make well over the median national income. I can assure you this couple did none of the research or contingency plans for a declining market. According to them, it wasn't in the stars; it was a decade long boom (read credit bubble) that was going to last until 2020. In fact, when times were good, they laughed at how dumb it was for people to be renting or socking money away for retirement. For a few years they were right.

The point of this article is to show the balance sheet of how quickly someone can fall over the edge into foreclosure. I’m certain we all know families like this one. This isn’t rare or unique. On the contrary, this is the mainstay in Southern California. In order for a first time buyer to jump into a home in the current market, the buyer needs to commit a high amount of net income to a depreciating asset. In essence, they take on the role of market speculator. The market will go down. We are going to be in adjustment mode for 3 to 5 years. The amount of inventory and stringent financing are shrinking the buyer pool and creating a recipe for a declining market. And what about those rate resets? All that jawboning about it having no impact is being proven absolutely wrong. Foreclosures are climbing sky high and prices are coming down.

I’ve noticed that ardent housing bulls are even softening their “real estate goes up for life” tune. Remember all those 10%+ appreciation predictions for 2007? What about the summer boom? Real estate cycles follow generic patterns. The only difference in this real estate boom is that we have gone so out of reach of anything in history. We can only compare it to other previous bubbles in other domains such as technology stocks or tulips. Most people will say the comparison is absurd. Even though the underlying asset is very different, the psychology behind this bubble and the current bursting has played out on the yellow sheets of historical records.

Anyone foolish enough to ignore the warning signs is facing the dire consequences.

slim said...

The real issue going forward will not be what happens to these two. It is that so many people are basically living way above their means and expect they have the right to. S=E/R which means satisfaction is expectations divided by results. Expectations are so out of whack is it unbelievable. The credit bubble is a social disaster that is going to unfold when not millions but tens of millions of people are going to find their lives are not living up to their expectations and the will be very tense/stressed and will react very differently than you can imagine.

The character building strengths of saving verses getting it all now is very well documented. The get rich mentality is fraught with character flaws.

The reality of what So Cal will look like will drive many away to the less stressed areas. This is already happening and will become a panic. Just because you are smart and read these blogs and forsee the future and can profit from think that you won't be villified by politicians and media as the undeserving. You will be. The social ramifications of this credit bubble will far outweigh the economic.

matt said...

Wouldn't S=R/E make more sense? If I have high results and low expectations, wouldn't I be much more satisfied as opposed to having high expectations and low results.

slim said...
"The real issue going forward will not be what happens to these two. It is that so many people are basically living way above their means and expect they have the right to. S=E/R which means satisfaction is expectations divided by results. Expectations are so out of whack is it unbelievable. "

The North Coast said...

Could these 2 people not see that $675K for a house was way over their heads? $350K would have been more like it, and that's only if there was no significant car or CC debt. That is over 5X their combined incomes! Even if they did not also have a mountain of consumer debt (2 exotic cars + $25K CC debt) this house would be enough to bury them.

In the days of financial sanity, no one was permitted a mortgage more that 2.5X his income. The no-money-down mortgages would be acceptable risks if the size of the mortgage was limited to this multiple AND if the borrower had no significant consumer or auto debt, and the mortgage is a 25 or 30 year fixed. Many people have gone "no money down" on modest homes relative to their means and have succeeded very well with them.

It's when you take on a mortgage that is many times more than you can pay back on current income that you quickly run into trouble. Yet these people seem to think the reset will never happen.

I guess they figured their incomes would always increase by huge increments and that they would have no trouble meeting the mortgage payments upon reset. Having been in sales before (which financially destroyed me) I know the sales mentality: spend over your head and buy the lifestyle that is your goal, your manager will tell you. That way, you will HAVE to make the money to support it.

They drank the sales koolaid, I guess. Did they ever think to ask their bosses: if I live over my head to spur myself to sales success, will you pay my bills if I don't meet my goals?

That does not absolve them of their culpability for their own ruin, of course. They were the architects of their disaster and cannot blame their bosses.But their mentality is the one sales managers try their best to imprint on salespeople. Fake it till you make it. Savings is for losers who lack confidence in their abilities. Only mopes worry about living within their means. No guts no glory.

Trouble is, this mentality has taken over our entire culture.

Bubba Brigham said...

In the immortal words of Nelson:

"HA-HA!!!"

I bet you these folks were the same ones pointing their fingers at the poor person getting in over their heads and said "they should have known better"

I hope this happens throughout the economy. It's the only way to clear out the bad credit out there.

formul8 said...

I swiped this from irvinehousingblog.com but the info was swiped from a book and is completely and painfully correct:

The reason why a bull market is ready to tum into a bear market when the general public gets involved is because the general public has the least tolerance for risk and consequently needs the most reassurance and confirmation that what they are doing is a sure thing. As a result, they will be the last to be convinced that the rising market represents an opportunity. If a bull market has lasted for any length of time, the general public will feel compelled to jump on the bandwagon so to speak, because of their perception that everyone else is doing it and making money. They will pick up on any reason that sounds the most rational to justify their participation, when in reality, they will know very little about what they are doing, but since everyone else is doing it, how can they go wrong.

A continuing bull market requires the continual infusion of new traders who are willing to pay higher and higher prices. The longer a bull market lasts, the greater the number of people who are already participating as buyers, leaving fewer and fewer traders who haven’t already bought and fewer and fewer traders who are willing to bid the price up. These older buyers obviously want to see the market keep on going up, but they also don’t want to get caught holding the bag, if the market stops going up. As their profits accumulate from the higher prices, they start to get nervous about taking their profits.

By the time the general public starts buying en masse, the professional traders knows the end is near. How does the professional know this? Because the professional knows that there is a practical limit to the number of people who will participate to bid the price up. There will come a point where everyone who is likely to be a buyer will have already bought, quite literally leaving no one else to buy. The professional trader would like the market to continue to go up indefinitely just like all the other buyers. However, he also understands the impracticality of that happening, so he starts taking his profits while there are still some buyers available to sell to. When the last buyer has bought, the market has no place to go but down.

The public gets stuck because they weren’t willing to take the risk when there was still potential for the market to move. For the market to sustain itself, it needs to attract more and more people. As big as this country is or the world for that matter, there are only so many people who will buy. Eventually the supply of buyers runs out, and when it does the market falls like a rock.

The professionals have been selling out their positions before this happens, but once the supply of buyers runs out, the professionals start to compete among one another for the available supply of buyers which is dwindling fast, so they offer lower and lower prices to attract someone into the market so they can get out. At some point, instead of the lower prices being attractive to people, it panics them. The public didn’t anticipate losing. Their expectations are very high with very little toleration for disappointment. The only reason they got in was because it was a sure thing. When the public starts to sell, it starts a stampede.

Again, people will ascribe their actions to some rational reason because nobody wants to be thought of as irrational and panic stricken. The real reason why people panicked and the prices fell is simply because prices didn’t keep on going up.


-SoCalWatcher

slim said...

matt it is r/e. This is formula for sucess. The reverse is also true. When young people today think that they have a right to Mcmansion, Mercedes etc that is where the problem comes in. The two were 28/29 anyone over 50 knows that most of us when we were 23 years old were not expecting to live such wealthy lives without having worked long and hard for it. It just does not come that easy.

The social problems will develop when is reaches the critical mass. When that takes place I don't know but it will surely happen as the last 10 years have seen and tremendous increase in expectations that can not be met.

Char said...

I am sorry, I Do not feel sorry for the couple. First of all, lets make this very clear to the " lay" people out there. An Account Esecutive, is nothing more or less then a " glorified salesman" his job is to sell his lenders products to Mortgage Brokers. Account Executives usually are paid straight commission, or get some bips or bonus points when a loan closes. If the guy was a seasoned professional and knew the business, he KNEW what he was getting himself into.. An Option Arm with the " pick a payment" minimal, interest only, 15 year fixed or 30 year fixed. So if he and his " successful" Realtor wife had to make the minimal payments, in order to have $1700 car payments, they were a disaster in the making.

They didn't factor in their Arm resetting? My God he is/was an Account Executive!!!!!!! That is some nonsense if you ask me, how can an account executive that is a liason between a mortgage broker and his underwriter not know that his Arm was going to recast?

It appears that his rate recast in 2006, he didn't refinance because? Oh that's right, the " professional Account Executive " paid only minimal payments on a Option Arm and he had no equity, in fact the professional he was, put himself into negative amortization because, you know he had to have that house that he and his Realtor wife just had to have.

I am sorry, I don't feel sorry for this couple. Their car payments speak volumes, especially since they are commissioned sales people. My guess is they " stated" their income to get the loan. much of went on during the refi/purchase boom" another words, they obtained a " liars loan".

It is also a tip off that neither one of them was very successful at their jobs if they had to take out 100% financing... we all knew what that implied, no money saved for a down payment.

And shame on Mr Account Executive, surely he knows a thing or two about forebearance agreements? Why did he avoid his lender? Could he not even make an arrangement? Banks don't like to foreclose. I smell fraud, so I am not sorry for this couple, and I don't think anyone else should either, keep in mind, she is the realtor that convinced purchasers to buy homes that they really never could afford, securing an option arm payment, and he got the approval for the borrowers he knew couldn't repay them. boohoo for them ABSOLUTELY NOT!

St. George broker said...

This doesn't just happen to those in the real estate industry. It is happening in some degree to all of those who took the sub prime route. Wether it was the guy who went stated because he couldn't afford a home at his pay. Or the family who chose to go with an interest only so they could afford the payments. It was considered the norm for a while. It is easy for us to say we say it coming but the reality is it is going to affect all of us in some way.
This blog was very informative. Well done.

JonMc said...

Has anyone noticed that the United States looks a lot like a giant used car lot, stretching from the Atlantic to the Pacific? Do whatever it takes to do get as much as you can. Lie, steal, and cheat to make the sale. Manipulate every situation in order to close the deal, give yourself the advantage, and screw whoever you can out of as much as you can. Forget anything other than pumping yourself up in order to close the deal and make lots of money! And don't foget to tie a balloon to every car. And be positive! Just get them in my office. I'll slam that deal closed and we'll be teeing it up tomorrow. Ok, team, let's go get em!

TechGromit said...

If people learn something from all of this (the Bubble Crash), perhaps it will all be worth it. If people started living within there means, start saving for the future perhaps we can finally turn this country around...

.... But somehow I doubt it.

Musnbny said...

I think this blog is great. I show it to my wife, who is itching to buy a home in Rancho Cucamonga, whenever her emotions are running amok on this issue.

Yes, we could scrape by if we undertook a 700K loan 30 fixed, but it is more than half our net income. I feel it is just too much, and this blog knocks some sense into my lovely wife. She understands that we can't afford what we want right now, but she really wants to decorate, build memories, and enjoy a nice backyard. I want those things too, but at the expense of nice vacations, dining out, gassing up the car, swimming lessons, etc. How much should one "give up" in order to have one's own mailbox?

Ipatent said...

A lot of us saw this coming years ahead of time.

I've always said that anyone doesn't pay their CC balance off in full every month is simply stupid, unless exceptional circumstances (medical bills) are in play.

This couple made bad judgments, but it is also true that lenders egg suckers like this on and fool them into thinking that everyone does it.

Those of us who saved may not have the last laugh after all since the value of the dollar is tanking. At least Joe and Mary had a few years with the Mercedes.

DSC said...

Hello,

first, I'm from Germany and I'm a little bit confused about the discussion. In Germany most of the credits are fixed for 15 - 30 years. A growing yield is only a problem for new buyers, but not more. I'm wondering also about your creditscoring. I made a test for my wife and me. In Germany the CreditCard is not a Credit. You pay all your bills at the beginnig of the next month. I have no limit at my CreditCards. So I don't get at the "Alt-A Test" a point. My wife never had a credit in her life and she has no CreditCard. So we scored Zero points. But we have saved more than $ 120.000,- and we have no debt. In the last two years our net income growth from about $ 26.000 a year to round about $ 92.000,- (bevor Tax $175.000,-). And we don't get a point at Alt-A? (I've done the test at MSN Money). What is this?
I'm also confused about the circumstances that the bank gives a 100% loan. In Germany normaly you pay 100% and the bank finance 70%. For people with growing income they give a loan from about 80%, but not more. You have to save the rest before you buy a house.

And don't think that homes in Germany are cheap. For a normal house, without luxury) near by (and not in the city) Frankfurt or Munich you pay more than $ 350 for every square feet.

Saca said...

Lumbergh, are you a poster boy for rich dad poor dad book "pay ourselves first" or you are just want to show off how financially sound you are? Based on your opinion posted, you must be chinese or indian, because they tend to be more financially sound than most white people. So you guys have a +5% top bracket income, and drive used car and no credit card debt. Very funny.
I wonder what kind of people are you. Why do you live??? You live just to save money? for what?
I am asian, I have very good financials too, but I know how to enjoy life without going over my head.

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Lumbergh said...
This example is a real shame, but not unexpected given the credit / housing bubble we have been living in.

$1749/m for autos? YGTBSM! $25k in revolving CC debt? Ouch!

My wife and I live below our means, and have a relatively hefty income (in the top 5%+ bracket). We drive used cars and avoid consumption pits like Nordstrom. We pay ourselves first, max out our retirement savings, and are debt free aside from our mortgage.

Gerry Davidson said...

Thanks for relating this. It was the scariest foreclosure article I have ever read. It brings things down to a personal level. This couple has now been removed from the housing market for at least seven years, in which time they could have bought and sold several houses. Yikes! I posted you on my blog. Everyone needs to read this.

Moneymonk said...

I agree with JonMc

America is a big used car lot. It's trying to sucker every consumer in a bad deal. Payday loans, rent a centers, high interest credit cards and now sub prime mortgages

When will it stop, in the 70s it was no such thing as 6 years car notes, 50 year mortages, ARMs, title loans companies. etc.

These days you do not get denied, you simply just pay a high interest rate !

Jorge said...

I don't even understand how they qualified for the mortgage, they make too little money, that's right way too little.

Assumming they had a $50,000 down payment, and we increased their income from 130k, to 200k/yr (a 50% increase) they would qualify for a
loan as follows at 6.0% (a very good rate for a JUMBO 30 fixed).

House value: $671,239.53
Loan value: $621,239.53
Monthly Principal+Interest: $3,724.64
Monthly Prop Tax+Insurance: $994.78
Monthly PMI: $403.81
Down Payment: 7.45%

They wouldn't qualify for a loan at that point. They bought way too much house.

2. How is their take home income so high? I really want to know I also live in California, and if I didn't put 900/month in my 401k I would only get 5200/month in take home income on a 90k salary, which is a higher effective tax rate on a smaller income. I would really like to save on my taxes.

pfdtx said...

I am a 41 year old middle to upper manager that was making 150K in 2002. Due to industry reactions related to 9/11, my world was turned upside down. Four years before 9/11, I bought the house I currently live in, the property value was equal to my annual income. I was very financially paranoid. Good thing I was.

I had savings and liquid investments that lasted about a year. Then in early 2006 I was one week away from having my house pre-foreclosed, and was fortunate enough to have some yard sales that covered the payment within a hundred dollars.

We would have been evicted if my wife wasn't in constant contact with our lender. There is nothing more important in a tough financial situation than working with your lender. They don't want the expense of a foreclosure anymore than you want to be in a studio apartment.

I am currently working at what I think is a quasi-stable job (my boss was let go two weeks ago because she wasn't doing the work that 2 to 3 people did ten years ago, which is the new standard). I don't have time to watch TV because I VPN into work after I kiss my 4 kids goodnight, and then work for another 4 hours that day.

I'm not complaining, because between 2002 and 2006 I had to work as a consultant (temp worker) off and on for 3 years with very sporadic income and no health insurance for my family.

I live in Texas where you can be foreclosed on within 60 days of non-payment. Texas has deeds of trust (34 states do as well), which allow for creditors to foreclose more quickly than mortgages.

My profession allowed me to analyze the speculative increases in housing costs on the east and west coasts, which now are now "correcting". The 15 to 30 percent annual housing appreciation was not based on economic reality. I still can't believe lenders thought this trend could continue for any length of time. This goes back to the previously referred to used car lot salesman mentality.

I am now making a little over half of what I did in 2002, but I still have my house. Unlike many in my middle class neighborhood which is littered with foreclosures going to auction because they haven't sold.

When I was making good money my peers were "egging me on" to move into a house five times more expensive than what I have now. Some of them are now living with mom and dad, kids and all, and I'm now thankful that I didn't.

The bigger issues here are the generational expectations, and the global squeeze on income in America. College graduates have unrealistic expectations of their worth in the emerging global economy, and developing countries are producing higher numbers of educated, competent workers for a fraction of the cost.

In America, the past fifty years have generally seen children "doing better" than their parents. This is not a reality for the overwhelming majority and contradicts the history that the new entrants in the workforce have been conditioned to believe. Hence the use of sub-prime, interest only lending and credit card debt.

I am a now an official member of the "depression era" mentality. My two vehicles were bought used and paid for before my life as a temp began. We don't "eat out" and I actually mow my own lawn and have my kids wear "hand me downs". Because I was frugal, I'm looking to get a house about a year from now with twice the square footage, and the same mortgage payments I have now.

I wonder how many of us remember the grasshopper and the ants story. We all know the story, but I wonder how many understood the message.

Doctor Housing, I think it would serve all soon to be college graduates (or any others, young or experienced workers), very enlightening to read your eloquent synopsis.

I can only echo what many others have said.

GREAT BLOG!!

Teresa Rothaar said...

>>>It may come to a shock to many people that a household earning $130,000 a year actually may have financial difficulties.<<<<<

Not to me. As you pointed out, these people were living WAY beyond their means, even in SoCal. $700.00/month for food, for TWO people? You have got to be kidding. People who weigh 700 pounds don't spend that much on food. And what would have been wrong with trading in those luxury cars for Hondas?

I don't feel sorry for these losers at all. None of this had to happen. They did it all to themselves.

Matt said...

It's idiots like these that make me want to bring back debtors prison. A real-estate agent and financial analyst didn't understand their loans? Morons. I own two 2001 model cars that are both paid off, I pay extra on my mortgage, and I don't live above my means. Idiots.

eddiehawkins said...

$700/month for food for two people in SoCal sounds really low to me, actually. I'm not sure where Teresa lives or what her situation is like, but if you have two people that go out to one decent restaurant a week (not a high-end place and no alcohol), that's $50 x 4 = $200, and if they eat three meals a day other than that they're averaging a little under $3 per meal, which means no more restaurants at all and nothing particularly expensive from the supermarket.

Lisa said...

Why did they have 25K in cc debt or any car debt to begin with since their income was so high? I earned 11,000 last year and am a single parent with no relatives close by or support from my former spouse. I have student loans that are deferment but I also have a very small savings account at my credit union and a small amount of cash I keep at home for urgent needs (taxi ride to ER, if a child needs antibioics, etc.) I can't believe someone borrowed hundreds of thousands of dollars when they owed 25K in credit cards. Most food banks will give you food 3x a some churches will give food more frequently than that. All electric companies will put off disconnect a few weeks longer if a customer calls the public utility commision. Unless they needed medicine what could an employed family charge on the cc that made debt a necessity?