The Dirty Little Secret Regarding This Bailout Mess

Posted: September 30, 2008 in Economy

I can’t help but laugh over how numbers of politicians and others are now attempting to exchange the word “bailout” with “buy in”. Me? It’s simply called getting screwed. Put that in your economic Wikionary!

This afternoon, Neil Cavuto had a guy on his show that, IMO, hit a grand slam with his take on the issue. I’ll summarize it while adding my own experiences and observations.

In short, he was appalled by the hypocrisy of Main Street hammering Wall Street and government for their greed on this issue. Homebuyers OF ALL STRIPES were doing everything from stretching the truth to outright lying on mortgage apps to get loans.

As I have told you in the past, I live in what is considered the hardest hit area in the nation when it comes to foreclosures: The Inland Empire, California.

In the past several years I have learned a great deal about real estate from close friends who worked in either real estate sales or lending in our area. Let me share with you a few lending stories:

NINA

This is referred to as a No Income/No Asset loan. Here is a quick definition:

A type of reduced documentation mortgage program in which no income and no assets are disclosed on the loan application, but employment is verified. NINA loans usually fall into the Alt-A classification, and may carry a higher interest rate than a prime mortgage (more…)

During the height of the market, a friend of mine dealt with a group of foreigners who used this type of loan to get a house. The group (made up of mostly friends and family members) decided to place the loan under a family member who they stated was the vice-president of a company for eight years. The only problem with that was the family member was only 25 years old. Loan was approved. That same group bought up a handful of houses in that area using the same questionable-type information. Once the market went south, that group pulled out of that community, leaving a bunch of vacant homes now owned by the bank.

Stated income loans were also very popular.

Someone told me this story of a couple: one was a nurse and the other a warehouse manager who applied for a loan by stating that their total annual income was $180K. The only problem was that their annual income was more like $80K. They were able to secure their $700K loan and move into their new home. That monthly mortgage payment plus taxes, btw, came to about $6,000 PER MONTH once the rate kicked in. No doubt they are no longer in that home.

There is a community about 5 minutes from me where the homes were selling for over $1.5 million at the height of the market. Now let me tell you a little bit about this community. When you first arrive, you have to stop by the guard house where you are verified as a guest or resident. Once verified, you pass through a beautiful solid wood gate that opens to a huge mountainside community complete with its own golf course, golf club and restaurant.

Folks were moving into that community in droves because it was anticipated that the home prices would continue to go up. Some of the anticipated figures I heard to me went way beyond the rational. Market takes a nose dive and folks broke out of there in droves. Today, those same homes that sold for $1, 1.5 million are now selling as low as $500K. Drive through that community now and just about every other house has a foreclosure sign and brown grass.

Here’s one more thing I have seen. In the early stages of the market going south, builders began slashing their prices to stay competitive. Homes that once sold for $600K were now selling for $400K. Homeowners who were stuck in loans that recently jumped to their full interest rate began to say to themselves, “Why should I be stuck with my current high mortgage payment when I can move to a brand new home that is bigger, cheaper and with a much lower interest rate?” I heard this a lot in my area. So folks began to simply walk away from their homes and move into brand new homes BEFORE THE FORECLOSURE ON THE FIRST HOME HIT THEIR CREDIT REPORT!!!

So check this out. Many of these folks moved into their home, took out an equity loan (because the home prices kept going up at that time), used that money to buy things like cars, boats, etc., walked away from their homes to move into brand new, bigger homes. Meanwhile, the home they left behind has absolutely no equity because they used it all up. Again, this was common practice in the Inland Empire.

Real estate agents and lenders played this same game with their own homes.

Main street is FULL of stories just like these, but you will not hear many of them. Why? Because it’s not a politician or a stock broker on Wall Street. Meanwhile, in the past year alone, we lost over $200k in the value of our home.

I think it’s time for “We the people” to turn the mirror on ourselves for a change.

But of course that will never happen 😉

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Comments
  1. Wil says:

    You are 100% acurate, people played all sorts of games during the real estate price boom. If you have the location that you want for now, be satisfied to wait it out, because California real estate is like gold in the long run. It is a great time to buy raw land near the ocean and in rural areas for future use (retirement).

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