As I was browsing some of the news on CNN, I came across a video that had the title: Foreclosure Family Camps Out, so I had to see what that was all about. I was curious to see where the blame was going to be placed, and what the details of the story were. We hear a lot about the subprime mess, real estate prices plummeting, and irresponsible buyers, each of which play a key role in the big picture. But for this family who is now living out of a camper, who would you put at fault? Let’s look at the details from the story.
The Couple’s Story
To better understand the circumstances around this foreclosure, let’s take a look at some of the details from the story:
- 2,700 square foot house in Las Vegas, Nevada.
- Dual incomes.
- Home price of $265,000.
- Purchased with no money down, interest-only loan.
- Home value doubled in just a few years providing a lot of equity.
The First Mistake
Looking at the information above, this represents a large number typical families, but what is wrong with this picture already? I’m sure most of you recognize the real problem is that the purchase was made with no money down, and with an interest-only loan. We know this is a problem, but from the reaction of the woman in the video, she knew that this was too good to be true as well. She says, “We can get this for $265,000 with no money down? Oh my God!”
So, if you’re shocked at being able to purchase a home valued at over a quarter-million dollars without putting a single dollar down, yet go through with the sale anyway, that is the borrower’s mistake. On the other hand, banks shouldn’t have been offering these loans to begin with, so that also scores a point for the lender as well. I’d score this round of mistakes a 1-1 tie between the lender and borrower. Both parties were greedy.
So far, this has played out like many other home purchases. People with steady incomes are looking for the “house of their dreams”, and seek out a home in the rapidly growing real estate market. They are shocked to find out that they can purchase a lot of house without even saving a penny for it, so they go through with the deal. As long as they earn decent income, they are living the American Dream.
Then, tragedy strikes. Someone loses their job, thus losing a stream of income. Suddenly, bills become harder to pay, and some will inevitably be late, including the mortgage payment. For most people, what happens when you’re faced with a sudden emergency like a job loss? Hopefully, you are able to turn to your emergency savings that can help you keep up while you try to find another suitable job.
In this case, this couple went straight to the equity in their home. Of course, when the real estate market is allowing your home to double in value in a short amount of time, why not? People see this as free money because they purchased real estate as an investment. Unfortunately, you’re only taking on more debt just to pay off other debts. This is almost always a losing battle.
It doesn’t disclose how much equity they took out, but it said that the home equity loan or line of credit increased their monthly payments by 57%. Given the sharp increase, I’m guessing they didn’t just take out a couple thousand to get them by until they found another job. They probably took out tens of thousands of dollars, but I won’t speculate.
In this round, I have to give a point to the borrowers for failing to plan appropriately for an emergency. Of course the bank is going to accommodate someone who has built up over $200,000 in equity in their home, and for all the bank knew, she was going to be getting another job and they would be able to continue to make payments.
The Nail in the Coffin
To make matters worse, when they tried to sell the home in a now depressed market and couldn’t, they took out another $35,000 loan to help pay the mortgage. Since they already tapped into the equity in their home, and now had to seek additional debt to pay the mortgage, they took out another loan.
It said that their new monthly mortgage payment with the home equity loan was just under $1,200/month. So, how long was this going on? If you borrowed $35,000, that could theoretically pay the mortgage and equity loan for 29 months (barring any changes in the loan or moving beyond the interest only period). Of course, you’d also be making monthly payments on the $35,000, but you could still assume that this influx of money could keep their mortgage current for at least 12-18 months.
Again, there are no time frames or interest rates being paid given, but the circumstances are pointing to a lot of bad decisions on behalf of the borrowers. With the money borrowed, and still having one steady stream of income, this borrowed money should have been able to bridge the gap until the woman could find some source of income.
They Blame the Lenders
This couple blames the lenders, and who wouldn’t in this type of situation. They go on to say that the loan documents are confusing and hard to understand, which is true. There is no doubt that understanding every little thing in the mortgage paperwork is extremely confusing for the buyers, and the lenders can make unfavorable loans look quite good. So, the lender is certainly not getting off the hook for promoting an unsuitable mortgage to people who don’t fully understand it.
Is There More to the Story?
While there are certainly parts of this story that can put some of the blame on each party, I think there is a lot more to this kind of story than meets the eye. This story didn’t mention what their incomes were, but given the fact that they had to take out another loan because they couldn’t afford the $1,200/month even after taking out home equity leads me to believe that there were some other significant monthly expenses in play.
Were they making payments on that camper while still in the house? What were their car payments like? Did they have other debts? Did they have any retirement funds to tap into, or were they saving for retirement at all? We know they didn’t have money for a down payment or sufficient emergency funds, so I’m guessing that even with dual incomes, they were living pretty close to paycheck to paycheck as it was.
What do You Think?
So, I’ll leave this up for discussion. What do you think about a scenario like this one? I feel that there is certainly some blame to go around, and with the facts provided and some basic assumptions from these facts, these people probably shouldn’t have purchased a home in that price range anyway. Sure, the lender probably shouldn’t have been offering this easy money to people who probably couldn’t afford it, but even so, this foreclosure was ultimately a result of job loss. Job loss is, and has been the number one reason for foreclosure for decades–well before these more exotic loans were being sold. So to me, it looks like a complicated case of a lack of planning, lack of common sense, and greed (on both sides).
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.