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Saturday, 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?
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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