Sunday, November 19, 2006

How Can They Afford This?

Last weekend, we had dinner with some friends that wanted me to look over their escrow documents and answer some questions about their property tax bill. I'm not one to pass up a good mean, so I eagerly accepted the invitation. They showed me a supplemental assessment they received from the county for around $3,000. I explained to them why they received it and that they are responsible for paying it, not the lender through their impound account. That was a pretty easy question and I was ready to eat dinner. But, they then told me they refinanced and didn't really understand the loan they received and had some questions about it and the property tax bill they received for the 2006/07 year. The property tax bill was over $6,000, and it was stamped copy, which usually means the lender will pay the tax bills from their impounds. I quickly glanced through their original loan docs, and they elected to have impounds instead of paying the tax bills and homeowner's insurance themselves. I noticed their refinance included an increase from the original loan amount by over $100,000. It wasn't until they said their mortgage payment went down after refinancing that I decided to take a closer look at their papers. Their previous payment was about $4,100 a month, which was an interest only loan at around 7%. After refinancing just two months later, their new payment was now around $3,500 a month. The interest rate was about 1/8% higher too. It was also an interest only note. Anyone care to guess why the loan payment went down? No, it's not an option ARM either. Here's the deal, and trust me, this one is a very sneaky trick the lender was involved with...

The owners built their own house. When you build a house, the county is usually a little slower at assessing the value and the county tax records sometimes aren't updated for up to two years after the house is built. This means the value of the land when it was purchased is all that shows as the assessed value when you examine the tax records. Lenders are aware of this and know that they should estimate the tax liability for the owners when refinancing from a construction loan. We built our own house twice, and both times the lender knew to take out enough money to cover the taxes for us in our impound account.

Well, this particular lender decided that he was going to estimate their taxes based solely on the value of the land as it showed in the current tax record. Yes, that's right, he gave them an impound account, but only for $800 a year. At this point, I asked my friends if they personally knew the lender that had set this loan up. Right then, the wife looked at the husband and gave him a dirty look and said "I told you something wasn't right with your friend. I knew he was out to get us." I looked at the husband and explained to him his loan. I told him, which I assumed he knew, that his loan was interest only for the first 7 years. The problem is he didn't know it was interest only. The look on his face was of complete disbelief and shock. I explained that he would be paying approximately $3,500 a month for the next 84 months (almost $300,000) in interest only and his loan balance would still be over $600,000 as when he took it out. Next I told him that his lender decided to only take out $79 a month instead of closer to $525 for his property taxes, which meant that the bill stamped "copy" for over $6,000 would in fact have to be paid by him. The good news, if you can call it that, is that "only" $3,000 of it was due by December 10th. He would have until April of 2007 for the other $3,000. The wife wanted to kill her husband at that time and they started to get into it right there in front of me.

The real issue here is that I don't think they could qualify for the new loan amount since they raised it over $100,000 and the lender knew this but wanted/needed their business. They make about $80,000 a year combined. Their mortgage payment should be around $4,700 a month for a fixed principle/interest mortgage with property taxes and insurance. A $4,700 a month house payment is 70% of an $80,000 a year combined salary.

I wonder how often this same situation is being repeated throughout Sacramento...

7 comments :

Rob Dawg said...

I want to know what this mortgage broker's backend and origination fees and spiffs amounted to so I can tell "Big Noze & Bubba Collections" how much to ask for in the back alley as this guy gets into his Lexus.

Max said...

This is unbelievable. Depending on what they did with the $100K they should be able to keep appearances up for a while.

If they have a good enough relationship with this so-called "friend", maybe they can get out of the loan with little/no penalty. Unlikely, since anybody willing to sell his friends down the river is probably pretty desperate himself.

The real solution for these guys is to get out of that place and get into something they can actually afford.

AgentBubble said...

Loan fees amounted to over $7,000. I didn't even bother telling them how bad that was.

They used the extra $100K to pay off existing debt...Credit cards, a boat, a car, etc.

They actually considered selling about a month ago. I told them to sell now while they still had some equity. Of course they wouldn't listen. They don't want to be looked upon as "renters."

I say being a renter is better than a foreclosed upon fool.

JR said...

The fallacy that no one talks about is that sellers think the homebuilders are dumping inventory today, and once they get it off the market, the builders will raise prices and everyone will be saved in the spring. People, people, people...the fundamentals of real estate are out of whack in Sacramento! We are running out of Greater Fools. We have converted them all the F'd Borrowers who cannot stand the heat in the kitchen, so to speak. They will be F'd Sellers (if they don't just walk) next spring.

The homebuilders will keep building as their costs continue to steadily fall. Commodities are down, land is dropping, and demand is thru the floor. In order for the HB's to sell any homes next spring, they are going to be selling them for less than the prices of today. The fundamentals dictate a reversion to the historical mean, using income to establish a meaningful sale price. Agent Bubble's dinner guests just proved the whole point. Too many people went blindly into an "ever appreciating" market. Well, that game is over and the piper has his hand out. Multiply the size of your home by $150/sf. That is the basic value today, and it will be lower tomorrow. Batten down the hatches.

Anonymous said...

Holy crap. A 600,000 mortgage on 80k a year income!? My wife and I are fresh out of college making more than that combined, but we won't even consider a mortgage for half that amount. I wish them the best of luck in their predicament.

MortgageTop said...
This comment has been removed by a blog administrator.
Marc said...

That mortgage broker is a sophisticated crook with a pair of brass b*lls. Most of the thievery I see isn't nearly that subtle or interesting, and it's usually perpetrated by the inexperienced upon the ignorant.

With friends like that.....time to go find some new friends.