November 30, 2005

Check this ponzi out - borrowers doing refi in order to take cash out to pay their mortgage


Oh, man, this is trouble if it's happening on a big scale - but hey, it makes sense. You get that $700,000 condo, can't afford the payments, what are you gonna do?

I love the Another F'd Borrower blog... good anecdotal from an insider

And I'm starting to think that rushed-through new bankruptcy law is just 'cause banks and lenders know that this type of stuff is happening, and that the bills REALLY come due real soon - when property values decline more...

Here's the case:


"I need to do a refi cash-out to get money to pay my mortgage."
Yes, you heard me correctly. I am seeing more borrowers that are refinancing to get cash out so they can pay their mortgage and "stay afloat". Yes, it seems that the mathmatically challenged "buy-now pay-later" American home buyers don't seem to understand that taking out a bigger loan to pay off a smaller loan is NOT a good long term financial strategy

31 comments:

Katy said...

Very interesting insight into why the bankrupcy bill was passed when it was. From the mainstream news coverage at the time, you would think that the was passed because of all those silly people who were charging up their credit cards on expensive vacations and gold hats.

000000000000000000000000000000000000 said...

I watched as the bill went thru at the absolute peak of the bubble. These guys and gals are no dummys! Pass the bill while everyone is busy feeling rich. The only ones I know that filed before the cut off date were lawyers!

41cadillac said...

To continue the story:

Mr./Mrs./Ms. and or Family:

Purchase a home in 2005. Then that home in 2007 is worth on the market $75,000 less that the mortgage owed.

They would like to move but don't have the extra $75,000 cash to pay off the mortgage when the home sells.

They are stuck in the rut.
They have no extra monies to buy a needed car. No cash in the equity of the home to buy the car.

The mortgage payment increases because of the ARM terms.

No night out at the theatre, ball games, or even dinner at the local diner. Maybe Bic Mac. But no gas to go very far. On, On, On, ect, ect.

How many people will be in this mess?

keith said...

41 - and don't forget - they can't file for bankruptcy - chapter 11 - anymore either

ouch!

skep-tic said...

here's the lowdown on new bankruptcy laws

**more difficult to file for Ch. 7 (where you liquidate all of your assets and are afterwards cleared of all debts). If you are above the median income, the presumption is that you cannot file a 7, but must file a 13 (where you must pay off all secured debt over 5 yrs).

**However, the many people who have above median income may still be able to do a 7 based on high allowed expenses. The way it works is that the Bankruptcy Code allows certain "reasonable expenses." You are allowed to subtract these reasonable expenses from your income. If income minus expenses puts you below the median, you can still do a 7.

**Bankruptcy law explicitly favors secured debt. The new law ups the ante. Thus, if you are on the borderline between 7 and 13, if you increase your secured debt (car and house payments), your reasonable expenses increase and you might be able to do a 7.

Basically, it's not clear that most of the homebuyers will be stuck with their debt due to the new bankruptcy laws. Many of them may still be able to liquidate their non-exempt assets and walk away from loans given a broad interpretation of "reasonable expenses"

41cadillac said...

The story continues:

So a person takes out some kind of bankruptcy. By 2007 lending institutions have learned their lesson and tighten up lending scrutiny, (no loans to bankrupt - no credit cards to bankrupt)...

that soap box daytime person still is in a mess. Stuck in a rut.

41cadillac said...

The story continues:

So now our Mr./Mrs./Ms. Has his Bankruptcy:

The telephone calls from work to the lawyer, time off for court, (usually extended lunch hours), the diminished work performance has progressed because of worry, ect. ect. So...."Your Fired".

P. S. The Lawyer wants his pay.

People are not automatons this housing bubble burst, (I call Crash and Burn) is going to take a great tole..

The rut gets deeper.

skep-tic said...

the great danger here is the MBS market crashing. at root, collateral has to actually serve as collateral. if loans are way out of proportion to collateral, which they seem to be, then the system will collapse. house prices could plummet and interest rates could skyrocket. it's possible that housing could remain just as inaffordable due to high interest rates. this would be a disaster for everyone

000000000000000000000000000000000000 said...
This comment has been removed by a blog administrator.
Wes D said...

Of course this year was a great year to pass the BK bill. Every home owner believes they are a year or two away from being a millionaire. Better to pass when the getting is good than when people are going bankrupt in records numbers, which will happen within 3 years.

keith said...

so knowing what we know, seeing what we see, besides selling your house and renting, suggestions for money-making plays now?

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