May 29-31, 2009
A Short Chapter in the History of Foreclosures
The Mechanic's Tale
By BILL HATCH
In the late 1990s, an entrepreneurial mechanic with a wife and one child bought a house for $65,000 with a down payment of $1,500?and took a fixed-rate FHA mortgage. His wife, a beautician, got a job as a clerk at a discount store. In the midst of the speculative real estate boom in Merced six years later, now with three children and a warehouse job, he took out an equity loan for $126,000, did some remodeling on the exterior (new stucco, paint, new lawn turf, foam sculpture), bought furniture, a big-screen TV and a nearly new Escalade. It is estimated that about $35,000 went for the home improvements and goods. Where did the other $91,000 go? It didn’t go into the property. Why wasn’t the equity loan monitored for home improvements?
A year later, with four children and two big SUVs, the speculative real estate boom in full force, he took out a conventional variable equity loan on his house for $246,500. The paperwork doesn’t reveal if this was a wraparound loan, including the mortgage and the first equity loan. He bought a five-bedroom, two-story house for more than $300,000. He put about $160,000 down on the new house, bought $60,000 worth of new furniture and another used Escalade, and hoped to put a pool into the yard of the new house.
It can only be speculated if or when he got an equity loan on his new house.
He rented the old house to relatives, with an option to buy. The rent was based on the variable equity loan. It began in 2006, at about $500 a month. The relatives have two children. The husband built trailer homes; the wife had a good job in food service. In the next two years, they had another child and the husband lost his job and she quit her job to go to school –?while expecting to?buy this house.
In April 2008, payments on the variable loan of $246,500 increased to more than $2,500, and the owner informed the relatives with the option to buy that the rent had increased fivefold. The relatives had no clue that the loan was variable. It’s possible the owner didn’t quite grasp that either. In any event, the relatives went shopping for a loan, without success, as the boom was turning into a bust.
If the owner of the two houses, now with five children and a new custom Escalade including the latest in rims, had just stayed in his first house and not taken out two equity loans, he would have been paying between $400-$500 a month on his mortgage. Even if he had spent the entire $126,000 to expand his 900-square-foot house on a 10,000-square-foot lot and not borrowed another $246,500 – in part, to buy another house and more good-life toys he might have been able to survive.
Result: the relatives had to move out, the house is empty and in foreclosure, and the owner is months behind on his mortgage payments on his present house, and his variable on the new house will kick in next year.
Late last year someone seeking to buy the house contacted a realtor. The realtor, after examining the documents for a month or two, told the prospective buyer that it was extremely difficult to tell who actually owns this house, title being clouded by: 1) sloppy title company work to begin with; 2) the number and size of the various, variable loans; and 3) the mystery of who might possibly own those loans now.
So, here is an empty house worth between $50,000-$75,000 for cash, given that few if any will qualify for a loan on it in the present lending climate. Meanwhile, the grass has died in the front and back, junk was left behind, an old pickup stands in the driveway. It has joined that ever-growing number of residential properties in foreclosure, in decline and its title may be clouded by the different loans, all with different companies. Nor is it clear to realtors or prospective buyers whether there was a consolidation of loans or not. It will not be clear before the house goes through auction on the county courthouse steps.
What were the owner and his lenders thinking? At a broader level, what were all the Valley business and political leaders thinking, as they approved project after project, predicting the growth boom would go on forever and universal prosperity would come to the Valley without jobs to support the inflated prices of the real estate? The entrepreneurial warehouseman should not have been given the first equity loan on his first house. Politicians, from city councils to boards of supervisors to state legislators to members of Congress, and the media are blaming poor people for their irresponsibility.
Meanwhile, in Merced, the foreclosure section of the Merced Sun-Star announced in late October, 2008, that Hank Vander Veen, the publisher of the Merced Sun-Star, presumed to be far better educated, more worldly and wealthier than the warehouseman, walked away from a $507,000 house in suburban McSwain.
Bill Hatch lives in the Central Valley in California. He can be reached at: firstname.lastname@example.org .