Monday, November 28, 2005

"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.

Here is a scenario: Bwr with a FICO in the 550's, is currently 2 months behind on their mortgage, and needs at LEAST 85% LTV, but would like to get 95% LTV on a refi cash out. They are going "stated income" (of course), and they need a loan for somewhere in the 420k-450k range. They want interest only...but the broker said "they will take anything they can get at this point". They need money to keep paying their mortgage. How do you like that?!?!?

I had another one today where the person had 12,000 in equity and wanted to pull it out to help get through the holidays and pay their mortgage. Poor broker only had 2 weeks in the business...and thought he had a "live one". I had to squash the bwrs dreams of a fancy holiday...and the brokers dream of getting a paycheck off this "loan". 12k would barely pay all the fees assocaited with doing a refi on a 400k property.

These are just 2 that I saw today! I could go back through my scenario book and there are plenty more. The sad thing is that NOTHING surprises me anymore. It just amazes me that somebody will "spend" $500,000 on something (a house), yet they won't spend 30 minutes doing research to figure anything out about the process, the loan, the collateral, the people involved, if it really makes sense.

There is going to be sooooo much annoying whining coming down the next 2-3 years, you are going to beg to be stuck in a room with Gilbert Godfrey instead of hearing the all these "sob stories".

(no offense to Gilbert...but can you think of a more annoying voice?!?!?!? Maybe that Janice girl from Friends....yup...the "chandler-bing" chick with the terrible laugh)

You get my point...

******After reading some of the posts, I want to make it clear that NOBODY tells the lender directly the refi is to get cash to help pay the mortgage. I have seen loans declined when it looked like that is what the borrower was doing. That is the dialogue between the borrower and the broker...and I deal with the brokers. When asked what they plan on doing with the cash (if/when they ask) the 2 main uses are debt consolidation and/or home improvements. I will make a post here shortly detailing the rationale of the "lender" side of things.

17 Comments:

Blogger David said...

Poweful post. Thanks for sharing.

11/29/2005 5:43 AM  
Blogger Metroplexual said...

SoCal,

Is this the result of dual incomes reduced to one? I agree with David. Wow! some people are really on the edge out there!

11/29/2005 7:37 AM  
Blogger Econ_101 said...

SoCal,

Wondering if you could give an overview of what a typical flipper's finacing looks like.

That is: what type of mortage do the carry and what is the pricing?

Reason I ask (beyond curiosity), This clown: http://www.realtor.com/Prop/1053094410 trying to sell a house for $728K that they bough in September 2005 for $570K ($158K gain in 2 months!).

Although it's clear he'll never get this in this flat market, I wanted to do a break even of the whole scheme. Also, what kind of bank/lender would give lend money on this kind of foolishness?

Thanks

11/29/2005 8:16 AM  
Blogger jack mehoff said...

A bit OT, but the best snapshot of today's housing maket I've seen.

http://thehousingbubble3.blogspot.com

The graph was snatched from Investors Daily Business. It appears IBD has spotted the housing bubble big time.

11/29/2005 8:35 AM  
Blogger SoCalMtgGuy said...

Metro - I don't think that single/dual income has much to do with it. It is about getting a loan that you can afford. I have seen 2 borrowers that made 120k each...and they were in soooo much debt it wasn't even funny.

Econ101- There is not really a "typical" situation, but one usual "give-away" with the flippers is their reluctancy to have a pre-pay penalty. They are usually using I/O loans and whatever else they can to get the loan. Some don't care about the payment at all, as they look at making 10's of thousands in just a few months.

Yeah, I know exactly where that house is. Plenty of lenders would do a loan on that house, but a lot of it would depend on the LTV, the appraisal, and the bwr. Some lenders might "chop" the appraisal if they felt it was being pushed higher than what the comps are suggesting. It would also depend largely on the bwr's history.

I hope this helps some...

11/29/2005 8:54 AM  
Blogger Marinite said...

I am seeing more borrowers that are refinancing to get cash out so they can pay their mortgage and "stay afloat"

That is truly amazing!

How many folks are like that I wonder? Maybe you could create a system of categories (of which people like this would be one category) and then plot a frequency histogram of borrower types. I'd give my left arm for some data like that for Marin County.

11/29/2005 1:52 PM  
Blogger Rob Dawg said...

Which is worse?

The borrower that admits to needing a cashout to meet expenses.

OR:

The lender that so much as entertains the prospect?

Leads me to the "uncomfortable" question; Are the upfront loan origination charges and downstream exposures out of whack? Clearly in this case giving this guy anything more than the 800 number for credit counselling is a breach of fiduciary trust on all accounts but when someone as a debt broker can wash their hands isn't there a built in problem?

11/29/2005 2:34 PM  
Blogger SoCalMtgGuy said...

Robert...

They NEVER put that on the app for the reason for cash out. They put "home improvements".

Debt consolidation and home improvement are the big 2 that are used when they ask what the cash out is for.

You never put "to buy an investment property" or "to pay my bills".

Sometimes it is painfully obvious what kind of shape the bwr is in...but when they are doing "stated" income, it is tougher to tell REALLY how strapped a bwr may be.

11/29/2005 4:30 PM  
Blogger john in va said...

socal,
Who in the world is buying all of these crap loans? We all know that the banks don't give a shit whether the loan ever gets repaid, but someone is going to get stuck holding the bag. Who's saddling themselves with this worthless paper -- Asian central banks? Hedge funds?

11/29/2005 6:49 PM  
Blogger passthebubbly said...

Lordy, this is worse than "I need to get a cash advance on my MasterCard to pay Visa".

It's more like, "I need to get a cash advance on my MasterCard to make the minimum payment on that very same MasterCard".

And banks let people do it!!

11/29/2005 8:17 PM  
Blogger SoCalMtgGuy said...

John,

THat is the BILLION dollar question. I know that the investment houses are buying them...but they usually only buy something they have a place for. I know that china/japan were buying a lot. I know that hedge funds are/were doing a lot of business as well.

Again, it is all "funny money" to soo many people when the times are good.

11/29/2005 8:58 PM  
Blogger chris said...

Whew! I sold just in time!...I was almost in that situation. I bought my socal home in 1999 for 168K a 4 bed/2 bath 1411 sq ft.in San Diego County. mortgage approx 1500/mo. then I refi'd did home improvement and thru layoffs paid my mortgage when I was broke. I sold the house may 2005 for 495K. Luckily I only owed about 255K on the house. So I cashed out nicely saved my credit and now own 2 properties in Portland, OR. One that I own 80% on and a rental property that I own 20% on. I was able to have a 500/mo mortgage on my primary house and I break even on my duplex I rent after the mortgage is paid.
I was facing losing it all though if it wasn't for my HELOC that I paid the last 3 payments on before I sold the SoCal house. I ended up never missing a payment or any lates too due to the equity loan(Heloc)

11/30/2005 10:15 AM  
Blogger SoCalMtgGuy said...

Chris,

Glad you made it out ok...but what would have happened had you NOT had a nice equity cushion to tap into??

If you have a game plan, I can understand living off savings for a while...but I'm seeing people that are just strapped, and that last little bit of equity is ALL they have. Once they pull that out...they NEED more appreciation, or to start making a lot more money.

I don't see either of those situations happening enough to save most of the bwrs in that situation.

11/30/2005 10:47 AM  
Blogger ajh said...

SoCalMtgGuy,

Shouldn't that be TRILLION dollar question?

11/30/2005 11:49 PM  
Blogger SoCalMtgGuy said...

Ajh...

billions, trillions....it's all funny money anyway, right?!?!?! ;)

just kidding. I think that china and japan are still in the billions...but I could be wrong. Tougher to track the numbers of all the MBS out there.

12/01/2005 12:17 AM  
Anonymous rent_boy said...

SoCal.

First I like to say "THANK YOU" for trying to wake/sober us up from this druken party brought on by the Bush/Greenspan tag team.

Remember it was Greenspan that endorsed Americans to take on ARM mtgs when he was starting his campaign of ratching up short term interest rates, and no one in the press called him on it. Incredible!

Second, you "THANK YOU" for providing an insight to what's going on with the bwr situation and why so many people are withdrawing cash from their houses.

I wondering if you notice any difference between this years bwr status/situation versus last year at this time. Do you think the bubble already burst but we are in denial or damage control mode?

12/14/2005 1:54 PM  
Anonymous QUALITY STOCKS UNDER 5 DOLLARS said...

When you took out that mortgage The banker said have I got a deal for you. Oh he had a deal for you alright.

1/14/2013 2:35 PM  

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