Wednesday, June 3
Written 10:30 a.m.
MORE THAN ONE PAIR OF SHOES: The New York Times has an article today about a homeowner who can't afford her monthly mortgage payments because she lost her job. She applied for a mortgage modification but was turned down.
The homeowner, Eileen Ulery, is in a bad situation. Looking from her perspective, you might think that she's a good candidate for a modification. But there's more than one side to every story, and when you look at it from the lender's perspective, things aren't so simple.
Ulery bought her condo in Mesa, Ariz., in 1997 for $77,500. Let's assume she put about 10 percent down and borrowed $70,000.
OK, so 12 years after she borrowed $70,000, how much do you think she owes on the house?
You're right. She owes $143,000.
Imagine that you lent her about $145,000 two or three years ago. She was doing a cash-out refi to buy a Hyundai, pay off some credit card bills and replace a roof, and you figured that it made sense to lend $145,000 to someone who brings home about $26,000 a year after taxes. At the time, you thought, hey, the condo is worth $200,000 in a bubble-inflated market -- why not give her a loan for 5.5 times her annual take-home pay, even though she has doubled her mortgage debt on the same condo in less than 10 years and clearly has been living beyond her means?
You're the lender today, and that loan was underwritten poorly then, and this is now. You're wiser and more cautious than you were during the mortgage boom. This spring Ulery comes to you and says, "Please modify my mortgage by lowering my interest rate and maybe forgiving some of the debt." What do you do?
It's not a slam-dunk case for a modification. Now, if she had never added to her mortgage debt, or had only added the $20,000 for a new roof, it would be easier to approve a loan modification.
As I said, put yourself in the lender's shoes -- in this case, Bank of America, which inherited the loan originated by Countrywide. With Countrywide's enablement, Ulery doubled her mortgage debt to buy a Hyundai, pay off credit cards, and put on a new roof. Now someone is going to have to lose money on her excessive debt. As a lender, you're thinking that maybe it would be more fair if the car loan company and the credit card lenders would take some of that loss. They got their money when you, the mortgage lender, approved a cash-out refi. They got repaid, with your money. Why should you bear the brunt of the loss instead of Ulery or her credit card companies or a car lender?
I'm not complaining about the Times article. It's fine to write a quick story describing what it feels like to be in a desparate situation. Not every article has to explore the details of every side of an issue. In today's media landscape, an article is just the beginning of the story. Blog posts and commentary add to everyone's understanding.
Countrywide made an error when it gave Ulery the loan, and Ulery blundered by living larger than her modest paycheck. People make mistakes. There's no moral to this story. Thus, there's nothing wrong with viewing the situation from the current lender's point of view in addition to Ulery's.
The lender wants to cut its losses. Maybe the best way to do that is by modifying the loan. Maybe it's by refinancing the mortgage. Maybe it's by foreclosing. It's a business decision, not an ethical decision.
CYBERHOMES MARKET FORECAST: If you're looking for a house, you should bookmark Cyberhomes, which is, in my opinion, more informative than its competitors, such as Realtor.com. In addition to looking up home listings, you can get info about neighborhoods and schools. The site's blog, written by Lauren Baier Kim, is useful.
This week Cyberhomes is rolling out a product called the Market Forecast. You can get detailed information about a home and the neighborhood surrounding it. The report forecasts the neighborhood's home prices over the next one to two years.
A report costs $3.99 for an introductory period, then will cost $9.99. Cyberhomes offered to do a free report for me, for an address of my choosing. I selected my house in Jupiter, Fla., in extremely bubbly Palm Beach County, roughly 100 miles north of Miami.
Cyberhomes estimates that my house is worth $168,771. That's more realistic than the Zillow Zestimate of $206,500. (The house was worth $200,000 maybe a year ago.) If I do a little bit of basic math, I calculate that Cyberhomes estimates that a bank would value the home at $154,459 in foreclosure.
Cyberhomes says correctly that our local real estate market is depressed, "with very little demand from buyers." Actually, I wouldn't say that there's little demand; I'd say that demand is surging, but is dwarfed by the supply of homes in foreclosure or for sale. For pricing purposes, this is merely a semantic difference. Cyberhomes predicts that the pace of new foreclosures in my area will remain steady over the next year, but that the inventory of bank-owned homes will surge. Banks will seize homes faster than they can sell them.
Bottom line: Cyberhomes predicts that my house will continue to lose value, and will decline another 6.6 percent over the next year -- down to $157,585 in May 2010.
The report tells what percentage of loans in my ZIP code are "exotic" mortgages, has a graph telling what year exotic mortgages peaked (2006), and mortgage delinquency trends.
If I were buying or selling a house, I'd get one of these reports. It's like Carfax, but for houses.
The report comes as a PDF file. Here are screenshots of what it looks like.