America’s Debtor Prisons
It's the hap-happiest season of all (wonderful time)
With those holiday greetings
And great happy meetings
When friends come to call
It's the hap-happiest season of all
There'll be parties for hosting
Marshmallows for roasting
And caroling out in the snow (out in the snow)
There'll be scary ghost stories
And tales of the glories
Of Christmases long, long ago
It's the Most Wonderful Time of the Year -- Andy Williams
Income Requirement: $157,500
Downpayment Needed: $126,000
Purchase Price: $436,500
Purchase Date: 12/13/2002
Address: 219 Terra Cotta, Irvine, CA 92603
First Mortgage $629,600
Second Mortgage $157,400
Total Debt $787,000
Sq. Ft.: 1,510
$/Sq. Ft.: $417
Lot Size: -
Style: Modern, Other
Year Built: 2003
Stories: Two Levels
View(s): City Lights, Hills, Mountain
Area: Quail Hill
On Redfin: 4 days
From Redfin, "Vaulted Ceiling In Living Room, Private Corner Lot With Open View Of Outdoor Sports Center. Spectacular City Light View From Master Bedroom Balcony & Other Area. Beautifully Upgraded In Spacious Private Courtyard. Wood Floor On Fist Level, Dining Room Open To Kitchen, Convenient 2nd Floor Laundry Room. Plantation Shutters, Granite Counters, Stainless Steel Appliances."
So how is it that someone can own a house for 5 years, sell it for $200,000 more than they paid, and still end up leaving the bank with a huge loss? Welcome to the Great Housing Bubble mania. Today's seller refinanced this property in July of 2005 for $787,000 taking out a whopping $350,500 cash. Now that the day of reckoning is at hand, if they get their asking price and pay a 6% commission, the shortfall will be $194,800. This is a recourse loan as it is a refi. Do you think they have $194,800 in assets for the bank to go after?
What is a debtor's prison? A prison is any place you cannot leave until you have served your sentence, and these debtors will not be able to leave until they can pay off their mortgage. Most will not be able to do so until market values go back up. Hopefully, it is a gilded cage, but it is still a cage.
Houses are America's new debtors prisons. By the end of 2008, anyone who purchased between 2004 and 2007 will be underwater. Let's say for a moment that the government comes up with some substantive bailout program where homeowners can stay in their house and continue making payments of 50% or more of their gross income. House prices will still fall, albeit at a somewhat slower rate if there are fewer foreclosures. Everyone who is underwater and making crushing home payments will be stuck in their homes until values climb back above their purchase price. Since there are a great many people in this circumstance, and since each of these people is in at a different price point, each one will have a different term in debtor's prison, but when their sentence is up, most will opt to sell to get out from under the crushing payments. Each of these people selling their home keeps prices from rising. This is called overhead supply. It is also why the market will not see meaningful appreciation without capitulatory selling. A bailout will make for a slightly higher bottom and a much slower recovery.
Anyone who purchased in the late 80s or early 90s knows the feeling of being imprisoned in their house. This is not a new phenomenon. This time around the sentence will be much longer, and the debt service will be much larger.
Home, sweet home? We will see...
My question to you today is this: Who is better off, the homedebtor rotting in their debtor's prison, or the family thrown to the curb in a foreclosure?