I think a lot. Often, about mortgages. In fact, a day doesn’t go by when I don’t try to think of topics to write about on this very website.
It’s not always easy to come up with new material, given the fact that I’ve been writing about mortgages since 2006.
But every once and a while, I try to come up with something interesting in the rather mundane world of mortgage.
And so the other day, I remembered a former landlord of mine. She owns a home in Los Angeles.
I had rented out the property back in 2004 or so when everything was booming.
Mortgages were hot, as was real estate. Home prices only moved in one direction, and did so in an accelerated fashion. You couldn’t lose!
I’ll never forget a conversation I had with the owner. At the time, I worked for a mortgage lender, and she had come by the house for some reason or another.
We began talking about real estate, mortgages, and the like, and she mentioned something I’ll never forget.
I Refinance My Mortgage Every Year
She told me, rather proudly, that she refinanced her mortgage every year. And that she had a Countrywide rep that took care of everything.
As far as I knew, this meant she was tapping her home equity each year as the property value increased, and likely employing an option arm to keep monthly mortgage payments low.
She seemed so pleased with herself, with telling me of her grand plan, which she apparently felt was bulletproof.
It was one of those one-sided conversations where the person tells you how it is and doesn’t need to hear your opinion on the matter.
They’ve made up their mind and are confident in their decision.
Not that I had any intention of telling her it was reckless, or that it could come back to bite her.
After all, her mind was made up and I would just be perceived as the pushy mortgage guy trying to “sell her something,” despite the fact that I was employed by a wholesale lender and never actually worked with homeowners.
Home for Lease
Anyways, years later I drove by the house I had resided in and saw a “for lease” sign plopped right in front.
I shook my head as I drove past, thinking how she undoubtedly got in over her head and was now stuck with a colossal mortgage.
Oh, and her Countrywide rep, who “took care of everything,” was probably long gone.
When I got home, I jumped on the Internet to check the lease price, and was not astonished to see that it was astronomical.
Clearly it had to be large enough to cover her bloated mortgage payment, which increased significantly as the price of the home doubled in five short years.
Unsurprisingly, it was so high that there weren’t any takers, and it wasn’t long before the home was taken off the market.
So she was unable to lease it, and there’s no possibility of a sale because she definitely has a deeply underwater mortgage, as the price of the home fell back to its original purchase price.
It’s unclear what her plan B is now, but the lesson is clear. Home prices don’t rise indefinitely. And if you take cash out, it must be paid back. Unless you walk away.
Either way, there’s no clean getaway. And she had to have known at some point along the way that it was just “too easy.”
It was a shortsighted plan, and one that didn’t leave much room for error. It banked on endless home price appreciation. Once that myth came undone, there wasn’t a logical next move.
Sadly, this story isn’t a unique one, which explains to some degree where we’re at, and why it will take a long, long time to get back to “normal.”
I appreciated the situation that you described in this article. I have been in the Mortgage Banking business since 1965, have managed several companies both insured and non-insured ove the years, and even I have been shocked at the events of the past 7 years. At this point, the major impediment to reaching a solution to this current situation seems to be the overhang of REO’s on the balance sheet of institutional investors. I have an idea that might reduce that overhang rapidly and without putting the investors into a major loss position. I would like to share that with you, since you may have the resources to “get to the right people” to analyze my proposal beyond my current rolodex entries.
Please let me know if a conversation would be of interest to you.
I used to be a mortgage guy..President’s club at wamu..the whole 9 yards…How’s this for a topic..As a shareholder back in 2003-6 used to follow earnings reports quite closely..somehow the accounting rules permitted the reporting of the increase in principle on (when making payments short of interest only) Option Arms as current income..I can remember one month Wamu’s results reflected the “income” of $350 million in accretion of principle. That’s why when the shit hit the fan I knew there was no turning back..when the market started to tank would they then have to restate earnings for the last few years and also write down the asset? At that point I knew Wamu, Wachovia, and Countrywide’s share prices were right as far as absoluet value was concerned…they were just missing the minus side in front of them…told everyone I knew to sell short all 3 and buy treasuries…I couldn’t of course because by 2007 I had already gone from millionaire to broke.
Can’t really blame her for being one of the sheep that led to the housing bubble…really. However, this does remind me of your advice on buying property and then renting it out. How does this story relate to your advice?
I do personally know someone who is buying property and renting it out. But, this person is extremely business savvy and runs a successful business. As such, buying and renting property is a ‘side’ job.
How then can people who are neither business savvy nor very good at being landlords succeed in the real estate world. Especially given the dog-eat-dog nature of the mortgage world?
Lastly, given your knowledge now, what would your advice had been provided you guys had that conversation again? Booming housing market, the ability to get cheap money etc. … Would you really have told her to just be ‘cautious’? After, taking risks in our economy is what it’s all about. Sadly, self-made realtors aren’t likely candidates for Bailouts if they bottom out….