Seattle: Cash Out Refinance Foreclosure Capital?

The Seattle Times ran a story on Saturday that is worth it’s own post here. While the narrative consists mostly of the usual “personal interest” angle stuff (single mom finds her fourth home in foreclosure when she loses her $800,000 per year job as a mortgage executive, etc.), the attached Tableau interactive tells a much more interesting story:

Home values in King County grew nearly three times faster than household income from 2000 to 2008, with barely a lull after the dot-com bust at the beginning of the decade.

About 40 percent of homeowners in the Seattle-area foreclosure data had owned their houses for more than five years. One out of five had owned for a decade or longer — long enough to build up substantial equity.

That may help to explain one defining aspect of the Seattle-area foreclosures: About half involved refinancing, the data show, a much higher rate than in the Phoenix or Baltimore areas.

The most common loan? A hybrid adjustable-rate mortgage that resets to higher payments after two years, a product that encouraged repeat refinancing.

Some homeowners cashed out equity to pay debt, make home improvements or finance a business. Homeowners also lost equity as refinancing added loan fees.

I assume they selected Baltimore as a comparison because it’s fairly close to Seattle in population, geographic size, and density. Phoenix was of course the “extreme” comparison point.

Although their analysis was only based on a sample of 400 foreclosures per market, this data does explain why it is so ridiculously easy to find outrageous examples of equity withdrawl gone wild.

Lili Sotelo, managing attorney at Northwest Justice Project, said she’s seen thousands of homeowners who got caught up in the refinancing frenzy.

“[Borrowers] thought they had to get on the equity train,” she said. “No one thought the train was going to crash.”

Wellnot exactly no one.


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

41 comments:

  1. 1

    What I’d like to see is how many homeowners used refinancing simply as a way to lower house payments vs how many used refinancing as a way to borrow more money to waste , i.e. use it as an ATM?

  2. 2
    David S says:

    RE: Ira Sacharoff @ 1 – This is fairly obvious. It was used to roll unsecured ATV, boat, car widescreen TV debt purchases all into the house payments. This would be the ‘smart’ move because you would be able to apply the coveted mortgage interest deduction to the non durable commodities and luxuries of your choosing. The smart borrower would be able to amortize their debt into infinity with multiple refinancing options.

    “Why would I want to just let all that money sit in my house?” one of my younger co workers once taught me.

    And also, the comments that were being posted on the PI story were truly brutal. It was apparent that there is a LOT of angst out here in the real world against this subject.

  3. 3

    By Ira Sacharoff @ 1:

    What I’d like to see is how many homeowners used refinancing simply as a way to lower house payments vs how many used refinancing as a way to borrow more money to waste , i.e. use it as an ATM?

    If you’re talking about people in foreclosure/bankruptcy, most of them refinanced to get more out. Often 2-3 times what they originally paid.

    What amazes me is the rate some of them pulled money out, and that banks were willing to let them do it! If you need to borrow 25k+ every 4-6 months, that should be a clue to the bank that something is wrong.

  4. 4
    joe dirt says:

    Predatory lending is an oxymoron. Look at the couple who are college teachers and say “There’s so much we didn’t understand in terms of this industry,”. Now they got a loan modification. This country is in serious trouble.

  5. 5
    Buy My House, Idiot Renters! says:

    “Well… not exactly no one.”

    Who are going to listen to – whiny losers who live in their mother’s basement, or Qualified Real Estate Professionals?

  6. 6

    So, Seattle Home Owners Like to Use their Homes Like ATM Machines

    That explains all the new cars glutting the market as newer used units about 4 years ago, hades, some of the homes’ 2nd mortgage(s) had just bought the 3rd SUV and they still hadn’t paid for the 1st on a previous refinance. Today’s newer used auto market is much leaner, the ATM machine dried up. LOL

  7. 7
    EconE says:

    Look at how many people were older than 40.

    You know what this tells me? (actually, I already know)

    The more established areas such as Madison Park, Queen Anne, Magnolia, Kirkland, Medina etc, are ticking time bombs that had a good chunk of the HELOC fueled spending sprees. The trendier the area, the bigger the HELOCs.

    People were able to refinance up into the MILLIONS in some areas.

    It’s pretty easy to see where much of the spending was going. Just look for the nice kitchens (Granite, Viking, Sub-Zero) in homes in the high end areas that are for sale. When you have 100k kitchens sprouting like weeds in homes that used to be 3-400k (but are now asking $800k+) it’s obvious where the next leg down will be.

    I’m suspecting that there won’t be much sympathy for them either. Especially after that tax giveaway for the rich that brought out so much anger in commenters in the NYTimes.

    It’s time for the high end to take it’s beating.

    Of course, as the lenders steamroll their way through these tony neighborhoods it will cause the median price to rise and certain posters will trumpet “RECOVERY”.

  8. 8
    anonimaniac says:

    I agree with Kary on this. Many people did refi, multiple times. If they were smart and did what David S said, only once, in order to consolidate loans then the mess would not have been so bad. But look at those numbers! Seattle is in for a lot of reset trouble. And someone correct me if I am wrong, aren’t the ARMs set to the LIBOR? It has been really low lately but could go back up. If it does, all those resets in the next year will cause a lot of huge increase of monthly payments.

    The article The Tim mentions just jumped onto the front page of the Seattle Times web site, again. Perhaps influenced by Seattle Bubble?

  9. 9
    Scotsman says:

    So, Seattle is special- we’re number one! Probably because of what I read about our population being so smart, educated, and on the cutting edge technologically. But it looks like Google may still be a mystery to some.

    Seriously, between Google and You-Tube one can self teach pretty much everything from quantum physics to Paris Hilton’s favorite positions. But figuring out whether your refinance is a good deal or a wise idea remains elusive.

  10. 10
    BillE says:

    “Some homeowners cashed out equity to pay debt…”

    Is it really paying debt, if you’re taking out another loan to pay it? Maybe more like moving or shifting the debt.

  11. 11
    Meadows says:

    RE: Kary L. Krismer @ 3

    Unless you are selling the mortgage to someone else.

  12. 12
    Hugh Dominic says:

    RE: David S @ 2 – Best post ever.

  13. 13
    ivan says:

    I got a hair cut by a woman around the peak of the bubble. $20, nothing fancy. She told me she was a single mom with a twelve year old son and that she had a condo in Edmonds. The subject of our cars came up and she told me that she had a two year old Cadillac. I said, ‘That’s an expensive car.’ She said, ‘I always wanted a Cadillac and I refinanced the condo and got a lower payment and had enough left over to buy the car.’

    Even if the bank eventually ends up with condo, she’ll still have the Cadillac.

  14. 14
    corncob says:

    By BillE @ 10:

    Is it really paying debt, if you’re taking out another loan to pay it? Maybe more like moving or shifting the debt.

    My favorite is people using their homes to pay off large, unsecured debt with debt secured by your house! The only debt I see as making sense to do this with is student loans (if the rates are equivalent), as they are also long term and you can keep your house in bankruptcy but cannot get student loans discharged for anything. Securing all of the stupid shit you bought at Best Buy on your Discover card with your house is not very bright.

  15. 15
    Hugh Dominic says:

    RE: David S @ 2 – Regarding the articles comments.

    Many comments bashing the $800k lady, saying she didn’t earn their pity. Only, she wasn’t asking for their pity.

    Americans just don’t like people who work hard and earn a ton of money. And they don’t like people who are lazy and want a handout. Americans like people who work really hard and earn not quite as much as they do.

  16. 16

    By Meadows @ 11:

    RE: Kary L. Krismer @ 3 – Unless you are selling the mortgage to someone else.

    That, or like was the case with credit card lenders, they assume that they will refinance again before they go under.

  17. 17
    David Losh says:

    This post, and thread doesn’t make a lot of sense.

    Number one was the very common, often quoted saying that people only keep a mortgage for 7 years, or the one that said the price of Real Estate doubles every 10 years.

    The idea people would make money with Real Estate is also very common. Add to that companies like redfin, and Zillow who publish the daily racing stats for what the value of a property is. On the same web sites you see ads for things like the pajama mortgage application.

    Next let’s take those credit card bills where the interest rates went up to 24% because some one made the mistake of mailing a payment only two weeks in advance, or as soon as they got the bill. They should have mailed the payment before they got the bill in order to avoid hefty penalties, and increased interest.

    I don’t understand why the people on this site don’t focus more on banking rather than the people who used the products.

  18. 18
    Updog says:

    I’m new at this – can anyone explain to me in layman terms the difference between HELOC/Refinance? I had always thought refinance meant changing a high-interest mortgage loan to a low interest mortgage loan. HELOC was how people bought boats, cars, vacations, etc. Based on the comments here I feel my understanding is not correct. Help anyone?

  19. 19
    Fran Tarkenton says:

    RE: Updog @ 18 – There’s also a cash out refinance, where the debtor takes out a loan greater than the cost of the current mortgage(s) and associated refinancing costs, and has money left over to spend however he sees fit.

  20. 20

    RE: Updog @ 18

    To My Knowledge

    They’re pretty much the same thing….using your house equity like an ATM machine. And if this a possible wise choice, why can you save mass interest money [like twice your debt principle, even at 4-5% over a few decades] by paying your house debt off with 0.2% money market funds? I know, you’ll see big “Pink Pony” increases in your house equity in the future? LOL

    They need to teach arithmetic in school better, obviously a lot of of us can’t add up our losses to our wins very good. Including the financial advisors that conned them into 2nd mortgages.

  21. 21

    RE: Updog @ 18
    Updog,
    A refinance means you are borrowing a set amount at a generally fixed interest rate. When interest rates have fallen or if you have a lot of equity in the house is usually when this happens. Some people have refinanced over and over as their equity has climbed.
    A HELOC is a certain amount allottted to be loaned to you, and you can tap into it a bit at a time, not to exceed that amount and at a variable interest rate. I.E.: Shyster Bankcorp gives you a HELOC of 300,000 dollars for your house, appraised at 400,000. You take 75,000 dollars and buy a BMW. You take 100,000 dollars and pay for your daughter’s wedding. A few months later you borrow 50,000 dollars to put granite on your countertops and to add a marble fountain in the shape of a fish.. And use the rest for a family vacation to Vegas.
    Meanwhile the interest rates have risen, your commissions from selling real estate have fallen dramatically, and you can’t make the payments. Shyster Bankcorp takes the house.

  22. 22
    Updog says:

    Thanks all. :)

  23. 23

    By Updog @ 18:

    I’m new at this – can anyone explain to me in layman terms the difference between HELOC/Refinance? I had always thought refinance meant changing a high-interest mortgage loan to a low interest mortgage loan. HELOC was how people bought boats, cars, vacations, etc. Based on the comments here I feel my understanding is not correct. Help anyone?

    I’ll take my stab at this too.

    Refinancing is any form of financing your house to take out the existing loan. You could do it by any means, such as replacing a 30 year loan with a new one for an identical amount, going higher in amount or going longer or shorter in term. The “best” uses of refinancing would be to go for a lower rate and/or shorter term without increasing the amount owing. Note though that there are costs to refinancing (sometimes hidden) and that frequent serial refinancing is not generally a good idea due to those costs. Also note that if you are 5 years into a 30 year and refinance into a new 30 year, you’ve probably greatly increased the amount of interest you will eventually pay, even if the rate is much lower. In such instances it would generally be better to refinance for a shorter period of time.

    HELOC is typically a second loan at a relatively low variable rate which can sometimes be fixed. There is nothing really special about a HELOC other than the fact that you do not necessarily draw any amount out at the time of getting the loan. It’s in effect a line of credit, or a secured credit line. There are some good uses for HELOCs, but it does take someone with some financial discipline.

  24. 24
    patient says:

    Refinancing yourself into foreclosure has been a smart move for many. Buy a home for $200k , cash out another $300k through repeat zero down, teaser rate refinances. Buy boats, luxury cars, lavish vacations, huge TV sets etc, etc for the money. Then foreclose on the home. It was practically free money for you. The bank took the risk and lost. Or wait did they? Actually the bank took the risk and then got bailed out and are still getting bailed out with free money from the fed that they can buy treasuries for and generate profits with zero risk or effort. The resulting ballooning public debt will then be paid by higher taxes and cut entitlements by everyone. So was it bright or not to refinance by the home owners?

  25. 25
    Dirty_Renter says:

    RE: David S @ 2
    Nothing says smart like taking out a 30 year loan for the purchase of a depreciating asset with a 5 year shelf life.
    The movie ‘Idiocracy’ was entirely too optimistic.

  26. 26
    patient says:

    And if we are to believe Ray our government will also soon reduce the principal of the loans so that the home owner can keep the home they didn’t pay for in the first place as well.

  27. 27

    RE: patient @ 24 – The only problem with that is you have little left when you’re done, except memories.

    But that does bring up two other points discussed in the past.

    First, this “irresponsible” activity did stimulate other economic activity and employment. Without this “irresponsible” behavior, the economy is not as strong and will not be as strong. That will limit our economic recovery going forward.

    Second, those who do this are typically doing little or nothing to prepare for retirement. I see that as a future crisis a decade or two from now as more and more then elderly are unable to adequately support themselves (and certainly not at the level of the last generation or two, many of which were able to spend (stimulate the economy) quite well during their retirement years.

  28. 28
    patient says:

    “The only problem with that is you have little left when you’re done, except memories.”

    Well, you could also have invested your cash out in an education, gold, Apple stocks or your ROT IRA for example. it just seems to drive home the point more effectively when you mention flat screen TVs. People seem more jelous of that than someone who is building wealth of some reason ;-)

  29. 29
    patient says:

    “Without this “irresponsible” behavior, the economy is not as strong and will not be as strong.”

    Yeah it really made the economy strong didn’t it?

  30. 30

    “The movie ‘Idiocracy’ was entirely too optimistic.”

    But a helluva lot funnier. I’ve seen it three times ( shows you what an intellect I am).

  31. 31
    Blake says:

    RE: patient @ 24
    -snip- “Refinancing yourself into foreclosure has been a smart move for many. Buy a home for $200k , cash out another $300k through repeat zero down, teaser rate refinances. Buy boats, luxury cars, lavish vacations, huge TV sets etc, etc for the money. Then foreclose on the home. It was practically free money for you.”

    Actually… many of the people that did this ARE being prosecuted and pursued. Yeah, they were laughing and playing… but they will have legal troubles for years.

  32. 32
    patient says:

    RE: Blake @ 31 – Really? What did they do that was illegal?

  33. 33

    By patient @ 29:

    “Without this â��irresponsibleâ�� behavior, the economy is not as strong and will not be as strong.”

    Yeah it really made the economy strong didn’t it?

    What I’m referring to is GDP. All this borrowing and spending increased GDP, increased employment, etc. That we’re well past the peak is part of the reason the economy is not so strong.

  34. 34

    By patient @ 32:

    RE: Blake @ 31 – Really? What did they do that was illegal?

    Absent falsifying income or perhaps intended residence, probably nothing criminal. But that wouldn’t prevent them from being pursued on a civil claim, especially in other states or on a second mortgage here.

  35. 35

    What would be interesting is a breakout of foreclosure by originating bank. E.g., what percentage are WAMU, Indymac, Countrywide, etc.

  36. 36
    EconE says:

    RE: Kary L. Krismer @ 35

    I’m surprised that we haven’t seen that yet although sooner or later I think we will.

    I have a feeling that we will also see many special interest stories regarding which RE agents and mortgage lenders have the highest percentages of past clients in foreclosure.

  37. 37
    Mike says:

    RE: Kary L. Krismer @ 35

    I don;t think the breakdown is going to reveal anything we don’t already know. But this does drive a stake into the “Predatory Lending” meme; the numbers just don’t back that up.

  38. 38

    By EconE @ 36:

    RE: Kary L. Krismer @ 35

    I’m surprised that we haven’t seen that yet although sooner or later I think we will.

    I have a feeling that we will also see many special interest stories regarding which RE agents and mortgage lenders have the highest percentages of past clients in foreclosure.

    I really doubt there’s a meaningful stat for real estate agents. That would largely just be happenstance, unless it was related to referrals to someone in my next topic.

    Mortgage brokers could very well be meaningful because some of them did pressure appraisers at the selection level.

  39. 39

    By Mike @ 37:

    RE: Kary L. Krismer @ 35

    I don;t think the breakdown is going to reveal anything we don’t already know. But this does drive a stake into the “Predatory Lending” meme; the numbers just don’t back that up.

    I’m not sure what you mean by that. I don’t think anyone claims the biggest problem was predatory lending, but that doesn’t mean predatory lending didn’t happen.

  40. 40
    Jonness says:

    By Hugh Dominic @ 15:

    Many comments bashing the $800k lady, saying she didn’t earn their pity. Only, she wasn’t asking for their pity.

    Your observations are correct.

    However, as far as I’m concerned, she overstretched her budget, got stupid with the money, and deserves everything she got. To impress me, she would have to have bought a house cash with $500K and wisely invested the rest while living beneath her means. I’ll bet if you were to ask her, she would agree with me.

  41. 41

    This makes me think of an old post I wrote at RCG “The Perennial Borrower” back in Jan ’07 about home owners who were using their homes as ATMs and making very poor choices about their finances over and over again.

    A borrower is approved for a mortgage based on their financial scenario (income, credit and assets) but one thing that is not factored is intellegence or financial understanding,
    As a mortgage originator, I do my best to educate and to try to make sure a borrower understands the terms of their mortgage. I bet a majority of borrowers never read their deed of trust or note…or even the loan application. I think I’ve had 1 or 2 request to have the DOT and Note prior to their signing appointment to review in the last 10 years I’ve been a mortgage originator.

    I am thrilled when I work with people who ask questions — people who WANT to understand their mortgage. I would bet that most don’t care or don’t want to know…they just want the house or the cash out of the house.

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