Rapid Rise in WA Bankruptcies

According to the Seattle Times, Washington State ranked 12th in the nation—up from 27th last year—for average monthly growth in bankruptcy filings between 2007 and 2008, with bankruptcy filings up 40% year-over-year.

How is this related to real estate? You can probably guess…

Across the state, declining home values and tighter credit have added a new twist to the old story of families bankrupted by medical bills, divorces or job losses. Experienced attorneys say they’ve never seen so many filers with houses.

In some cases, those filing for bankruptcy bet on real-estate investments at just the wrong time. An engineer acquired more than $4 million in property. One schoolteacher took out mortgages to buy five houses.

More common are those who faced insurmountable increases in mortgage payments when their teaser interest rates jumped, say bankruptcy attorneys. By then, the real-estate market had dropped and they couldn’t sell their homes. They include retirees, nurses, teachers and software engineers.

Count among them the Ruedas, who like many first-time buyers in the recent housing boom, relied on 100 percent financing with an adjustable rate to buy their three-bedroom rambler.

Said Ruedas: “It was the American dream, right?”

The family profiled in the Times article bought a home in Auburn in 2005 for “a little more than $200,000” on a pair of $12 an hour incomes. They put zero down and got two mortgages (80/20), both adjustable-rate.

This is exactly the kind of dangerous loan situation that was disturbingly common during the boom years, since everyone mistakenly believed that the real estate market would be hot hot hot forever and ever, and hey, you can always just refinance later, no big deal.

Turns out it was a big deal.

In a somewhat related tale, I was digging around on the Snohomish County records and thought I’d share the anonymous history of one of one property I’m researching.

February 2003
Bought for $320,000
Mortgage of $256,000 – 30-year, 80% LTV

May 2003
Acquired a $32,000 HELOC

December 2005
Refinanced to a new 30-year mortgage for $353,180

September 2006
Equity withdrawal to the tune of $40,000 in an additional 15-year mortgage

February 2007
Refinanced to a new mortgage at for $459,000
30-year adjustable-rate fixed for 2 years at 7.625%

February 2008
Notice of Trustee Sale received.
Behind more than $15,000(!) in monthly payments.
$454,955 owed on loan.

September 2008
Foreclosure finalized. Property now bank-owned.
Listed by bank for $400,000.

November 2008
No bites, price lowered to $360,000. Bank now nearly $100k underwater.

Situations just like these have played out and are playing out all across the Puget Sound with surprising frequency. I have seen many, many properties with similar histories in my research.

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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. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

33 comments:

  1. 1
    Everett_Tom says:

    Same comment I put in the forums for the SnoCo. Records link:

    the direct link didn’t work for me.. I had to trim it down to the base link so I could accept the terms and conditions before the site would load.

    base link http://198.238.192.100/

    (note: now the I’ve accepted the terms and conditions once, the direct link appears to work)

  2. 2
    CD_Carol says:

    Tim
    I think the situation you just described is more common than we think. We recently put an offer on a short sale property. Here are the stats on the property
    Purchased 2004-$295,000
    2004 HELOC-$85,000
    2005 HELOC-$60,000
    2006 HeLOC for $129,000

    The house had been on the market for over a year, originally listed in 2007 at $595,000. Now listed at $310K, we offered $300K. But for various reasons, we pulled out of the offer. When I look at those HELOC numbers, I can’t help but wonder where the heck did all this money go? The house was built in 1986, as far as I could tell, there were no significant improvements made to the house..except maybe a deck and a hot tub. Where is the accountability? They get to walk away from this, whether they successfully short sell their home or forclose on it.

  3. 3
    Matt says:

    I don’t get it. somebody help me out here.
    2003: loan is $256,000
    2003: $32,000 HELOC
    2005: refi loan is $353,180

    so, 256+32=288. how do you get from $288k to $353k? is the difference an equity withdrawal? was that a sale in 2005 instead of a refi?

    – too dumb to figure it out, not so dumb I can’t ask stupid questions.

    thanks

  4. 4
    TheHulk says:

    Yes, its the homeowner’s responsibility to pony up the cash on HELOCs. I believe the law should be modified so lenders can go after these people and wring out every single dollar out of them. OTOH isn’t it also the lenders responsibility to ensure that the asset actually has that *value* and they are pricing in the risk?

    In this case, both parties are screwed. The lender loses money big time. Good. The homeowner loses his/her house. Brilliant. Whatever little money they put into the house has evaporated. Additionally that foreclosure stays on their credit record. I hope no one gives them a mortgage for another 15 years (should certainly be done to people who took out HELOCs like the example you have given above).

    I can maybe excuse a poor first time home buyer (especially non native English speaking people) who got suckered into the American Dream. Cannot excuse people who took out HELOCs and refinanced repeatedly.

  5. 5
    The Tim says:

    Everett_Tom @ 1,

    That’s odd. Is anyone else having that problem? I assumed that if you hadn’t agreed to the terms it would force you to that page first.

    Matt @ 3,

    It’s definitely a re-fi, not a sale. Most likely yeah, there was some serious equity withdrawal going on. Possibly in the form of rolling in other debts such as credit card debt and/or car loan(s).

  6. 6
    Everett_Tom says:

    It occurred to me later that it may not be a cause and effect kind of thing. :P

    All I know, is I tried the link once, it popped up an error page… I went to the base address, it worked… I tried the full address again later.. and it worked.

    I may have just been unlucky with the fist attempt.

  7. 7
    TheHulk says:

    Hey Tim,

    How did you get the figure of 256K in your example? Is that information publicly available?

  8. 8
    The Tim says:

    TheHulk @ 7,

    Yes, loan amounts are available on DEED OF TRUST documents via the Snohomish County records website. However, this information is not available online for King County. To view deeds of trust in King County you must go in person to the recorder’s office.

  9. 9
    anony says:

    Matt @ 3. There could be a second 20% loan in the original purchase if it was an 80/20. Someone correct me if I’m wrong but I don’t think the 2nd is on the deed of trust.

    256K 1st + 64K 2nd + 32K Heloc + 1.18K refi fees rolled in = 353,180

  10. 10
    The Tim says:

    Wouldn’t there be a second deed of trust for the 20% second loan, assuming there was one? There would have to be some document filed with the county recording the 20% loan, correct?

    The summary above includes all documents filed with the county by the party in question from the purchase date to the present.

    Edit: I just looked up the loan info for a friend that I knew got an 80/20 back in ’03, and indeed there are two separate deeds of trust listed with the county, one for $194,400 and a second for $48,600. So in the case described in the post above, I don’t believe there was a second 20% mortgage.

  11. 11
    anony says:

    I stand corrected. Maybe it was a 64K Benz rolled into the refi.

  12. 12
    anna says:

    TIm,
    how do you find the records of loans and HELOCS? I’m renting a house for long term, and would like to make sure the owner won’t default on the house and evict us at a bad time. Thanks a lot

  13. 13
    The Tim says:

    anna,

    Go to your county records website. Here are the links for King, Snohomish, and Pierce. Search public records for the owner’s name (as recorded on the parcel sale) with a start date at the purchase date of the property and an end date of today.

    Loan information can be found on the “DEED OF TRUST” document type. For Snohomish and Pierce, you can view these online. For King County you will need to write down the “Instrument Number” for all the documents you found on the web search and want to view and head down to the King County Recorders Office in downtown Seattle to view them.

  14. 14
    Mike2 says:

    Snohomish: http://198.238.192.100/
    Pierce: http://hartweb.co.pierce.wa.us/

    King pulled all Deeds of Trust about 2 years ago – but back when you could see the terms on recent sales, it was what you’d expect for a market experiencing a housing bubble.

    Ah, Tim. You beat me.

  15. 15
    anna says:

    Thanks Tim and Mike,

    This is why I love Seattlebubble so much. Always something new and fills the void in some significant way.

    Any idea why King county pulled the records from the web Mike? Just curious.

  16. 16
    The Tim says:

    anna @ 15,

    Any idea why King county pulled the records from the web Mike? Just curious.

    I’m not Mike, but I can answer that. The official reason can be found here:

    Deeds of trust filed in King County are no longer available online due to an ordinance passed by the King County council aimed at safeguarding personal information contained in online documents.

    Apparently some people were putting SSNs on deeds of trust, so rather than go through and censor the documents with the problem, they just pulled them all offline.

  17. 17
    b says:

    I feel terrible for that person I hope that my taxes can go to making sure they not only keep the house, but also the boat, car and toys they bought with their HELOCs. Its just not fair to give people free money and then expect them to pay it back, quite a travesty if you ask me.

  18. 18
    economist says:

    The homeowner loses his/her house. Brilliant. Whatever little money they put into the house has evaporated.

    Wrong, they got far more money out of the house than they put into it. The lender’s loss is the borrower’s gain. What they spent the money on is irrelevant – that was their choice.

  19. 19
    Jillayne says:

    Adding up the potential for bank losses is staggering to me. Even now, with the bank losses that have already been reported, it seems to me that we keep throwing money into a black hole with these banks. For example, this REO that Tim is looking at…..how many more are there just like it? Thousands? Hundreds of thousands?

    Why don’t we just call their bluff and nationalize the banking system.

  20. 20
    Jonness says:

    @16:

    Thanks for the info. A house I’m tracking sold for $550k in 2006. As it turns out, it was an 80/20 ARM. It’s currently listed at $370k and says nothing about it being a short sale. What’s the deal on these short sales? People list their houses for way less than they owe. But how is that possible, the bank hasn’t approved a sale for $180K less than owed? Also, isn’t it a little unethical to list a house for way less than owed and not state on the listings it’s a short sale contingent upon the bank’s approval of the amount?

  21. 21
    Dave0 says:

    Anyone have any idea how far back the king county records go? When I look at some houses there are no records for them. I’m guessing that those houses haven’t been bought/sold/refinanced since they started tracking these things online?

  22. 22
    Sniglet says:

    Why don’t we just call their bluff and nationalize the banking system.

    Isn’t that pretty much what is happening already? The Citigroup deal is yet another nail in the coffin of private banking, as the government takes recieves equity in exchange for capital. Without government help Citigroup is insolvent. The $1.2 trillion Citigroup holds off-balance sheet has decline so much in value that the instution would be in violation of reserve requirements if it were forced to properly mark to market.

    Unfortunately, each bailout the government makes only puts more pressure on the remaining institutions which haven’t yet been “helped” (i.e. since people prefer to do business with “safe” institutions backed by the government, rather than private ones with no backing). It is just a matter of time until the next domino falls.

  23. 23
    Mike2 says:

    Jonness: People list their houses for way less than they owe. But how is that possible, the bank hasn’t approved a sale for $180K less than owed?

    My understanding is that banks generally wait until an offer has been submitted before they determine what they’re willing to accept. When a short sale property enters the market, the listing agent has to generate an offer and present that to the bank – then, the bank will either accept, reject or counter.

    I agree it is a bit misleading to offer a property at a price that the seller may not be able to sell at, but that’s how it is for now. The listing agent has to pick a price that is likely to generate an offer and the bank may be willing ot accept. If the two are far apart, the agent needs to err towards the former.

  24. 24
  25. 25
    TheMightyQuinn says:

    Said Ruedas: “It was the American dream, right?”

    I am tired of hearing people claim this. One common theme of these people who make idiotic financial decisions is that it’s not their fault, they were just doing what they were supposed to do.

    These people get into trouble because they let others make decisions for them, instead of activating their intellect and choosing for themselves. Unfortunately many, including the government, see these people as victims, and so kindly offer our money to allow them to continue to make stupid choices.

  26. 26
    softwarengineer says:

    WAIT UNTIL THE INTEREST IS DUE ON ALL THE TRILLIONS OF BAILOUTS THE FEDS PLAN TO IMPLEMENT TO KEEP OUR CREDIT CRISIS GROWING

    Even Obama knows you can’t add taxes to Detroit or Citi Bank, etc….who’s left? Boeing and Microsoft, etc? Even Obama knows if you tax our companies, they pass on the costs by increasing layoffs.

    So who does that leave to pay the bailout mess interest? Look in the mirror.

    I estimate all our net pay, if we’re lucky enough to have jobs in 2009, will be cut like 20-30%. This will cause even more home price deflation, it has to.

  27. 27
    deejayoh says:

    Case Shiller numbers out for September today

    Seattle off 1.4% M2M, 9.8% Y2Y, 10.1% off of peak

  28. 28
    Curtis says:

    TMobile has also cancelled all hirings and now keeping the positions on hold until sometime in 09..
    2009 will be only worse.. So far it was just losing the homes, now people will start losing their jobs. We were in recession in 08 but not many bothered to tell.. 09 will be the deep depression.

  29. 29
    jon says:

    Lenders such as China and the oil countries seem to be willing now only to lend to the US government but not to individual businesses. That is driving this country into socialism as the government takes equity positions in companies in exchange for providing the cash lent by overseas investors. That’s a dangerous proposition, because now the government will be incentivized to pass laws to favor the larger, risk seeking companies that it has equity positions in over the smaller companies that were better managed and took no bailouts.

  30. 30
    Michael Long says:

    I am sick and tired of hearing this anti-tax stupidity. Taxes are good if they increase efficiency and bad if they don’t. Being anti tax is like being anti business or anti regulation these are far too broad of terms to mean anything and the dogma creates very bad policy. The idea that you can get something (public services) for nothing (no tax) is Anti American and frankly just idiotic.

    Here is a list of places where most of the population pays no tax:
    1. Haiti
    2. Sudan
    3. Congo

    These countries are also fully deregulated and very lax firearm controls.

    Here are countries with higher tax rates:
    1. Sweden
    2. Luxemburg
    3. Japan

  31. 31
    jon says:

    The fact that a large number of people in a country are destitute does not mean that the tax rates are low. If they were low, it would be attractive to business, and people would not longer be destitute.

    Here are some tax rates:

    1. Haiti – 40.1%
    2. Sudan – 31.6%
    3. Congo – 65.5%

    1. Sweden – 54.5
    2. Luxemburg – 21.0
    3. Japan – 55.4

    source: http://www.doingbusiness.org/ExploreTopics/PayingTaxes/Details.aspx?economyid=98

    While the rates are comparable, companies benefit from a lot better infrastructure in the developed countries. This makes the net cost of operating lower. So while taxes that are efficiently spent are beneficial, it is the core services that benefit the economy. The rest must be relentlessly trimmed so that don’t breed dependence and become a drag on society.

  32. 32
    bools says:

    I have owned a home in Sammamish for 18 years. House is 4/2.5, .8 acres, remodel, deeded community lake access. Did a WaMu refi March 08 for 385 1st, 95 K HELOC. Property appraised for 600K then. Just got a letter 11/24 from Chase: HELOC capped at 69 K, based solely on declining property values. Visited bank, was told Chase sees bleakness in Seattle, is capping HELOCs all over town.
    My wife’s and my FICO scores were both over 800; surely will take a hit now.
    We the taxpayers hand Chase 200 billion to “free up credit” and they just tighten the predatory racketeering screws. Let’s give them some more billions, but cut off the car companies with no bailout. Chase is far more deserving of taxpayer money than those 2 million blue collar workers and their expired credit, right? Who needs a middle class in America? (See French Revolution)
    Moral of story: Your HELOC in Seattle: USE IT OR LOSE IT!
    Chase: any appropriate response would be redacted by the editor due to policies of this site prohibiting vile and profane diatribes.

  33. 33
    explorer says:

    Said Ruedas: “It was the American dream, right?”

    I defer to George Carlin: “It’s called the Amercian Dream because you have to be asleep to believe it.”

    I don’t care how low the rates go as a potiental buyer. If it’s still way overvalued, I won’t catch a falling knife. Prices have a ways to go, downwards. I don’t live in a world of simultanious Hope and Denial. Relying on one or the other never proves wise.

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