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.
Bought for $320,000
Mortgage of $256,000 – 30-year, 80% LTV
Acquired a $32,000 HELOC
Refinanced to a new 30-year mortgage for $353,180
Equity withdrawal to the tune of $40,000 in an additional 15-year mortgage
Refinanced to a new mortgage at for $459,000
30-year adjustable-rate fixed for 2 years at 7.625%
Notice of Trustee Sale received.
Behind more than $15,000(!) in monthly payments.
$454,955 owed on loan.
Foreclosure finalized. Property now bank-owned.
Listed by bank for $400,000.
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.