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Monday, March 19, 2007

So....were the big-screen TV, the Escalade and the new kitchen worth it?
Posted by Jill | 7:43 AM
I've taken a fair amount of ribbing from certain quarters about my little piecemeal kitchen pseudo-renovation. Way back when housing prices were at their highest, a co-worker nagged me relentlessly to just take out an equity loan and spend the $50,000 - $75,000 it would cost to REALLY remodel the kitchen, instead of taking two years to reface the perfectly intact and solid pine cabinets, deal with all the hot-and-cold-running people required to reconfigure a few things, put down a new floor, and then decide if a laminate countertop will suffice in the Age of Granite, when isn't putting granite over refaced 1950's-vintage cabinets sort of like putting a Blackglama mink on a street hooker?

But we didn't succumb to the Siren Song of the Home Equity Loan, and that leaves us far better off than many NJ homeowners:

Need some cash?

If you're like a lot of people, you've found that what's in your wallet is nothing like what's in your house.

As wages stagnated and real estate prices doubled in the first half of this decade, homeowners discovered their home was their best credit card.

Refinanced home loans, home equity lines and second mortgages have become the way to pay for Hummers, high-tech kitchens and vacation cruises. The interest rates are usually lower than the rates on credit cards, the interest paid is tax deductible, and there's been a lot more cash available in house equity.

The numbers are staggering. New Jersey homeowners borrowed $183 billion on mortgage refinancings and home equity loans from 2003 through 2005, the peak refinancing years, an Asbury Park Press analysis shows. Some homeowners may have refinanced more than once in that time. Nonetheless, that's enough to pay for all the fast food meals in America this year or to run state government for the next six years -- tax free.

But now bankers and economists worry some homeowners have overspent like families at Disney World. Default rates on mortgage loans are rising, and real estate prices are falling as higher interest rates have made loans less affordable.

[snip]

James F. Brown, a Spring Lake Heights mortgage banker, said demand for loans that effectively provide cash from house equity has been so high that he has, in recent years, tried to persuade people to borrow less money and not put themselves in so much debt.

Brown, 52, a 24-year mortgage industry veteran, said he's failed to dissuade a single borrower.

Brown said he recalls the days when people tried to actually pay off their mortgage and have a party to burn the paperwork. That's not a modern-day attitude, he said.

"People are sitting back and saying: 'Tell me how much equity is in my house, I want to consolidate my debt, and I'm not worried if I ever pay my house off,' " Brown said


Perhaps it's because there are so many people who have paid so much for their homes that the idea of paying it off is simply laughable. We were lucky enough (or smart enough) to buy at the bottom of the market in the mid-1990's, refinance three times as rates went down, and resisted the call to use home equity to buy more luxurious cars, or vacations, or home improvements.

My immediate area hasn't been hit all that hard by the falling housing market as yet, largely because most people who had hoped to get out before the crash pulled their homes off the market when they couldn't get peak price. Even so, I would guess that prices have fallen about 10% for houses like ours. No, we don't have a bit-screen TV and a home theatre, and a spanking new kitchen with cherry cabinets and granite countertops, and we still have the ugly red carpeting that the previous owners obviously spent some money on, because it is wool and is only now, 40 years in, starting to show serious wear, and most of the money we've spent on the inside has been on maintenance not improvements. But at least we probably won't have to deal with this:

You are in trouble if John Bittel calls you.

If Bittel contacts you, it means your mortgage company is ready to throw you out of your house.

Bittel, of Stafford, is a property investor. He buys houses from people who can't pay their mortgage loans, or he buys them at foreclosure. Then he renovates the houses and either rents or sells them.

Bittel admits he and other investors may look like vultures to those who don't understand the business. But they play an important role in the real estate market, he said.

"Even a vulture has a purpose," Bittel said after one sheriff's sale last month. "He cleans up the mess."

[snip]

The man whose job it is to represent lenders at the Monmouth County sheriff's sale auctions, at which foreclosed properties are sold, said he sees a lot more trouble coming.

That's especially true for owners of large, suburban homes who bought during the boom times, have since run into financial trouble, and now are dealing with a declining market, said real estate broker Dennis Kessler, the lenders' agent in Monmouth County.

"We're seeing more foreclosure action at the top of the market than at the bottom," Kessler said. "You see a lot of people who can't sell their homes, and they're really extended out."

[snip]

Many homeowners in trouble during a real estate downturn attempt to rent out their houses in order to cover the mortgage. That won't work for many this time, Kessler said.

"You can't rent a McMansion that's worth $800,000 and has $20,000 a year in property taxes," he said.

[snip]

Dennis DeBernardis, 57, of Freehold, a property investor and retired New York City police officer, sat motionless after a sheriff's sale in Monmouth County last month.

He had researched the loans on the properties and driven by the houses, but never raised his hand once to offer a bid.

"There's no equity in these," he said. "What's coming through is these interest-only, balloon mortgages, no-money-down loans."

The scene has been much the same for investors in Ocean County.

"Look at these judgment amounts — they're huge," said Bittel, the Stafford investor, as he slapped the sale list. "That house has a $254,000 judgment. It's only worth $200,000. Look at this one in Brick: $500,000 to buy it today. Forget it."

After a while, Bittel and other investors predict, the banks will have to start unloading properties for whatever price buyers will pay.

When that happens, real estate prices in general will drop, since those sales will be used as comparisons for homeowners who put their homes on the market, Bittel said.


...though we will not be immune from the fallout from a huge rash of foreclosures. And that's what's so dangerous about the current environment. No matter how careful you are, no matter how frugal you are, no matter how much you resisted the calls from lenders at the beginning to buy more house because you qualified for more, the calls from lenders through the years to tap equity, no matter how long you waited for new siding and windows while you methodically saved the cash -- when houses on your block start sit unsold at sheriff's sales and become boarded-up, bank-owned properties, well it could make the Great Depression look like the 1990's.

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