The aftermath of using your home as an ATM

Exploded ATM

Right out of college I worked as a commercial loan officer for First of America Bank in Kalamazoo. Every loan decision in every area of the bank was made manually, by a human being or a committee of human beings if it were large.

One spring, the residential mortgage department was buried in applications and they called upon us commercial lenders to go upstairs and help them process some of the backlog. We sat around a conference table with our HP12C calculators, looking over TransUnion credit reports, applications and income tax returns, manually calculating debt to income ratios. The easy loans (good credit, good employment record, low debt to income ratio) were put on a fast track through and approved, some loans were denied, and others were left behind for the mortgage department to make their own call on the loan. There were no fancy algorithms generating credit scores. That would come along in a few years.

It was a labor intensive process. But what I remember now is that all of those borrowers had equity in their homes. The purchasers were not looking for 107% deals. They had all saved up money for a down payment to buy their house. That was the mid 1980′s, and interest rates were much higher than they are now.

Fast forward to today, and here we find ourselves in the the middle of turmoil in the mortgage industry, where lots of buyers borrowed every penny that they could out of their home, and now, unfortunately here in East Michigan home values are declining just as people’s mortgages are ballooning. Not only do they owe WAY more than their house is worth, they can’t afford the new payments. And they don’t have the money that they would need to bring to the closing table to sell the home.

In the last month and a half, we’ve seen mortgage lenders permanently close their doors, underwriting standards change daily and general confusion as the market reacts.

Everyone is looking for somewhere to point their finger.

  • Did Greenspan make money too cheap, too long?
  • Did investors get greedy and promote ridiculous products to marginally qualified applicants?
  • Did mortgage lenders put consumers into products that the borrower had no hope of repaying?
  • Did Realtors encourage people to buy homes that were more expensive than they could afford?
  • Were consumers lead astray?
  • Did consumers take the money and hope for the best?

Maybe a bit of all of the above. No one factor is totally responsible. Though my opinion might not gain the popular vote, “buyer beware” is in play especially with things like mortgages. Consumers do have a responsibility for making sure that they get the right loan product for their needs. Afterall, the consequences of not understanding how a loan works will bear most heavily upon the consumer, not on the mortgage broker or the bank.

There is a human face behind all these loans where the owner is “upside down” even though the lending decisions are no longer made by human beings. I am seeing people respond in lots of different ways.

  • Some have resigned themselves to staying in their current home and figuring out a way to make it work. They are paying the bills and waiting for the market to turn around.
  • Others are walking a fine line, just barely keeping up and unsure how much longer they can make the payments.
  • Some are walking away. Leaving the house for the bank after having trying to do everything they could to save their credit rating and their home.
  • Others are grasping at straws, looking for any possible solution to the mess that they find themselves in.

It is hard to watch people in these situations. Though there are some cases where we can help, especially if the homeowner comes to us early and is willing to face reality. It is awful telling someone that their home isn’t worth anywhere near what they owe on it, even though they often already know it. Or they don’t know it, and they insist that it is worth that number from the refi appraisal 18 months ago.

In the short run, we will all feel the consequences.  Foreclosures hurt the values of other homes in the neighborhood.  Tightened underwriting standards diminishes the pool of home buyers.  Higher interest rates for jumbo loan borrowers means that even those with perfect credit can afford less.

[tags]short sale, foreclosure, owe more than home is worth, mortgage, michigan real estate[/tags]

Exploded ATM by Pat Hawks

Comments

  1. says

    For every borrower who had no idea of the details of their loan (whether due to it being something exotic, or simply not asking questions before they got to the closing table), I believe there were 1-2 who absolutely knew what they were in for. They assumed values would rise forever.

    I had clients like that, who didn’t ask so much as tell me “it’s okay, values will double in the next year.” And no matter what I said to dissuade them, they remained convinced of the invincibility of the markets.

  2. says

    Jonathan,

    Hence the title. I don’t know the stats, but i know of plenty of people who chose to believe that the refi appraisal was the market value and ended up borrowing hundreds of thousands more then their home was worth, even at that time. Or they chose to hope that the market would catch up with their spending habits, as you said.

    Thanks so much for stopping by!

  3. says

    Great post. Add in the way refi’s were being handled. Rather than 70% LTV it was often much higher than that. Cheap money, the misunderstood idea that real estate never drops in value, the inability to listen to those with more experience….on and on. It is so sad to see people lose their homes when they have been in them for many years but just got caught up in the ATM mentality a few years ago. Our president did not help the situation either when he kept telling everyone it as going to be just fine and go out and go shopping. Irresponsible comments like that helped to fuel the fire.

  4. Roosevelt Williams says

    I have question: My question is, can I sell sell my home even though it not paid for?. If so, would you explain to me how? Thank-you, Roosevelt Williams

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