Damage of Foreclosure after 5 years of payments

[dickthegrouch]

I haven't seen anyone else remark on it so I think it's time to generate a little more outrage out there in the hopes of finding a more equitable way of doing things.

If you took on a $250,000 mortgage at 6.25% a few years ago (and, trust me, NO-ONE in urban California took on that small an amount in the last 10 years. $675,000 was the median price in Santa Clara County just 14 months ago) the Principal and interest payment was $1531.32/month.

In the first 5 years you paid a total of 60 * 1531.32 = 91,879.04
However, the amount that went to interest on that was 75,700.68 (82%)
and only $16,178.36 to principal.
This is not news to anyone who's bothered to calculate out the mortgage.
In fact it take 19 years for at least half that monthly payment to go to principal every month.

Now back to the original point:
What happens when the bank forecloses on you after a small number of years?

All that investment you have made goes to nothing. The bank has stripped assets out of the foreclosed mortgagee for however many years with virtually no risk to themselves (they get the property to resell for whatever they can get). The lower the loan to value ratio, the more the mortgage holder loses.

When all these funds were essentially phantom to begin with (being highly leveraged) is it right that the bank should be getting away with everything?

It just struck me reading another thread about poverty, how many of today's poor are being created. It is by greedy banks stripping vast amounts of wealth out in the early part of the mortgage.

Just another way in which the system is set up to screw the largest number of people possible.

[leftofthedial]

1. capitalism is theft

otherwise it wouldn't work and no one would do it. you weren't screwed when you took out the mortgage; you were screwed when you were born in a capitalist country.

[MercutioATC]

2. That's the way ANY ammotization schedule works.

It's a simple formula and there's nothing wrong with it.

[SoCalDem]

3. MANY home loans (especially in CA) were Interest ONLY

for a few years, so not even your $16K figure would apply. They paid all or most of the money without even touching any principle..but that was the whole marketing "plan". Rents were/are sky-high out here, so they relied on the fact that people would gladly take on a mortgage that "cost" them "little more than rent", and then "later" they could refi or sell and make money. Two facts came from that ploy.

1. Many people "bought" houses they could not afford (under any circumstances). They put nothing down, so they really "lost" nothing. They did have to endure the ruined credit and the hassle of moving, but for many, their credit may have been sketchy already, and that's why they were targeted for those goofball loans.

2. They would have had to live somewhere, so they got to live in a pretty nice place, and even if they "lost" it, they had plenty of company, and during the pre-foreclosure timeframe, many just stopped paying, and stayed there as long as possible, without paying a dime. We know a couple who "saved" about $10K prior to being finally made to move on. They had NO trouble finding a rental house to live in, because they had cash saved up, and contrary to common wisdom, their ruined credit did not hamper them all that much.

[Celebration]

10. exactly

The banks are losing money, too, on these foreclosed homes. Hey, it is called DEFLATION!!!

Nobody wins, generally. The banks would much rather have their loans repaid than foreclose.

[Hannah Bell]

11. no, they lost money on their *bets* on the properties.

[Statistical]

16. +1.

Banks just want a stream of income.

They don't want you to refinance.
They don't want you to pay late.
They don't want you to foreclose and destroy the house and then they have to sell it into a depressed market and the 6-9 months it takes it generates no income and finaly they write the entire note down as a loss.

[truedelphi]

4. Very good point, Dickthegrouch

Another point that needs to be made is that as far as I can tell, the rich get all the benefits of our present income tax system. They do not expect ever to pay very much. My dad was a CPA, and when he did taxes back in the early '80's, people making over 100K would be grumbling that they were paying 10 K.

Meanwhile someone making $ 30 K might be paying 5 K.

So the little tiny bone that got thrown to the middle class was that to makeup for the unfairness of the tax system, IF YOU MANAGED to buy a house, then you would be excused in total the interest you paid to a bank for that mortgage.

As house prices mushroomed in Califronaia, NYC, Washington DC and some other areas, many in the middle incomed class were never going to own a home. SO they basically lost the right to this mortgage deduction.

But for the rest of the Americans, the notion that when you did get a 1.5K monthly mortgage payment, you WANTED it to go mostly for interest so that you could make that interest tax deduction worthwile. And so America as a society put up with the mushrooming of house prices - SIDEBAR: Unless you live in California, you don't get it - in 2005, a 645 K home in San Anselmo CA was a three bedroom bungalow with storm damage and had only a small yard. (When I first moved to Califronai in early eighties, I expected to find my friends who owned 200 K homes to have a stable and a pool, like a 200 K home would in Ohio. It was shocking to see the pieces of crap that they had been sold for 200K.)

In my purview, the whole unfairness of the tax system propped up the notion that it was okay to pay this $ 1,500 a month mortgage and see that it only went to interest.

[xchrom]

5. i wish you'd combine your post and the OP for one OP.

or some one -- great points made.

[dickthegrouch]

6. Fascinating - That's something I hadn't considered

I realize there's actually something on the other side I hadn't considered either.

The bank essentially generated funds out of saying look I have this promise to pay me $551,274 (over the life of that same loan from my OP)

They then leveraged that money early to make more loans.

If the loan is closed out early they are effectively left holding the bag for the phantom difference between what they actually received and what they expected to receive if the loan went to maturity.

Silly question: How many loans actually last longer than about 7 years? Do they take that into account or are they supremely greedy and leverage the entire 30 years worth of payments (that smacks of more fraud, but I wouldn't put it past them).

[imdjh]

7. The truth is also, that if America's corporations weren't in the Dark Ages....

.... you couldn't get an outrageous price for a house anywhere except perhaps warm waterfront.

Of all the industries which should not drive local real estate prices, you would think that "high tech" would be at the top of the list. Is there a good reason for most people who work in Silicon Valley's computer world to live in Silicon Valley? No. Can they replicate the "lifestyle (sorry I have been there and I don't get it)" much more cheaply elsewhere? You bet. So, why aren't these high tech companies leading the way for telecommuting? I have a friend who lives in Florida and works in California. I have another friend who lives in Florida and works in DC. Both of these people work for foreign owned corporations. I have known some local people who telecommute to some degree to workplaces that aren't terribly far away, but they are few and as soon as they got promoted they had to start commuting again.

We were supposed to be telecommuting ten years ago. When is this going to happen?

[w4rma]

9. Telecommuting happened, but not for Americans. Outsourcing / Telecommuting to India happened. (nt)

[jody]

8. Please explain "stripping vast amounts of wealth out in the early part of the mortgage"? n/t

[truedelphi]

12. Jody - I think that what that phrase refers to is that

In his exqmple (I will copy ane paste here:)
If you took on a $250,000 mortgage at 6.25% a few years ago (and, trust me, NO-ONE in urban California took on that small an amount in the last 10 years. $675,000 was the median price in Santa Clara County just 14 months ago) the Principal and interest payment was $1531.32/month.

In the first 5 years you paid a total of 60 * 1531.32 = 91,879.04
However, the amount that went to interest on that was 75,700.68 (82%)
and only $16,178.36 to principal.
This is not news to anyone who's bothered to calculate out the mortgage.
In fact it take 19 years for at least half that monthly payment to go to principal every month


In that example the person paying the mortgage for five years has paid off 91K on a 250K purchase.

Now depending how the bank got the house, that amount could actually pay for the house. (A lot in my part of the countyry was about 10K in the year 2002 - and then a 70K pre fab house put on that house - the bank sold that kind of package to the city person moving out here for around 250K)

And now they are re-assuming possession of the house -even though you have made these payments. So they (the banks) have stripped the wealth from you the mortgage holder to themselves, and they have your house and you have nothing except a huge smirch on your credit rating. And in my example - they are not really out anything.

[jody]

13. Your say "paid off 91K on a 250K purchase" but most of the initial payments went for interest.

If one wants to pay off the principal faster, then payments must be increased and that's a choice a borrower makes when entering into a mortgage, e.g. 30 yr vs 20 yr vs 10 yr.

[truedelphi]

14. Yes exactly,that is the point.

A person paying one of today's modern loans is paying interest first. So they get NO CREDIT toward the actual item (i.e. the principle)

That is what is meant by the expression "stripping vast amounts of wealth" refers to.

I mean, if you borrowed 250 K from me rather than from a bank (assuming I had 250 K to lend you,) and over five years you paid off 91K, in our friendly little loan agreement you might be paying off a great deal toward the 250K purchase price of the house (and lot.) So after those five years, you'd maybe own the garage and the back yard by the time five years had gone down.

But the modern loans are set up so that the borrower is not actually getting the credit toward the item, or even part of the item, during the first long set of years. And the wealth is therefore effectively stripped away, should the borrower stop making payments.

And like I tried to set up as an example - banks in my community only paid out around 90K - the lot itself cost around 10 K (circa 2002) and the pre fab house that was put on the lot was another 70 K for the bank. Sure there were also additional expenses - like permits, septic tanks, power lines etc. But even if the bank was paying out 120K for the house it saw built, it would realize a a 100% profit on the homes they put up and sold for 250K.

Then when the buyer defaults, they have the buyer's 91K (in payments) plus all of the house and all of the lot given back at foreclosure.

[jody]

15. OK but the borrower has used the principal for the time period so that that's not a problem. If one

wants to argue the interest rate is too high, that's another issue.

[sammytko]

17. exactly, you had to live somewhere

just look at it as rent.

[truedelphi]

19. I was not the person that used the expression.

I was explaining what the expression was concerned with. (Since you asked.)

In a sense I agree with the expression, but in another sense, I see your point also.

The people in this scneario did have use of the house for a certain time, and they also had the ability to sell the house during the boom times as well.

However in a lot of cases the product that was sold was a truly shoddy product, the price was very inflated and the bank made out so well on the original sale that I can only shed crocodile tears for them when it comes back to them in foreclosure. The other way of looking at the same situation is no one held any gun to the head of anyone who bought a house while the market was running hot. Unfortunately in America, people are only into real estate when the markets are hot and very opposed to getting into real estate when the market cools off. They love the hype.

[Statistical]

18. "A person paying one of today's modern loans is paying interest first"

come on.

All loans have always worked that way if they didn't the only way to make it pay principle equally would be an un-equal payment.

Take a $360,000 loan.

0% interest, 30 years (360 payments) = $1000 in principle + $0 in interest.

Now lets add some interest. 6% interest.

Now if you want the principle to pay down equally (i.e 1/360th of loan paid off each month) you would need to pay $1000 in principle each month.

Month 1: $1000 principle + interest ($1000 total principle paid)
Month 2: $1000 principle + interest ($2000 total principle paid)
Month 3: $1000 principle + interest ($3000 total principle paid)
....
Month 360: $1000 principle + interest ($360,000 total principle paid)

The "problem" is every month the interest is based on the existing balance.
So month 1 the interest is paid on $360K. On month 360 the interest is paid on $1K.

So 6% interest = 0.5% per month.

Month 1 interest is 0.5% * 360K = $1,800
Month 360 interest is 0.5 * 1K = $5

So your payments would begin at $1000 + $1800 for month 1 = $2800 and end at $1000 + 5 = $1005 for month 360.

Your payments would steadily decline because the principle payment would remain the same but the interest amount would decline.

It does create some budget problems because maybe you can only afford $2000 per month. Well starting at month 180 your payment would be $2000 and decline every month after that.

Of course that doesn't help because for months 1-180 your payments would be $2800-$2001.

Banks solved that problem by amortization.

Instead of SAME PRINCIPLE + DIFFERENT INTEREST = DIFFERENT PAYMENT
it is DIFFERING PRINCIPLE + DIFFERENT INTEREST = SAME PAYMENT.

You pay less principle up front and more interest however your monthly payment stays the same.