no third solution

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Serial Refinancing, Part 1

July 5th, 2006

Previously, I wrote about the mortgage bubble, and one of its causes, the widespread avaialbility of historically rock-bottom interest rates. Well, a corrollary to the rock bottom interest rates, and the ever-decreasing rates of the last five or ten years is that of the Serial Refinancer. This nefarious individual cashes out equity at an alarming rate, leaving his financial future in a rather perilous position. I’ll discuss it at greater length in the next few days, but I wanted to share an anecdotal example of just such a borrower.

Those of you who know me might be aware that I work in real estate title insurance. I see all of the dirty work that goes into securing a mortgage or buying a property. With respect to the truth-in-lending and privacty acts, the following is completely anonymous, but I assure you it happened:

A few weeks ago I came across some titlework that looked like this:

House was purchased in 1973 for $20,000, there was a mortgage in an undisclosed amount to help secure the purchase price of the property.
Last November, $25,000 worth of equity was withdrawn in the form of a 15-year note.
The house had previously been refinanced in 1987, 1991, 1992, 1998 and 2004, each time taking out successively more “money.”
=====
The property is currently encumbered by approximately $190,000 worth of mortgage debt, and the house is listed for $212,000.

IF (and that’s a big “if”) they’re lucky enough to get $212K for the house, the homeowner will be lucky if he’s able to cover the broker fees, closing costs, titlework, home warranties, etc., and he’ll walk out the door after selling his home for 33 years with not a penny to show for it. Not so much as a pittance of equity to roll over into a downpayment on a condo to retire in, or a new, smaller house elsewhere.

Heck, for all I know, these people have a Million in the bank. I don’t see their credit reports (usually) so I have no idea what their financial situation is. But what I do know, is that this sort of serial refinancing is all too common. And most people don’t have a cool Million in the bank to live out their retirement on.

…Hope the kids don’t mind if you move in, gramps. Equity is only a long-term benefit if you can somehow hold on to it. The “real-estate-qua-investment” ought not be treated as an annuity or an income stream for current consumption. It is best viewed as a vehicly by which one can acquire a relatively stable, relatively liquid emergency reserve. And even then, there is no guarantee of appreciation.

But hell, I know people my age who cash in their 401(k)s to put downpayments on houses, or to take vacations. Responsibility, it seems, is not high on many American’s “to-do-lists.”

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no third solution

Blogging about liberty, anarchy, economics and politics