Living beyond your means

This is an extreme example of the cash-out game, but it shouldn’t be hard to understand why the US economy is so completely hopeless as a result:

It’s obvious from looking through the property records that many borrowers supplemented their lifestyles with regular trips to the home ATM machine. The regularity and the size of these withdrawals is astonishing. It also explains much about why houses are so popular in California. If owning real estate gives you the opportunity to obtain hundreds of thousands of dollars for doing absolutely nothing, ownership will be highly desired; in fact, it becomes the primary reason people buy homes. Californian’s live in their own personal ATM machines.

The owners of today’s featured property paid $441,000 on 4/25/1991. I don’t have their original mortgage information, but it is likely that they put 20% down ($88,200) and borrowed $352,800.

* On 5/27/1997 they obtained a stand-alone second for $50,000.
* On 12/7/1998 they refinanced their first mortgage for $387,500.
* On 3/26/1999 they got a $47,500 stand-alone second.
* On 12/28/2000 they refinanced with a $441,000 first mortgage and crossed the threshold of borrowing more than they paid.
* On 3/31/2004 they refinanced with a $536,250 first mortgage.
* On 10/5/2004 they obtained a $628,000 first mortgage.
* On 11/30/2005 they refinanced with a $686,250 Option ARM with a 1.5% teaser rate.
* On 5/3/2007 they obtained a second mortgage for $15,764.
* On 7/3/2007, after witnessing the above patter of serial refinancing, World Savings Bank brilliantly loaned them $788,000 in an Option ARM.

Total property debt is $788,000 plus negative amortization and missed payments. Total mortgage equity withdrawal is $435,200 including their down payment. Total squatting time was minimal as the bank moved quickly to evict these squatters.

The important thing to understand from this is that there is no such thing as “home ownership” with a mortgage. It’s just renting from a bank. The problem is that debt is intrinsically inflationary, (inflationistas take note regarding the implications of this in a debt-deleveraging environment), so the willingness of others to take on debt severely harms the ability of more prudent individuals to make purchases without debt.

On a related note, watch for panic over the UNEXPECTED collapse in home sales next week. Now that the federal credits have expired, Texas monthly home sales have fallen 25% to the lowest July level since 1997.

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