This post AIN'T about Evander Holyfield.
This is an opportunity to put some order around the claims that are often expressed on "Black-Wing Grievance Talk Radio" regarding foreclosures and WHO "sucked the money out" of the house.
For starters - there are some discrepancies between the "market value" of the house (more accurately the high mark that it once reached), which was $20M and the cost to construct the house - and the original purchase price of the land. I see $10M as the "cost".
The Acquisition and Closing Process And Construction Costs
At some point in the past Mr Holyfield had to purchase the land on his estate. There was some "per acre" cost to make the acquisition. He actually has an original home on the same property - which is still standing and his new house was constructed years afterward.
So the new house was architected, financed and constructed on the property that he already owned.
What we don't know is if Mr Holyfield used his own capital assets on hand for the original construction costs - and then later took out mortgage against the home because he needed cash OR if he used bank financing from the start and got behind on his payments.
Whom ever was handling the financing - all of the building supply companies, general construction contractors and landscapers - GOT THEIR MONEY in a time frame that was in line with when the products and services were rendered. The first part of the "Where Did The Money Go?" mystery is right here. These are hard costs and not values that fluctuate with the market.
The closing process on the normal new home construction (normal meaning us 99%'ers) has it that the bank gives the builder of the home a check for the entire 30 year mortgage price - be it $200K or $2M or $10M.
The builder needed to be financially solvent along the way to pay their building suppliers and laborers along the way as their inventory of houses are known to sit, unoccupied, until an approved buyer comes along and closes.
So again - you as an individual committed yourself to a 30 year mortgage. The bank that approved you pays either the builder of the new house or the owner of an existing house (normally a combination of the home owner with equity and another bank that still has an unpaid mortgage that it is servicing).
IF there is a positive gap between the sales price and the total cost of bringing the new home to market - the builder profits.
The bank profits as that $200,000 check paid today will render more than $450,000 in payments over the 30 years that the house mortgage is serviced.
WHO GOT THE MONEY? - See that those with TIME in their favor as they hold title to a physical asset that (hopefully) appreciates are the greatest of the beneficiaries.
The Appreciating Asset
The first point is important because it brings up the first issue that is so frequently mishandled on talk radio: property value and the ability to borrow against this asset.
Of course, in the context of the claim that "Black people were TARGETED for 'Subprime Loans' " the issue regarding how gentrification has caused property values to get bid up is not far behind. The fact is that if a person's home is fully paid for after they completed their (most likely) 30 year mortgage if they do not transact any more mortgages against this property the only constant liability they will have which could produce a lien and force them out of their home is property taxes. (I an not considering maintenance costs, lawsuits, eminent domain or condemnation as 'unfit for human habitation' because of code violations).
The bottom line is that while the home owner might indeed have been strapped for cash and sought to "take money out of her house" to pay bills, etc - it was the initiation of a new loan that started the cycle, not the inflating housing prices around them that triggered anything.
Of course there were shady banks who were underwriting many of these loans. Many assumed that by lowering their lending standards and setting up new financial products in the "secondary market" that they could accept in more risk and then spread their risk across the market via these new products. (Bundling mortgages and selling them to other investors).
It is also true that many "Mortgage Brokers" played a large part in the fiasco. Doctoring financial information to bring the application in line with what they knew the underwriting bank would need to approve the loan. The broker wanted the commission check. The banks failed to do sufficient quality control to root out the higher numbers of fraudulent paper being sent their way. They were assuming that the shared risk would mitigate their own exposure.
The Subprime Loan
The term "Subprime Loan" is a characterization of the RELATIVE spread on the APR of a mortgage rate offered to a "distressed client" as compared to "prime loans" - that being the rate that is offered to customers with good credit and sufficient collateral.
While the rates were valley that you see between 2000 and 2008 (below 6%) those individuals that were offered "subprime" rates were quoted rates of 8% and above. The point is that the fault was these rates were higher than the market rate and the rates that the buyer would have qualified for had the underwriter and the broker been more transparent with the consumer.
It is also true that many of these loans were "teaser rates". Low rates to get the homeowner in the door which later ballooned to a higher rate.
I have a mixed opinion on this practice. On the one hand when my wife and I were newly weds she forced me out of my comfortable bachelor pad - a 2 bedroom apartment where I was paying $650 a month and quite content, into a house. We had solid income but no credit together and were were in our first year of marriage. Few banks wanted to take the risk so we had to use a "subprime loan" - with an adjustable rate to get into the house. A mortgage broker who is also a family friend told
The system was abused as this same valuable "last chance" tool was used to get people who otherwise had no business getting locked into a 30 year contract - let a lone a 3 year rental agreement for an apartment - were offered these loans.
It should also be noted - BECAUSE I HEARD THEM - that the very same "urban radio stations" that are now complaining about Black people having been targeted by 'sub prime loans' played a large part in the original propaganda that brought the "sheep to the slaughter". They had remote broadcasts at new subdivisions that had "affordable housing" meant for lower middle class working people. They made sure to tell the audience that they had "financing specialists on hand". "Why rent and pay someone else when you can own a home of your own?"
The bubble effect where there were multiple co-conspirators lead to the inflation of the home prices and then the eventual collapse. At the end of it all - regardless of the "flipping scheme" which draws cash out of the home - if you don't have an occupant that is actually paying money for the privilege of living in the house - the house of cards financing scheme is going to collapse.
The Foreclosure
The great train wreck.
After living in the house for 5 years - your cash flow can't handle the burden that the mortgage has placed upon you. Regardless of if the loan had been a fixed rate all along or you got caught up in an adjustment - you can't pay and you get behind on your mortgage.
WHO GOT THE MONEY?
The one aspect that most people don't consider is the money paid for the privilege of occupying the house. You are paying "rent" (if you will) but you are also working toward the eventuality of becoming the title holder of the asset, hoping that the asset is now worth more than what you originally paid for it.
5 years in a house - paying $1,000 per month you paid out (60 x $1000) = $60,000.
That $1000 per month is not all to the bank though.
- Money paid into escrow to pay your property taxes to the county
- School Taxes
- County Tax for municipal operations
- Mortgage Insurance
- Interest
- Principle
I speak from personal experience when I say that enlightenment about how little progress you are actually making in paying off the home is when you do a mortgage refinancing and note how much you still own in principal on the previous loan despite years of paying.
You pay mostly interest during the first portion of your engagement. Even though I had been on a "payment accelerator" that was supposed to knock a 30 year loan down to 24 years - I saw that I was merely on a hamster wheel.
Still the local schools received funding and the local government retains its tax base to provide for needed goods and services.
When your house is foreclosed upon - that sample $60,000 is functionally lost to the home owner. On the one hand you paid to live in the house. Any money that might have been on paper as the spread between the mortgage price and the market value - in theory - now goes to the bank.
Don't get too excited though over the banks' ill gotten profits. A market that has a normal default rate can sustain the home price, allowing the bank to quickly shed its inventory of "REO" or bank owned properties. A market in which the bottom has fallen out is a serious drag on the bank - regardless of how "evil" it has been in its conduct of business.
With the dual burden of an increasing inventory of REO homes and a plummeting market price - the red ink on the bank balance sheet eliminates any short term advantage they recognized during the "Wild West" of the origination process.
Today we are seeing a massive reset of home values as the price that they were bid up to can't be maintained in the market. There are fewer buyers willing to purchase the home at the posted price.
It should also be noted that about 6 years ago we heard stories about how decades from now the average home market price would spiral to some astronomical number because they were predicting constant increase from their vantage point at that time. This meltdown ensures that this will not happen during our day.
(To be continued in the next post that I have queued up in reference to the consequences suffered by the communities with large inventories of foreclosed homes)
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