Posted on the OCRegister Mortgage Insider by Mathew Padilla:
Homeowners who treated their houses like cash machines, tapping the equity as home values rose, are among the most likely to end in foreclosure, even more than those who bought at housing’s peak, a new study finds.
Often homeowners have had second, third and even fourth mortgages at time of foreclosure — a trend not adequately addressed by any of the federal or state foreclosure avoidance progams, said Michael LaCour-Little, a finance professor at Cal State Fullerton who authored the study.
LaCour-Little tracked all houses and condos set for foreclosure auctions, known as trustee’s sales, in the first two weeks of November 2006, 2007 and 2008 in Orange, Los Angeles, Riverside, San Bernardino and San Diego counties. He is presenting his study today in Washington, D.C. at the mid-year conference of the American Real Estate and Urban Economics Association.
I plan a bigger story on his findings, but wanted to share a few results now.
For example, for the early November 2008 data sample, he tracked 2,358 properties. Here’s what he found:
- They were purchased at an average price of $354,000 and average year of 2002 (long before the housing peak of 2005).
- Total debt on the properties averaged $551,000 at time of foreclosure. That’s 56% more than the properties were worth when purchased, meaning at least that much was cashed out!
- An automatic valuation model estimated average value at time of foreclosure was $317,000, which suggests a combined loan-to-value at foreclosure of more than 170% ($551,000/$317,000). And that is a conservative estimate. Properties that banks later sold had an average resale price of $271,000!
LaCour-Little is, well, diplomatic in his conclusion that “borrower behavior, rather than housing market forces, seems to be the predominant factor affecting outcomes.”
More telling is a rough calculation the professor did, estimating that for all properties in his study homebuyers made downpayments of $262 million and cashed out $2 billion, for a 40% return on their money over six years.
The professor stops there. But my inference is — are these people government officials should be trying to help keep their homes?