Anatomy of a foreclosure

In the late 1990s, an entrepreneurial mechanic with a wife and one child bought a house for $65,000 with a down payment of $1,500 and took a fixed-rate FHA mortgage. His wife, a beautician, got a job as a clerk at a discount store. In the midst of the speculative real estate boom in Merced six years later, with three children now and a warehouse job, he took out an equity loan for $126,000, did some remodeling on the exterior (new stucco, paint, new lawn turf, foam sculpture), bought furniture, a big-screen TV and a nearly new Cadillac Escalade. It is estimated that about $35,000 went for the home improvements and goods. Where did the other $91,000 go? It didn’t go into the property. Why wasn’t the equity loan monitored for home improvements?  A year later, with four children and two big SUVs,  the speculative real estate boom in full force, he took out a conventional variable equity loan on his house for $246,500. The paperwork doesn’t reveal if this was a wrap-around loan, including the mortage and the first equity loan. He bought a five-bedroom, two-story house for more than $300,000. He put about $160,000 down on the new house, bought an estimated $60,000 worth of new furniture and another used Escalade and hoped to put a swimming pool into the yard of the new house. It can only be speculated if or when he got an equity loan on his new house. He rented the old house to relatives, with an option to buy. The rent was based on the variable equity loan. It began in 2006 about $500 a month. The relatives have two children. The husband built trailer houses; the wife had a good job in food service. In the next two years, they had another child and the husband lost his job and she quit her job to go to school – all on the expectation of buying this house. In April, 2008, payments on the variable loan of $246,500 increased to more than $2,500 and the owner informed the relatives with an option to buy has increased five-fold. The relatives had no clue that the loan was variable. It’s possible the owner didn’t quite grasp that either. In any event, the relatives went shopping for a loan, without success, as the boom was turning into a bust.Now, let us consider the economics here. If the owner of the two houses, now with five children and a brand-new custom pearl white Escalade including the latest in rim technology,  had just stayed in his first house and not taken out two equity loans, he would have been paying between $400-$500 a month on his mortgage. Even if he had spent the entire $126,000 to expand his 900 square foot house on a 10,000 square foot lot, and not borrowed another $246,500, in part to buy another house more good life toys, he might have been able to survive. Result, the relatives had to move out, the house is empty and in foreclosure, and the owner is months behind on his mortgage payments on his present house and his variable on the new house will kick in a year.Recently, someone seeking to buy the house, contacted a realtor. The realtor, after examining the documents for a month or two, told the prospective buyer that it is extremely difficult to tell who actually owns this house, title being clouded by 1) sloppy title-company work to begin with; 2) the number and size of the various, variable loans; and 3) who might possibly own those loans now. The present situation: here is an empty house worth between $50,000-$75,000 for cash, given that few if any will qualify for a loan on it in the present lending climate. Meanwhile, the grass has died in the front and back, junk was left behind, an old pickup stands in the driveway. It has joined that ever-growing number of residential properties in foreclosure, in decline and its title may be clouded by the different loans, all with different companies. Nor is it clear to realtors or prospective buyers whether there was a consolidation of loans or not. It will not be clear before the house goes through auction on the county courthouse steps. What were the owner and his lenders thinking? At a broader level, what were all the Valley business and political leaders thinking as they approved project after project, predicted the growth boom would go on forever, and universal prosperity would come to the Valley without jobs to support the inflated prices of the real estate?  If they became concerned, the public certainly heard nothing of their concerns. Whatever else they did, while predicting eternal housing growth at ever-rising values, they did not see the largest confidence game the world has ever seen, evident as early as 2000 to Arab bankers in Saudi Arabia and the Gulf States (Hsu, Global Research, 10-23-08).The entrepreneurial warehouseman should not have been given the first equity loan on his first house. Politicians from city councils to boards of supervisors to state legislators to members of Congress and the media are blaming poor people for their irresponsibility. Meanwhile, in Merced, the foreclosure section of the Merced Sun-Star announced 10 days ago that Hank Vander Veen, the publisher of the Merced Sun-Star, presumed to be far better educated, more worldly and wealthier than the warehouseman, walked away from a $507,000 house in suburban McSwain, and today the foreclosure section notified that public that two top community leaders -- Paul Lo, an attorney, and Merced City Councilman Noah Lor -- walked away from a $236,000 house in Merced.