So what has happened to those who took out these HELOCs and MEWs years later? These are not purchase money loans so there is some recourse I assume (but my knowledge is limited here)... I'd like to hear your stories or of people you know. What did they do with the money (over $100k in some cases)?
True and interesting tales of HELOCs and MEWs.
By American in Japan Follow Tue, 19 Jun 2012, 8:11am 1,738 views 14 comments
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All that money is smoked and did not help economy when it needed most of it.
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The answer will shock the bears. :0)
HELOC, cash-out refinance, non-purchase money loan, it doesn't really matter. In CA, you're pretty safe unless you're rich. Let's go through each of them.
HELOC - a short sale will make it disappear. You're protected by SB-458. You don't owe the lender squat. If you're stupid enough to let the bank foreclosed your house. Your next ticket is to file for BK to get rid of the debt through insolvency. It seems like almost anyone would qualify. If you don't qualify, you settle for pennies on the dollar. :0)
Cash-out refinance is the best. You take the money out tax-free through refinance or refinances over and over and over again. You use it however you want. Then you live in the house rent-free for years until the bank forecloses or you short sale it. No consequences due to the one action rule.
Non-purchase money loan - no consequences due to the one action rule.
It is golden to live in CA. No wonder why they call it the Golden State. :>)
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@E-man.
Thanks for the info (as always). ..too busy in Asia to have much time keep up, but glad to get the facts.
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I think the original intent was for Homeowners to use that money to renovate their homes. I bet most people did that.
E-man says
Can you still do that even if your first mortgage is underwater? Also, what about loan modifications? If it's really that easy to get out of it, most people would get out, no problem.
Most of them are interest only for the first 10 years. So even if enough people are unable to get out of their HELOCs (and I don't know if they are and how many), we won't see much HELOC-caused defaults in the next 2 years. People continued to refinance until 2008.
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tdeloco,
No cash out refinance if you're underwater. There is no cash to get out. :)
Back in the hey days, people were doing it every year or two because home prices were going up $50k-$100k/year. They would repeatedly refinance and pulled out the equity in their house for whatever purposes. I know one gentleman who refinanced his house in 2006, pulled out 100% equity of the house, & stopped making the mortgage payment after 6 months. He moved to Montana to retire & bought a nice property for cash in late 2006. Who cares about credit when you can pay cash.
He knew the housing market was going to collapse. I was skeptical at that time. I was expecting a 15%-20% drop, but the gentleman was correct. :o)
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Tdeloco,
I have two ex-coworkers that bought in 2005 & 2007. The person that bought in 2005 refinanced in 2007. Both have 10/1 ARM interest only at around 6%. One person bought in the Sunset District in 2005 with 100% financing. The other person bought in Santa Cruz in 2007 with 90% financing. It is my understanding that both applied for a loan mod, but unsuccessful due to making too much money.
According to Zillow, one person is underwatered by about $100k while the other is underwatered by $150k. Both are still current on payments as far as I know.
The beauty about HELOCs is that you can wipe it out completely provided that your 1st loan is also underwatered. For example: You bought a house for $750k with 80/20 financing. Your 1st loan is $600k, and your 2nd loan is $150k. Now the property is worth $599k or less, you can file BK Chapter 13 & completely wipe out the 2nd loan. Get the 1st to modify your loan or not and voila, your monthly mortgage payment is equivalent to rent or pretty close. Why short sale when you don't have to? This property is cured from default & is no longer part of the inventory. :o)
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tdeloco says
You'd think that, wouldn't you? That's the way it was back east, when I took out a small HELOC to renovate/restore a fine old craftsman/folk victorian I had. Seemed there was a lot of scrutiny by the bank as to what I was doing with the money.
Then I moved to CA and what did I see at every turn? Regular folks with luxury cars, RVs, vacations, you name it bought with HELOC money. I actually thought it was illegal but no, you can spend your magical equity on anything, and there is no recourse if you default.
Just anecdotal but suffice to say, a lot of people got free money and didn't ever pay it back - and it's a travesty.
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E-man says
And it's no wonder the state is bankrupt.
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Thanks E-man.
So yeah, bankruptcies and loan mods can take care of the problem. Refis work if the mortgage is not underwater.
Are CA mortgages still non-recourse after refinancing? I thought they become recourse loans.
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E-man says
I know someone like that too, he moved to Pennsylvania last year. Left his old property here for a short sale / foreclosure.
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Bankruptcy seems like the #1 way to get away from these...
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tdeloco says
Nope. It becomes recourse after refinancing, but it doesn't really matter unless you're a high networth person. Why? Because the bank can sue you for the deficiency if you walk away from an underwatered mortgage. Also, there might be some tax implications too.
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American in Japan says
Actually, it depends. It's a case by case basis. One size can fit a lot of people, but it doesn't fit all.
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Interesting and helpful comments...thanks for the info, especially E-man!