Economics

How Can You Believe in the American Dream Anymore When People Have to Pay Cash for Their Vacation Condos?

|

In a recent USA Today story, Julie Schmit makes the case that lenders have overreacted to the high forfeiture rates of recent years, becoming unnecessarily nitpicky in vetting mortgage applicants. But in her eagerness to show that eminently qualified applicants are being turned away, she forgets that a story of this sort requires sympathetic victims. Her main example is Bob and Janet Zych of Omaha, who "have excellent credit with scores that top 800, life-long careers and investment portfolios that have set them up for a comfortable retirement." The Zychs gave up on obtaining a mortgage "after faxing a ream of paper" about their financial condition. They were so "fed up" with lenders' unreasonable demands that they "simply wrote a check for their new, $85,000 vacation condo in Phoenix." The horror.

It turns out the vacation condo is the Zychs' fifth home, in addition to their primary residence and "three rental properties" that "produce a positive cash flow" (on top of Bob's salary as a manager for Mohawk Industries and, presumably, Janet's salary from her "life-long career."). Schmit says "the Zychs were hamstrung by lenders' concerns about their previous investments." The lenders thought "they had too many properties, even though their finances were solid" (possibly a reasonable concern, given the continued downward trajectory of home prices). The bottom line, according to Bob: "How would anybody ever get a loan if we can't get a loan?"

From Schmit's account, it is not at all clear that the Zychs couldn't get a loan. It sounds more like they decided getting  loan was not worth the trouble, especially since they happened to have $85,000 lying around to purchase the condo outright. As other examples cited by Schmit show, people do still obtain mortgages, even people with finances far shakier than the Zychs', although they may have to jump through more hoops or make a bigger down payment than used to be the case. And while it may be true, as Schmit says, that many homeowners "can't take advantage of some of the lowest interest rates in 50 years because they don't have enough equity in their homes to refinance," I know a couple not nearly as well-off as the Zychs who recently refinanced their mortgage at a lower rate even after they had missed a couple of payments and applied for a loan modification—from the same bank. So it may not be true that the Zychs' difficulties (such as they were) mean any mortgage applicant with a lower credit rating or less money in the bank might as well give up.

Schmit notes that "fewer than 1.3% of loans originated in 2009 that were resold to Freddie Mac and Fannie Mae went into default after 18 months," which was "down from more than 22% default rates for 2007 loans and about 3% default rates in 2002." At a certain point, presumably, driving down default rates begins to cost lenders money because it means forgoing too much revenue from rejected applicants who don't quite meet the new standards but would have kept up with their payments. I have no idea where that sweet spot is, but I would imagine that profit-driven businesses would be highly motivated to figure it out.

Advertisement

NEXT: UPDATED: One of the Fullerton Cops Who Beat Kelly Thomas Into a Coma Had a History of Violence

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Fucking anecdote journalism.

    I knew a guy who….
    Well, I know someone who….
    Apparently, there are people who….

    they found a well off couple who had a hard time geeting a loan, you knew someone who didnt. This tells us what?

    1. That anecdote != data.

      1. datum…. one point

        1. *cough cough* I’m some good shit.

    2. “they found a well off couple who had a hard time geeting a loan, you knew someone who didnt. This tells us what?”

      It tells us the intent of the story isn’t supported by the example cited.

    3. I know this guy who complained about an article using anecdotes, and that means that all commenters complain about articles that use anecdotes.

      That’s what it tells us.

      1. Pssh!! You and your stories!

      2. I heard about some anarchist who snarks at people who complain.

        What does that tell us?

        1. Careful, Greer, that anarchist is armed!

      3. so, two anecdotes walk into a bar… What? You already heard that one?

        1. Did you hear the one about the anecdote, the synecdoche and the asymptote?

  2. I have worked in the mortgage business for years. People with rental properties make money but usually have a lot of write offs on their taxes. The people in the story probably had a low AGI. That’s why the couldn’t get a loan.

    1. It’s not even clear they couldn’t get a loan.
      And if I were loaning, I’d ask pretty serious questions on a 5th home; you’ll do a lot to make your payments on the first one, but by the time you hit 5, well…..

      1. I wondered – do they have mortgages on any of their other properties? Maybe they could have them, along with their checking accounts, at the same bank? It might simplify things…

        1. And did they have positive equity in their other homes? If they were getting rental income, but in a negative equity situation due to housing price declines, I sure as hell wouldn’t give them more money because any slip in their income could bring it all down around them.

    2. Actually it’s a Fannie Mae guideline to not approve loans if a borrower already has 4 Fannie-owned loans.

      Some banks will allow an exception if there is sufficient documentation, which is why the poor folks felt like it was too much trouble.

      1. Fannie Mae actually sets conditions?!

  3. Great to see that in this time of economic malaise with 9% unemployment and depressed incomes the USA Today is focusing on the truly needy: A bunch of rich people who can’t get a mortgage for their FIFTH fucking home.

    The rest of us are eating PBJ sammiches for dinner and we’re supposed to be scared that the poor Zych family have to pay CASH for their vacay condo?

    The horror indeed.

    Fuck you, USA Today.

    1. I’m thinking that you deserve to eat “PBJ sammiches,” as punishment for writing “PBJ sammiches” and “malaise,” not to mention “fucking home.”

  4. . . . people do still obtain mortgages, even people with finances far shakier than the Zychs’, although they may have to jump through more hoops or make a bigger down payment than used to be the case.

    Clearly this is an example of banks being racist and/or greedy.

  5. At a certain point, …driving down default rates begins to cost lenders money because it means forgoing too much revenue from rejected applicants who don’t quite meet the new standards but would have kept up with their payments. …I would imagine that profit-driven businesses would be highly motivated to figure it out.

    They sure are, and they will pay you good damn money if you can figure this kind of thing out for them. That’s why I studied to be an actuary for a while. Too bad it’s very, very hard.

  6. Off topic, but:
    “Obama admin reworked Solyndra loan to favor donor”
    From the link:
    “The Obama administration restructured a half-billion dollar federal loan to a troubled solar energy company in such a way that private investors ? including a fundraiser for President Barack Obama ? moved ahead of taxpayers for repayment in case of a default, government records show.”
    http://www.sfgate.com/cgi-bin/…..822D95.DTL
    Or your fave AP reseller.

    1. Yeah, but without the loan restructuring, Solyandra would have faced immediate bankruptcy. Instead of, you know, merely inevitable bankruptcy.

      1. Yeah, and under immediate bankruptcy, Obama’s backers might have taken a well-deserved bath.

    2. It’s called “encouraging private investment”, something I thought littlebratarians supported. Little did I know that you wanted government to be favored over private investors.

      If you know you’re first in line to get paid back in the unlikely event of a bankruptcy, you’re more likely to invest.

      1. God Damn you are fucking retarded.

        1. mustard might just be connected to one of the cronies of this administration.

          Wait, which do we assume first? Corrupt or stupid? Dammit, I always forget…

        2. I’m not the retarded one in this conversation.

          “Intelligent people talk about ideas, mediocre people talk about events, dumb people talk about people.”

          Eleanor Roosevelt

          1. “Corrupt shitheels change the subject!”
            Rod Blagojevich

            1. “Mustard is a condiment and also a Colonel.” -Alexander Pope

              1. “Among the many misdeeds of the British rule in India, history will look upon the act allowing idiots to comment using condiments for handles as the blackest.” -Gandhi.

                1. You win this time, Britt!

                2. Check out the big brain on Briiiitttt!

          2. Oh, look!
            Quotation from noted intellect Eleanor Roosevelt!
            Uh, sorry. Anyone dumb enough to marry FDR isn’t worth listening to.

          3. Quoting Elanor Roosevelt as an authority on anything is a about as dumb as you can get.

          4. I’m not the retarded one in this conversation.

            Yes you are.

      2. dude,
        you are missing the point. A story about someone maybe having difficulty in securing a loan FOR HIS 5TH HOME is not indicative of anything. Hell, I bought a condo with cash but it was not my 5th property. This is bad journalism.

      3. It’s called “encouraging private investment”

        It’s called cronyism, dipshit. And when the government is playing on the Green Energy roulette wheel (which they shouldn’t be doing in the first place) with my money, yes, I want them to be the first to get it back.

      4. mustard|9.16.11 @ 9:56PM|#
        “It’s called “encouraging private investment”, something I thought littlebratarians supported.”

        And you call that “thought”!?
        No wonder you’re a troll.

  7. I’m wondering about what distortions could exist in the mortgage market to make it appear that getting a mortgage was (or as the article seems to be arguing should be) a more valuable way to acquire a property than acquiring it outright, when you have the spare money to do so? I mean I’m not great at economics, but what exactly is that saying? That debt is somehow better than a fully-owned asset?

    If that’s the case, isn’t that a more basic question worth addressing?

    1. If you have your money invested, and it’s returning 8%-20% a year, then borrowing at 4%-6% makes sense.

      1. 8-20% a year? Are they criminals? Nothing is producing that kind of return right now, other than *maybe* silver, and that’s illiquid as hell in large quantities.

        1. I was thinking of mentioning that, but when you can borrow at effectively zero, the bet is that the returns are gonna go up, and you still have a cheap mortgage.

        2. And if anything is, it sure as hell ain’t Real Estate.

      2. If you have your money invested, and it’s returning 8%-20% a year,

        I’d shoot a puppy at midnight on All Hallows Eve if I could get returns like that.

        1. C’mon, RC – you’d shoot a puppy at midnight on All Hallows Eve just for FUN.

          Who wouldn’t?!

        2. That would explain how SWAT team members get so rich.

        3. Fuckin’ doctorates. Put a “D” on the degree, and look what happens…

          Anyway, Tulpa / RC – I was looking at properties near where I live. One of them was a 4br 1ba house selling for $70k. Using $7k as a down payment, and assuming a 6%, 30 year mortgage, you’d have payments of $350 a month.

          Around that area, a house like that can easily rent for $750 a month. To be fair, and to account for other expenses, I had the rent as $600. Then I added $5500 in initial cleanup expenses. Even with all that, the IRR on the investment was 22%. You’d be into positive cash flow by year five, and it would be gravy from there.

          Now if you don’t want to deal with the BS that goes into renting homes, I certainly understand. But the opportunities are out there.

          1. RC Dean, you’re in East Texas, IIRC, so you should have some similar opportunities. Tulpa, you’re in the Pittsburgh area?

            Okay, forget I mentioned it.

            1. I thought RC Dean lived in San Angelo.

              1. I doubt he’ll be inviting me for tea and quail hunting if I’m in town, so I’m not really bothered either way. As long as the area he is in has a rental market that hasn’t tanked, my point still holds.

                Most people (and I’m not necessarily saying this about Tulpa or RC Dean) view the housing market by looking at the current market value of a house, and trying to determine whether it will go up or down, like it’s a stock or something. Property is a capital asset, and it can either be productive or non-productive.

                In the scenario above, the house could be worthless by the time the mortgage is paid, and it would still be a good investment for someone with a long time horizon. If it’s worth the original 70k market value, that’s great. If it’s appreciated in value, that’s a bonus.

          2. Damn it. I just realized I hadn’t made it explicitly clear I was discussing a second house to be rented to others.

            1. Also, if you have a great deal to invest, you would probably need to form an LLC or REIT, which would change the income mix a bit.

    2. “I mean I’m not great at economics, but what exactly is that saying?”
      Opportunity costs, time-value of money. Both are probably Wiki’d pretty well.

      1. I understand, but there’s the other half of the equation in terms of opportunity costs. The bank could so something else with that money or than lending it to them to buy a condo as well.

        I suppose that’s why the bank didn’t lend it to them. It just seems to me there appears to be (have been) distortions in the market to encourage debt on both sides of the equation because the debt is being guaranteed by a third party. It seems like that third party has a good chance to be the loser in the deal.

        1. That first paragraph is barely English (sorry) but I hope you get my point.

    3. McCracken:

      If you buy the property with leverage and it appreciates, that appreciation return is measured against your initial investment.

      If you buy a $100,000 property in cash and it doubles in value, you have a 100% return.

      If you buy that same property with a 5% down payment and the rest as leverage, you have a 2000% return.

      1. I get the mathematics of it, that’s easy to see. But the bigger returns are only a function of an appreciation in value above what the money was lent to you at. The same dynamic works against you if the cost of the loan outpaces the value of the asset.

        Furthermore, paying cash, the most you can lose is the whole stake. Borrowing, there is some non-trivial chance you could wind up under water; not only losing your entire stake, but additional money on top of that. And the costs of such a situation can often be quite high if you’re not properly capitalized.

        So my problem is, what the hell is with the assumption that you’re necessarily going to make more on the property than what you’re being charged in interest? If that’s the case, isn’t there a flaw in the interest rate? I mean I understand that the difference is risk (5% all of the time is better than 10% half the time and 0% the other half), but doesn’t the cost of that risk apply equally to you as it does the bank (possibly even moreso)?

        Isn’t living in the house the only non zero-sum aspect of this? If both you and the bank both make money off of an empty house, doesn’t someone, somewhere necessarily get screwed?

  8. I have no idea where that sweet spot is, but I would imagine that profit-driven businesses would be highly motivated to figure it out.

    They’d probably be better at it than govt regulators, but you do have the possibility of the loan originator encouraging borrowers to lie on their application so it looks less risky than it really is when the originator sells the loan to someone else.

  9. Ooo, they’re advertizing a website about the science of Fringe. Summary: everything is totally made up with a little bit of scientific terminology sprinkled in, and the plot makes no sense. Just like everything else JJ Abrams has done.

  10. This article’s alternate title? In Every Dream Home a Heartache.

  11. Two things the article leaves out:

    First, for a condo loan, the financial condition of the condo association is of paramount concern, above and beyond the financial condition of the borrower(s). That would be doubly (or maybe a billion-y) more of a concern in motherfucking Arizona, one of the most fertile homes of the dead or dying condo association in 2011. There are condo associations in Arizona and Nevada right now that would be unacceptable collateral for a loan to Warren Buffet. If the lender put the burden of getting docs from the condo association on the borrowers, it would explain why they thought they were being asked for excessive paperwork.

    Second, I’m pretty sure that these people are lying about their intentions for this property. If someone with a primary home and three investment properties calls you on the phone one day and says they want to buy a “vacation home” in Arizona, wink wink, what they really mean is that they’re buying another investment property but read in a real estate course they bought from a late night TV pitchman that they can just lie and call it a vacation property and avoid paying the higher investment property interest rate. I bet if we could get copies of the loan applications for the other three properties these people own, we’d discover that they applied for three “second home” loans in a row and are now going for a fourth. That shit used to fly in 2005 but it’s a lot harder to get everyone to play dumb and let you do it now.

    1. I think this comment sums up the situation pretty well. speaking anecdotally, the notion that loans for second homes are nigh unobtainable, it’s bullshit. the half of my family who made something of themselves just bought a vacation condo and gota loan no problem at all. of course their circumstances were completely different. for instance, it was only their second home, and they didn’t have 85k in cash in their hip pocket.

  12. I bought a house a few months ago and the amount of paperwork and confirmations and checking and rechecking was a hassle…. and every time another month went by they needed the last two pay-stubs again. And I had to put in writing explanations regarding travel reimbursement etc etc etc. But it was worth it to borrow at 4% when I consider where inflation will be in 5 or so years.

  13. I think we’re all burying the lede here. The real story is: why the fuck would you want to vacation in Phoenix?

    1. “why the fuck would you want to vacation in Phoenix?”
      Because you live in New Jersey?

      1. I’m told the dry air is good for sufferers of the consumption.

        1. well, it IS a dry heat.

    2. They’re called snow birds. Six months of the year, when most of the country is freezing fucking cold (like in Omaha, Nebraska, for example) the Phoenix area is a pleasant 75 degrees every day. The city of Mesa sees their population double every winter, and then snow birds all fly home in the spring.

      1. It’s amazing that you have to explain this.

        1. I already knew this, I was just being a smartass.

      2. Fuck, Yuma – where I live – doubles its pop in the winter.

        Gives you an idea how much winter sucks up north if these idjits are coming out to the middle of nowhere.

  14. and yet, the cops arrested him without killing him!!! it’s unpossible.

    killed the tuba man. 18 months
    armed robbery of somebody for marijuana… at gunpoint

    and now runs a witness off the road.

    clearly, our local justice system is having an impact on this scumbag…

    SEATTLE — The convicted killer of Tuba Man Edward McMichael has pleaded guilty to running a woman off the road.

    In court on Friday, Billy Chambers pleaded guilty to attempted second-degree assault and hit-and-run in a June 23 incident in the Central District. Prosecutors are seeking an 18-month sentence.

    Investigators said Chambers rear-ended and side-swiped the car of a woman who’d reported him to police for allegedly stealing several items from her car.

    According to the statement of probable cause, the woman was stopped at a red light on 23rd Avenue East at Jackson Street when she was rear-ended by a black Crown Victoria. The woman said she looked in the rear-view mirror and saw Chambers behind the wheel.

    When the light changed and traffic began moving, the Victoria pulled up alongside the woman’s car and “intentionally swerved into the rear right passenger door pane of (the victim’s) vehicle, causing (the victim) to lose control, leave the roadway and strike a tree,” the document said. After the victim crashed, the Victoria sped off, detectives said. The woman was not injured.

    The victim initially told investigators she believed Chambers had intentionally run her off the roadway because she’d reported him to the police for alleged theft the week before. But the victim later recanted when asked for a written statement.

    Investigators found Chambers in his home, talking on his cell phone. When officers entered the room, they heard the teen saying, “Will you please tell them you did it,” the statement said. When questioned by detectives, Chambers said he’d spent the day sleeping at home and had let his cousin use the car.

    Chamber has a long criminal history that dates back to his juvenile years.

    His most notorious conviction resulted from the October 2008 death of Edward McMichael, a beloved Seattle musician who was a fixture outside local sporting events and arts performances.

    On Oct. 25 2008, McMichael was walking home on Mercer Street when a group of teens attacked him and tried to rob him. During the attack, McMichael fell and hit his head on the concrete. He died several days later.

    Chambers, along with accomplices Kenneth Kelly and Ja’Mari Jones, pleaded guilty. Chambers, who was 15 at the time, served 18 months.

    “He has demonstrated that he has no concern for the Court’s authority,” wrote the prosecutor in the 2008 case.

    In January, Chambers pleaded guilty in January to stealing marijuana from a man at gunpoint.

    1. dunphy,
      You might check the top of the thread for comments on anecdotes.

    2. Walls of text suck. Headline, link, and point of post – that should take no more than a paragraph.

      1. Skimmed, found:
        Cops got thug, didn’t kill him or others in the effort.

    3. AS another anecdote – Yuma County Sherrif’s Department serve a warrant of a guy suspected of burglery (of firearms).

      Surprisingly the serving of the warrant is an example of what *to* do.

      Yuma SWAT is on scene, but 3 uniforms actually knock on the door and wait for an answer. Unfortunately the answer is the suspect firing shots through the door that wounds three deputies.

      But what makes this unbeleivable is that the sherrif’s department *do not* fill the apartment with bullets in reponse, they never returned fire and negotiated with the suspect to surrender with no further violence.

  15. “They were so “fed up” with lenders’ unreasonable demands that they “simply wrote a check for their new, $85,000 vacation condo in Phoenix.” The horror.”

    The horror indeed.

    EVERYONE has a RIGHT to a loan, you know. It’s all part of that invisible writing in the Constitution that only liberals are able to discern.

    1. I wanted to do an URKOBOLD comic where the hero was a progressive military officer named “General Welfare”. tsk tsk, too little time.

    2. EVERYONE has a RIGHT to a loan to an unlimited number of real estate loans, you know.

      FIFY

  16. From Schmit’s account, it is not at all clear that the Zychs couldn’t get a loan. It sounds more like they decided getting loan was not worth the trouble, especially since they happened to have $85,000 lying around to purchase the condo outright. As other examples cited by Schmit show, people do still obtain mortgages, even people with finances far shakier than the Zychs’, although they may have to jump through more hoops or make a bigger down payment than used to be the case. And while it may be true, as Schmit says, that many homeowners “can’t take advantage of some of the lowest interest rates in 50 years because they don’t have enough equity in their homes to refinance,” I know a couple not nearly as well-off as the Zychs who recently refinanced their mortgage at a lower rate even after they had missed a couple of payments and applied for a loan modification?from the same bank. So it may not be true that the Zychs’ difficulties (such as they were) mean any mortgage applicant with a lower credit rating or less money in the bank might as well give up.
    http://www.aimengcrystal.com

  17. Welcome to America. Run by the rich, FOR the rich!

    http://www.anon-web-toolz.at.tc

  18. Shrug, my mom just bought a house, despite the fact that her only income was disability payments. Of course she spent the entire time complaining about all the paperwork she had to fill out, but hey, who said it should be easy.

  19. I like your texts very much. That is why I like to use them in my work, if it is ok for you. I am interesting in that topic, and I need you help. Please, say YES. Thank You! Moncler Down Vesten Mannen , Moncler Down Vesten Vrouwen

  20. I’m writing this from my office…at a mortgage company.
    The truth of the matter is that mortgage rules are written for “common folk.” Problem is, most people that make a lot of money don’t get a bi-weekly paycheck & a w2. So the Zychs’ probably have some rental properties, Bob may still work and they probably have a million dollars in the bank, but the fannie mae and freddie mac guidelines don’t know how to handle sophisticated rich people who are most likely to pay their loan back.

    Perfect example of why GSEs are the best conduit to private business.

  21. A bank would have to be insane to give a mortgage to a 65-year old person, especially for a property in Phoenix that is expected to drop in value in the short term. No person on the edge of retirement should be taking on new debt, and certainly are not the intended purpose of the GSE’s. These people seem a lot closer to scammers than victims.

Please to post comments

Comments are closed.