Mad Money

After reading two LA Times stories over the last couple days, it's easy to get the impression that there's just way too much money in the world - mad money.

Sometimes the numbers that correspond to this oversupply of money get lost amongst the fine prose that reporters are required to provide. Fine prose, that is, telling of groups or individuals just trying to make their way in the world, given the circumstances in which they find themselves.

In a novel experiment today, a few number-rich snippets from each of these two stories are separated from the prose in order to demonstrate just how ridiculous some of the numbers are becoming - how mad the money has become.

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The first story tells of cash-out refinancings, which have once again hit a fever pitch, oddly enough, at a time when interest rates are rising. In years past, the Pavlovian response by homeowners to falling interest rates was to lock in a lower rate, get a lower monthly payment, and maybe skip a mortgage payment in the process.

Today it's more a matter of getting the cash while the cash can still be gotten.
It seems that home equity extraction is now very much a way of life in many parts of the country, especially here in California. And why not? The money is just sitting there, waiting for you, and with advertisers bombarding homeowners with pitch after pitch encouraging them to take some of that money, it is hard to resist.

And, of course, it is your money.

Almost nine out of 10 homeowners who refinanced during the second quarter "cashed out" additional money — often tens of thousands of dollars and more — according to mortgage investment giant Freddie Mac. The 88% cash-out refi rate was close to the all-time record and could surpass it later this year.
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Say you need $40,000 to $100,000 for home improvement, a down payment on a vacation property or to consolidate high-cost consumer credit debts. Say you also have lots more than $100,000 sitting untouched in home equity. Rather than signing up for a home-equity credit line tied to a jumpy and unpredictable prime rate plus 1%, you instead opt for a fixed-rate cash-out refi.
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Amy Crews Cutts, Freddie Mac's deputy chief economist, says another factor at work in the big shift to cash-out refis may be the estimated $500 billion in adjustable-rate first mortgages that will experience rate "resets" this year, plus another $650 billion in second mortgages and equity credit lines that will adjust upward.

Almost ninety percent cash-outs, tens of thousands, $40,000 to $100,000 in home equity, lots more the $100,000 untouched, $500 billion in resetting ARMS, $650 billion in adjusting HELOCs.

It's enough to make you think that we've all gone a bit mad with our money these days.

There's just too damn much of the stuff around and it comes way too easily (except, of course, in the form of wages - then the money is neither mad nor easy).

The other LA Times story tells of the housing situation in Santa Barbara, just up the coast from where this blog originates. The mad money numbers originating from that community are even more bizarre - housing assistance will apparently be provided for families with household income of up to $160,000.

It seems that in Santa Barbara, with a median home price now almost 20 times the county's median household income, city workers can't find a decent house at a decent price.

Here's what a median home costing about ten times the median income looks like.
Sweet! Honey, look at the picket fence.

So, given the situation in which local government finds itself, about to pass judgment on one of the last remaining properties big enough for a housing development, they are considering stretching the definition of the phrases "housing assistance" and "affordable housing".

Is it just me or does anyone else think the phrases "affordable housing" and "for families earning up to $160,000 a year" in the same sentence are a sign that there's something seriously wrong? The City Council is just doing what it thinks is best, given the circumstances in which they find themselves.

The City Council is considering whether to use the property to build affordable housing, a condominium complex called Los Portales for families earning up to $160,000 a year.
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It would take some fancy math to keep the two- and three-bedroom Mediterranean-style condos affordable. And, truth be told, they'd be considered affordable only in a housing market like Santa Barbara's. On the open market here, they'd bring more than $1 million each; the proposal is to sell them for $495,000 to $595,000.
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State and federal laws generally state that, depending on the program, people eligible for affordable housing can't make more than 80% of the area's median income, as defined by the U.S. Department of Housing and Urban Development. In Santa Barbara County, which includes tony Santa Barbara as well as working-class Santa Maria, the median income is $65,800 for a family of four.

The City Council here had already created a class of affordable housing several years ago for people making up to 200% of the median income. Last week, they agreed to tailor the Los Portales project for people making up to 240%, or nearly $160,000. (To keep these affordable condos affordable, buyers would be subject to price controls on resale that would restrict any price increase to about 2% a year.)

Sell them for $495,000 to $595,000, an open market price of more than $1 million, from 80% of median income to 200% or 240% of median income to qualify for affordable housing, price controls of 2% a year.

In an ironic twist that neatly ties together these two stories, another story of affordable housing and mad money cash-out refinancing is recalled.

Not more than a year or two ago, outside of some nearby 2002-era affordable housing new cars began showing up - boats, SUVs, you name it. Apparently owners of affordable housing had hit the California real estate jackpot.

It seems that home equity lenders and some refinancing specialists, in their zeal to make yet another loan, either didn't bother to check, or were not required to check, on price controls for the property where equity was being extracted.

So, for example, homeowners having purchased 250,000 affordable housing in 2002, having found themselves sitting on an extra $250,000 in home equity in 2005, were extracting this equity at a blistering pace, despite the fact that they could never sell the place for more than a few percent a year over what they paid.

The mortgage originator didn't know or didn't care - they probably sold the loan shortly after the ink was dry and these sorts of details might be easily lost amongst all the other paperwork. The homeowner didn't care - all they wanted was the free money - their money. And, the city never knew it was going on until a local reporter started asking questions about all the Escalades and Hummers parked out front.

Had they purchased more modest wheels and been able to tuck them away in the garage, they may have never been found out.

It's a mad world, full of mad money.