Wikinvest Wire

A vicious cycle of overspending

Monday, December 17, 2007

Down in the bowels of the lead story in today's Wall Street Journal is the tale of the Oropezas, formerly of Calle Canon Road in Corona, California, where it seems the housing bust is now about equal in magnitude to the housing boom a couple years ago.
What is fascinating about the details provided below is that there must be literally hundreds of thousands or millions of people all across the country who have similar stories to tell about how a "vicious cycle of refinancing" has now done them in.

The Oropezas arrived at Calle Canon Road in 2004. Corona appealed to them because of its quality of life and regional cachet. "It was labeled as the new Orange County," Mrs. Oropeza says. Public records show they paid $557,000 for a four-bedroom house and took out a $500,000 mortgage. Her husband is an area manager for an auto-parts retailer and she is a purchasing manager for a firm that sells dietary supplements.

As property values skyrocketed, they refinanced three times, most recently in late 2006, for $835,000, Mr. Oropeza says.

The couple say they used some of the money they pulled out of the house for home improvement, such as a backyard waterfall. But Mr. Oropeza says the bulk was used to pay off credit-card arrears. "We were in a vicious cycle of refinancing our home to get out of debt," he says. "We banked on selling the house, but that's where we failed."
...
The couple stopped making their Corona mortgage payments in June, triggering a notice of default 90 days later and starting the countdown to foreclosure. The family is now living in Texas.
...
"We're sad because there goes our credit, and because people think we are a bunch of flakes who walked away from the house and tried to make money," Mrs. Oropeza says. The property's for-sale listing has expired. "We have zero expectation that we can sell this house," she says. After the government-brokered mortgage plan was announced, Mr. Oropeza says he called the toll-free helpline and left a message, though he doubts he will qualify to get his Corona house back.
Mr. Oropeza actually thought he was getting out of debt by refinancing - that only works if you can unload the inflated asset, against which new money was borrowed, to an even bigger fool.

Alas, there was no bigger fool to be found.

What, in the minds of the Oropezas, was a vicious cycle of refinancing debt was in fact just a vicious cycle of overspending - this confusion is all too common these days.

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10 comments:

Ben Bittrolff said...

Personal Finance 101 should be a mandotary course as early as high school. Nuff said.

As harsh as it may sound, I can't say I feel sorry for these clowns.

Food for thought: Demographics. Baby boomers. Did they even try to save for retirement? Can they ever retire? Are is there even enough time left?

TheFinancialNinja

Anonymous said...

It's because of people like this that I hope they never get rid of that debt forgiveness tax. Unless they change the law (which the morons in DC probably will), this family will probably end up owing taxes on about $300,000!

Anonymous said...

well fortunately for them there is a lower cost state for them to go to - Texas. What about the people in Texas who messed up?

Anonymous said...

So...they bought a $550k house and within two years had proceeded to withdraw around $300k of the home's supposed equity.

That they refinanced three times ostensibly mainly to pay off credit card arrears suggests that their personal spending far outstripped their income. The article doesn't mention medical expenses so I have to assume that this was simply the result of lavish spending (the backyard waterfall supports this suspicion).


"We banked on selling the house, but that's where we failed."

There were a number of failures but I would argue that their fundamental failure was...failure to control their personal spending. It would be interesting to know what their debt level was prior to buying the house. Did they begin spending wildly after buying the house?


"We're sad because there goes our credit, and because people think we are a bunch of flakes who walked away from the house and tried to make money," Mrs. Oropeza says...

They borrowed against an unrealized gain to fund personal spending and got burned. Hard to feel sympathy here.

I completely agree with Ben's earlier comment...basic finance should be a required course, ideally at both the high school and college level.

Anonymous said...

Gosh, did they lose their Hummer, too?

These people are freaking idiots.

Anonymous said...

For those of you who think financial literacy should start in high school or college, I think that is even too late. A lot of those kids will already have credit card debt or learned idiocy from their parents by then. My 8 year old already "needs" a cell phone because her classmates' idiotic parents got their kids one.

Anonymous said...

If you read the article you'll note that they stopped their mortgage payments in June, bought a Lexus, took the family on a Carribean cruise.

Then they moved to Texas.

They knowingly and blatently bilked the system.

Anonymous said...

People like this make me so angry. They obviously do not have any self control when it comes to buying whatever they want, when they want. Why are banks still extending credit.? Sadly the taxpayers' will have to foot the bill for their excesses.

Anonymous said...

I read that article in the WSJ, too.

All I could think of was: Why am I so stupid? I should have bought a house in CA three years ago, mortgaged it to the hilt, and HID THE MONEY UNDER MY MATTRESS. Then, I should have walked and lived the good life for a few years, TAX FREE.

Oh wait, I might have ended up 'sad'.

Anonymous said...

I'm pretty sure Texas has no debt relief after foreclosure. If they do it there, they will not be able to walk away from that debt.

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