Subprime, Overextended, Whatever You Want To Call It – “Two friends of mine who are both broke bought property last year.”

jbc at VREAA 4 Apr 2011 6:28am“Two friends of mine who are both broke bought property last year [2010].
Friend #1 bought a condo for a little under $200,000 in Victoria with a down payment from a credit card and moved in with so little money he couldn’t fix his broken stove for 6 months.
Friend #2 bought a dumpy townhouse for $350,000 in Victoria and once again used the credit cards to do it. He’s worked for the government for a little more than a year and his wife is unemployed. 2 kids, #3 on the way. Maxed out credit cards once again and they can’t afford to fix the fridge. But the bank thinks they can afford to be $350,000 in debt. WTF?
Both friends can barely make ends meet with their 5% down, 35 year mortgages at record low interest rates. How on earth will they manage when rates normalize and why do banks think they’ll make their payments on time every month through the year 2045? Both of these people have sketchy job and credit history.
And these are just a couple of examples off the top of my head. If you surveyed Victoria and Vancouver readers in the 25-35 age range I’m sure you’d get swamped with hundreds of similar stories. I have no clue what these people are thinking but I know for a fact they are just scraping by right now and would be devastated with a 1-3% interest rate increase.
Oh, and retirement plan? Ha ha ha ha ha ha! What retirement plan? There’s no money for trivial expenses like retirement. It’s all about the house. Or in these cases it’s all about the condo and townhouse.”

28 responses to “Subprime, Overextended, Whatever You Want To Call It – “Two friends of mine who are both broke bought property last year.”

  1. “How on earth will they manage when rates normalize and why do banks think they’ll make their payments on time every month through the year 2045?”…

    Because… because… ahh… Wait a second, I know – I know…

    Because PropertyAlwaysGoesUp! Right?

    The following commercial message/speculative ‘enticement’ is offered without comment….

    “The Real Estate Market in Greater Vancouver and BC is Now Booming! …and you want to get licensed fast!” – The RealEstateLearningLab’s QuickStart 6 Week Licensing Program

    Elsewhere, in other (apparently unrelated) news…

    [WSJ] – India Graduates Millions, but Too Few Are Fit to Hire

    “BANGALORE, India—Call-center company 24/7 Customer Pvt. Ltd. is desperate to find new recruits who can answer questions by phone and email. It wants to hire 3,000 people this year. Yet in this country of 1.2 billion people, that is beginning to look like an impossible goal. So few of the high school and college graduates who come through the door can communicate effectively in English, and so many lack a grasp of educational basics such as reading comprehension, that the company can hire just three out of every 100 applicants.”…

  2. You have CHMC to thank to for this situation and an education system that fails to teach financial literacy.

    It is obscene that you can use credit cards as a down payment but I can see how that can be done. In my case I only keep two credit cards a Visa and a Mastery Card I can borrow 33K before I max out those two cards, my personal line of credit is 20K (has zero balance, and credit cards always paid in full every month). Point is I could borrow 53K on unsecured debt and I could probably get a 800K mortgage on that 54K down payment.

    When I moved to Vancouver a few years ago a person I knew who lived in Whistler told me about his friend who used his credit cards to buy condo’s pre sales and then flip them and in the process became a millionaire so the story goes. So I guess using credit cards and leverage up 100% is probably a viable strategy if you are willing to declare personal bankruptcy.

    How about the rest of the RE market addicts on this board, given the current lending standards how big of a mortgage could you get on your credit cards.

    • 和谐的房地产泡沫

      this is hilarious

      i am considering personal bankruptcy over <$20k in unsecured debt. lol!

      i guess it never occurred to me to exploit leverage to make a profit – that should be required learnin' in BC High Schools.

    • The banks should know when someone is sourcing their downpayment from credit cards. They obviously don’t care.

      If stories like these are widespread an entire generation of Canadians will be ruined and have to rebuild their financial lives. Plus your government will be bailing out the CHMC in a year or two.

      Bubbles always last longer than you would expect, but at the pace Vancouver’s lunacy is growing, I think you guys will be lucky to make it to Summer of next year. I guess the fickleness of the HAM will be the deciding factor.

  3. …”given the current lending standards how big of a mortgage could you get on your credit cards?”…

    Let’s see, AMS – Hmmm… Ok, given the current state of the market in AZ – I do believe my black VisaInfinite could manage a perfectly adequate/servicable (if neither ‘lavish nor ‘opulant’) abode without need of supplementary/’bridge’ financing. Imagine the AeroMiles! 🙂

    But Yikes, AMS – do people REALLY do s**t like that? If so, I rather suspect the DarwinAwards selection committee/judges panel are going to be terribly busy this year…

    • Yeah, people really do things like that.

      What amazes me more is that the banks don’t flinch on that one.

      But hey, best Banking System in the world!

    • In the US, at the height of the housing stupidity, the banks were doing it themselves. They’d give you a second loan to use as the downpayment on your mortgage.

  4. pricedoutfornow

    This is such a familiar story to me. I know A LOT people who are maxed out with mortgage debt. Guy who has never made more than $50k per year in his life, $900k mortgage? No problem! Another guy has a couple rental properties and $700k in mortgage debt. His salary? $55k. Actually, I could sit here all day and tell you stories about people I know and their massive mortgage debt. It’s gotten so that when I see people who have mortgage debt of “only” $300k, it seems quite reasonable. Then I give my head a shake when I calculate that when rates double, their payment of $700 bi-weekly could easily double as well. And family net income is only a measly $70k per annum. Ouch!
    This will not be good. Anyone who says otherwise has their head in the sand.

    • 和谐的房地产泡沫

      replace sand with ‘up their own ass’ and that’s probably a fairer description.

      i am 29 and i know dozens of people like this – i am treated like a leper with oozing renting sores all over my person.

      well it’s 11am – probably time to do something constructive. 😉

  5. What is the current monthly payment for borrowing $100k these days? 6 years ago it was roughly $500/month with 25 year amortization.

  6. close friends…inherited $200k in 2001. Purchased 1st home for $300k. sold in 2003 for $500k. bought 600k home… sold in 2008 for $1,250,000. purchased $1,400,000 home. windfall! …you’d think! $1,000,000 in equity!
    Wrong! …$900k mortgage on the 1.4 property, co-signed by parent…35yr amortization. why? because he is a self-employed small businessman…she is a stay at home parent, and the missing $500k was used to conspicuously consume…I mean supplement their income to the tune of 70k per year. But wait! recent HAM invasion indicates that their van westside home is currently worth $1.8+ mil!!! soooo….you guessed it they know have a $900k ish mortgage and $400k heloc! I have never seen such high rolling high spending, low income earners in my life! It is frightening! There is absolutely NOTHING productive going on in this town anymore. If you bought a house in the past 10 years…work shmork! who needs a career. Be very, very afraid for the children.

    • EXACTLY. When people argue “long time residents are selling and making out like bandits” or “I know a guy who has been flipping homes since 2004 and he’s rich!” they underestimate how many ways that money can go POOF!
      They made all those “savvy” real estate moves over the years, and just being stuck with this last home when the bubble pops might ruin them.

    • I hear of similar stories, not as big as that one, one of a guy who does contract work starts slowly siphoning off $ from a LOC to supplement income between dry patches. Nothing big but a few $10s of K per year over several years. With prices on a tear the past decade, that’s easily covered. I often wonder how savings rates can be negative.

      Remember what’s happening in 14 days: non-amortizing lines of credit are no longer underneath CMHC’s wing. That can’t be good for people like this.

      • I’m still not clear exactly what is affected by the new cmhc stops. Many of these mortgages are structured as loc’s. … as the home increases in value … the “equity” is just available for withdrawal. This case in particular the home was purchased with 35% down, so no CMHC. …even with the new heloc, there is still a “perceived” 30% equity.

      • “as the home increases in value … the ‘equity’ is just available for withdrawal”

        The statement from CMHC reads:
        “Effective April 18th 2011 Mortgage Insurance for non-amortizing housing loans (lines of credit) will no longer be available. (CMHC Mortgage Insurance will continue to be available for loans secured by collateral mortgages, but only for amortizing loan components).”

        Your statement is certainly true when prices are rising at near-double-digit rates. The math you provided showed how this family was withdrawing money at a rate such that their % equity is decreasing even with 8%+yearly gains.

        I don’t know how banks hedge these days but they are able to buy MI on loans with LTV<80%. That vehicle is being cut off so now borrowers either need to get an amortizing LOC insured through CMHC or banks need to hedge in other ways. It may be that even a family with 30% "equity" will find that LOC borrowing costs will increase as of April 18th.

    • “I have never seen such high rolling high spending, low income earners in my life! It is frightening! There is absolutely NOTHING productive going on in this town anymore. If you bought a house in the past 10 years…work shmork! who needs a career.” – Epica…

      That story’s older than you think, Epica… In that same vein, at the bottom of this post I’ve abstracted a few choice paragraphs from today’s best think piece (and highly recommend the entire essay to VREAA’s rapidly burgeoning audience of literati).

      First, however – an Oki RE sitrep/anecdote… ‘Nemesis’ mounted ‘La bestia cremisi Italiano’ this afternoon for a regional ‘quickie’. 91 fast Kilometers later I can report that the ‘bears are out’ – literally and figuratively. I was briefly eye to eye with one ‘BlackieInTheWoods’ on GreenLakeRoad near SeeYaLater’s vineyard – but he just shook his head and waved a paw; a professional courtesy, I would imagine. No doubt about it, REaltors’ signage is definitely starting to build out here… albeit, not a single flourescent ‘Sold’ sticker amongst the lot. More to the point, I quickly lost count of the boldly emblazoned ‘NewPrice’ labels. It’s going to be an interesting season.

      And now for something really meaty….

      [Lapham’s Quarterly] – The Servant Problem

      “The country is in the hands of an affluent oligarchy content with Voltaire’s reading of its rights. During Ronald Reagan’s terms as president, the income that individual American families received from rents, dividends, and interest surpassed the income earned in wages. Over the last thirty years, the wealth of the emergent rentier class has been sustained by an increasingly unequal sharing of the gross domestic product; the percentage of GDP accounted for by manufacturing fell from 21 to 14 percent, and the percentage accounted for by finance rose from 14 to 21 percent…. It is man’s nature to be doing something, or at least to fancy that he’s doing something, but to what purpose, and for whom? Satisfactory answers to the questions lately have been hard to find, not only for the unemployed poor but also for the underemployed remnant of what was once a diligently aspiring middle class. It isn’t simply that the consumer markets don’t value work worth doing; it’s that the society’s ruling and possessing classes regard working for a living as the mark of inferior or damaged goods. The attitude made its first appearance on the American scene during the Gilded Age, dancing with the newly crowned kings of finance under the ballroom chandeliers in Newport and New York. Thorstein Veblen took note of the arrival in 1899, his Theory of the Leisure Class (Chicago, page 107) suggesting that it is the conspicuous consumption of the product of other people’s time and effort that makes up the sum of one’s own worth and meaning. Not the doing of the work, the digesting of it. “Leisure, considered as an employment,” said Veblen, “is closely allied in kind with the life of exploit, and the achievements which characterize a life of leisure and which remain as its decorous criteria, have much in common with the trophies of exploit.” …

      • 和谐的房地产泡沫

        nem, you read Lapham’s too?? i thought i was the only geek – have you seen his musical?

  7. 和谐的房地产泡沫

    are you saying HAM isn’t smart??


  8. I find it very interesting that people are able to use credit cards for down payments. I just bought a house 4 months ago…and before I could secure a mortgage I had to provide proof of funds in my personal acconts to cover all closing costs and my down payment. The records had to show that I was in possession of the cash for at least 3 months before applying for my mortgage…Scotia bank…I wonder if the banks are starting to wise up and actually follow the money trail before handing out martgages.

    • I’m surprised too. The only time I used my visa card was for a small deposit attached to my signed offer on the last unit of a condo development; the developers agent preferred visa over my personal check.
      Downpayment balance + mortgage were followed up by the lending bank in the ensuing weeks.

  9. Think about it this way, the people in the scenario are broke BEFORE buying a property. So in a strange way, they’re actually taking the correct course of action.

    Scenario A: Prices go up, they make money

    Scenario B: Prices go down, they’re broke…same as where they started..broke anyways so who cares

    • you should care because your taxes and mine that will be used to pay the bank for mortgage once these people default.

  10. the stories are bogus.
    obviously, the commenters do not know what the mortgage process is. besides the proof of a d/p few months before closing, banks will check your credit report at the last minutes to ensure your credit is good, and will even suggest to close a a few credit card accounts just to satisfy their lending criteria.

  11. Pingback: RE_ATM – “If you bought a house in the past 10 years…work shmork! Who needs a career? I have never seen such high rolling, high spending, low income earners in my life!” | Vancouver Real Estate Anecdote Archive

  12. 4SlicesofCheese

    So do CIBC

    This is the best part.
    The money is yours to spend any way you choose. The larger your mortgage, the greater your 5% CashBack reward.

    The more money you borrow the more “reward” you will receive. What kind of bizzaro world do we live in.
    I am positive everyone uses that cash back to put back into their mortgage. Right?

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