Housing crisis is worse than I imagined

We all know there’s a “housing crisis”  and yeah, some people bought houses they shouldn’t have, but the real problem is with refinancing and home equity lines of credit (HELOCs.)  Here’s an example of a house I was looking at, and if typical (which I suspect it is) represents a tremendous problem.

The house was bought in 1998 by an investor who “flipped” it.  They sold it (presumably for a profit) in 1999 to the current owner for $215,000.  It’s in a desirable neighborhood in California and is in fairly good condition with a good sized yard.  Sounds reasonable so far.

The current owner is attempting a short sale.  Here’s the breakdown of their mortgage history:

They bought the home in 1999 for $215,000.

They had a second mortgage of $21,500 presumably for a 10% downpayment.  In all likelihood, they bought with 0% down.  They signed some papers saying that they would pay it off over 30 years.  Instead, this is what happened:

The current owner puchased the home in 1999 for $215,000.
A second mortgage was used for 10% downpayment of $21,500.
The mortgage was refinanced in 2002 for $181,000.
This could be considered the principal owed on the first mortgage (originally $193,450).
A line of credit (HELOC) was granted in 2002 for $50,000.
The first and second mortgage, plus line of credit were refinanced in 2003 for $270,000.
This is a $5000 profit, assuming no principal was paid.
Another line of credit was granted in 2005 for $183,900.
The mortgage and line of credit were refinancd in 2005 for $456,000
Assuming no payment, that’s an additional profit of $2700.
You can assume the differences in refinance were absorbed in fees.
That’s a total of $7700 profit for the lenders.
And a staggering $255,400 profit over 11 years for the buyer with zero investment.

That’s more than TWO HUNDRED AND FIFTY THOUSAND DOLLARS extracted from the property over 10 years, with effectively no principal payed.  No doubt some of that money was used to service the debt, and some of it was spent on improvements to the property, but we’re looking at more than 100% of the value of the home completely vanishing.

Sure, the lenders extracted $7700 in profit refinancing, but who’s the real bad guy here?

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