Hidden Villain in the Foreclosure Mess: “Cash-Out ReFi Disasters”

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In the Northeast, they say it’s not the heat that gets you, it’s the humidity. In New Orleans, they say it’s not the fish that makes you fat, it’s the batter. We’re beginning to think there’s something similar going on in foreclosures: It’s not always the initial mortgage that kills you; it’s the cash-out refinancing loan.

Consider this from reader Linda Slocum, a Realtor and blogger in Santa Clarita:

‘Many of the people who are in trouble now aren’t hurting because of their initial financing, they’re in trouble because they did cash-out refi’s with a suicide lender who appraised their property at much more than it was worth, and then the people promptly spent that money on toys and vacations. Talk to any local bankruptcy attorney - you’ll find that their caseloads are filled with these cash-out refi disasters.

‘Case in point: A local townhome owner got about $100k in excess of his home’s equity in a cash-out refi because his lender was able to push through an appraisal using homes that were DETACHED townhomes that are not true comparables. The guy spent the money and is now looking for a bankruptcy attorney to get him out of hot water.

‘Another local single-family homeowner was able to pull $250k out in a cash-out refi, spent the money (not on the house), and now wants to dump the home because the wife wants to move to a newer area. This guy wants to just ‘walk away’ from the current house and leave the lender holding the bag.’

A footnote: This is one of the many reasons there is such virulent opposition to government aid to homeowners facing foreclosure. Government aid for the guy who got a Hummer and a new deck out of his refi and can’t pay for it? Not flying.