Sunday, July 16, 2006

The Real Estate Market View from Beverly Hills

The housing market continues to deteriorate and now the credit problems are starting to emerge. Yesterday, we had a meeting with a Beverly Hills mortgage broker who has been in the business for more than 40 years.

He tells us that he expects many credit problems for low and middle class wage earners. In some cases, he tells us, home owners have borrowed, between mortgages and home equity lines of credit, four or five times against their houses.

He told of one case that had just come across his desk,a woman,who years back, had paid $200,000 for a home with $50,000 down. As the price of the property climbed in value, she borrowed against the house. First $15,000. Then $50,000. Then $100,000. Then another $80,000. Including her first mortgage, she had borrowed against the house five times.

From each new loan, she used funds to make payments on her earlier outstanding home loans, and just plain spent a lot of the money on personal items. Now that the real estate market has stopped climbing in value, she is not able to get anymore loans. Her current situation: She has monthly loan payments of $4,200 per month. Her income from her job as a secretary is $2,500 per month.

There is no way she can meet her financial obligations. She is going to lose her house. We remarked, "She must be in shock." Our mortgage broker friend replied, "She is numb. It is hard to even carry on a telephone conversation with her. You can tell she is having difficulty processing the situation she is in."

Our friend claims that across the country there are hundreds of thousands that will be in the same situation. And although he expects the brunt of the crisis to be absorbed by the low and middle class, he tells us that there are going to be some spectacular celebrity bankruptcies in six months or so. He personally knows of two situations that are developing right now.

He tells us that there are some super-wealthy in Beverly Hills, but most are in debt up to their plucked eyebrows. "It's a lot of show. Many, many of them don't have a penny in the bank," he says. "There will be some newsmaking bankruptcies."

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