Monday, March 20, 2006

It'll Never Happen Here

People in California are so squeezed by California's crushingly unaffordable housing that they are even unable to buy earthquake insurance. Earthquake insurance! You know, there IS a reason why it's called "earthquake country". So you agree to pay a ludicrous amount of money for your PoS house, more money than you will ever be able to repay, and you don't insure it against a disaster that is sure to happen? I mean, seriously, what the heck is wrong with you people?
When Charlie Bott got an offer in the mail recently for earthquake insurance, he stared long and hard at the bottom line. Then he threw it away.

"It was way beyond anything you pay for house insurance. Not even in the same league," said Bott, a nuclear engineer with a baby on the way.

Now, like millions of others, he's hoping the Big One doesn't strike — or if it does, the government will come to the rescue.
But no worries, right? I mean you can always just walk away from the loan, right? Think again.

So you are stuck with a mortgage you could never really afford and you are now "underwater" and you can't just mail in the keys. So what do you do? Why, what any good, red-blooded American does these days...borrow more money of course:
When new bankruptcy laws took effect last October, adding time and expense for consumers seeking Chapter 7 protection from their debts, mortgage broker Equity Concepts saw an opportunity.

Bankruptcy law now requires debtors to undergo a means test to qualify for Chapter 7, which shelters them from creditors. If they fail the test – designed to gauge their ability to pay creditors – debtors must file for bankruptcy under Chapter 13 and, therefore, submit to a repayment plan.

So, Cranston-based Equity Concepts launched WhyFile.net seven weeks ago, offering loans to debtors who would fail to pass the means test for Chapter 7.

19 Comments:

Blogger moonvalley said...

This happened all over Santa Monica after the 94 Northridge Quake..which by the way totally devastated SM.Afterward they couldn't give the properties away.I saw it happen first hand as I owned a condo there at the time. Of course FEMA which still worked at the time came to the rescue..but of course that was pre-Katrina and we weren't also paying for a war at the same time.

Mar 20, 2006, 11:19:00 AM  
Anonymous Anonymous said...

Yeah, get tough with those deadbeats whose savings are wiped out by an illness or who lose their homes in a disaster. This is what those of you who voted Republican wanted, right? Well, you got it. Enjoy it when your turn comes.

Mar 20, 2006, 12:08:00 PM  
Blogger Athena said...

bahahaha... love the graphic! Remember what the marina looked like after Loma Prieta? Remember all the Condiotti homes that had their walls start to separate in Sonoma County? hmmm... WTF? is right.

what are these people thinking?

How exactly do they expect the government to bail them out? From my understanding the Federal FEMA funds only bridge the gap between the damage and what your insurance will cover... if you have no insurance you do not qualify for coverage. I know this was certainly the case for a friend who had flood damage to her home... but did not have flood insurance... so she was ineligible for Federal Funds.

Mar 20, 2006, 2:59:00 PM  
Anonymous Anonymous said...

Two points:

1) Much of Marin County is on bedrock, so this is less of a concern for Marin homeowners. During the 1989 earthquake, my parents' Mill Valley home was completely undisturbed. Not a single thing out of place.

2) An expert in earthquake insurance told me once that it would be far more cost-effective for most Bay Area homeowners to hire a structural engineer to identify the potential causes of damage to a home during a earthquake and then address those dangers than to pay for earthquake insurance. Apparently it is possible to reduce your risk exposure radically using this approach, and at a fraction of the cost of more earthquake insuance policies.

That said, you make an excellent point.

Mar 20, 2006, 4:55:00 PM  
Blogger moonvalley said...

This Why File ? program is awful, just when I wonder how low people can go dealing with their fellow humans, I'm always surprised.

Mar 20, 2006, 6:08:00 PM  
Blogger Marinite said...

This Why File ? program is awful

Ok, I have to admit that I have no idea what you are talking about here. "Why File ?"? What is that?

Mar 20, 2006, 7:33:00 PM  
Blogger moonvalley said...

Bankruptcy law now requires debtors to undergo a means test to qualify for Chapter 7, which shelters them from creditors. If they fail the test – designed to gauge their ability to pay creditors – debtors must file for bankruptcy under Chapter 13 and, therefore, submit to a repayment plan.

So, Cranston-based Equity Concepts launched WhyFile.net seven weeks ago, offering loans to debtors who would fail to pass the means test for Chapter 7.

you latest blog entry.

Mar 20, 2006, 7:36:00 PM  
Blogger Athena said...

anon... that is an excellent point as well. So how many specuvestors HAVE called out a structural engineer to do the evaluation and said work? That is what I want to know. Perhaps in an area where home owners are really buying with the intent to occupy for a long time it may be more likely. But what about the people banking on being in the property a year, two years thinking they will sell and upgrade or sell for flip profits? It is the short termers that I think are more likely to overlook the opportunity to make sure their structure is entirely sound.

maybe not though.

Mar 20, 2006, 7:39:00 PM  
Anonymous by_palladium said...

Wait a second....

While this isn't the POS blog, the reality is that most of the "value" or cost of RE in marin is for the land, not the structure. So, when the big one comes, you are just out the cost of rebuilding the POS. To me (a renter), that doesn't neccessarily sound like a bad deal. Junky house => pile of rubble => new mini-mansion built with a land equity line of credit.

Often times, insurance is just used by people as a way of getting something for nothing, not as a risk mitigation tool. (look at the way some people insure their cars with super low deductibles)

Furthermore, the former geologist in me sees that landslides are at least as much of a risk as EQs in most parts of marin.

Mar 20, 2006, 8:51:00 PM  
Blogger Rob Dawg said...

Understand, all the earthquake insuance written in California, no matter who writes the policy is purchased on the secondary market by John Doe, POBox 666, Liberal, KS. When a big quake hits the POBox will be close with no forwarding address. Go "Google Earth" say the 3x3 blocks 14th-17th Streets Wilshire to Montana in Santa Monica. $1billion with a "b." Now zoom out. In about 4 clicks you are at $1trillion with a "t." The government can't print that much insurance money.

Mar 21, 2006, 4:15:00 AM  
Blogger marin_explorer said...

Much of Marin County is on bedrock, so this is less of a concern for Marin homeowners. During the 1989 earthquake, my parents' Mill Valley home was completely undisturbed. Not a single thing out of place.

It sure helps to be on bedrock, since it can reduce the period and magnitude of a quake. However, it's just important where the fault ruptures, and at what depth. I'm sure most of us in Marin know the San Andreas fault slices through Bolinas Lagoon, Olema/Pt. Reyes Station and Tomales Bay. Another big unknown are how major fault systems connect to tributary systems, which might explain some of the delocalised effects of the Loma Prieta quake. In other words, if someday there's a large displacement along the San Andreas in Marin, we could see tributary faults activated in other regions of Marin. I happen to live on bedrock too, but I do know a fault runs along Ross Valley, so if something big comes, it come affect me too. This is true for much of coastal California, as well as some interior valleys.

Mar 21, 2006, 7:26:00 AM  
Anonymous rejunkie said...

An expert in earthquake insurance told me once that it would be far more cost-effective for most Bay Area homeowners to hire a structural engineer to identify the potential causes of damage to a home during a earthquake and then address those dangers than to pay for earthquake insurance.

I am actually take a "belt and suspenders approach". I am currently in the midst of getting a retrofit performed on my 1955 house in San Anselmo (that just so happens to be a rental, athena) -- it is on a hillside and on bedrock but it is not bolted to the foundation to current code and the supporting walls between the slope and the floor of the house are not shear. The cost to fix: $12,500. My earthquake insurance policy: $1200/year. I would argue it is really cheaper just to carry insurance, but I would prefer the house not collapse in the first place, although a retrofit is no guarantee. As my seismic engineer told me, just because my house stays put does not mean the hillside above and neighboring homes won't fall on top of it and you cannot insure against earth movement or landslides. So even on bedrock, there are other factors to consider (such as slope) that can still cause to damage to your home in an earthquake.

He actually serves on the state advisory boards and lobbies hard for mandatory earthquake insurance -- you would think the lenders would require it, just like they require you to prove you have a typical homeowners policy for fire, liabtility, etc. It is puzzling that they don't.

My engineer showed me maps of "shaking intensity" based on an earthquake in either the San Andreas or the Hayward/Rogers Creek fault (that runs right through Petaluma and Santa Rosa) and the flat, former flood plain in Santa Rosa is at a MUCH higher risk of being devastated than almost anywhere else in the north bay. Also, anywhere built on compacted bay mud (Hamilton, Santa Venetia, the flats of Corte Madera, the Canal) are high risk due to liquefaction.

Stinson Beach is an absolute disaster in the making -- the houses are all built on a sand spit that straddles the San Andreas fault. So if the shaking doesn't flatten Stinson, the liquefaction followed by the possible tsunami will finish the job.

The safest homes are single story ranchers built slab-on-grade located anywhere with a moderate slope on bedrock and away from steep hillsides, such as most of Terra Linda and Novato -- in other words, many of your PoS candidates would, ironically, survive the big one. -- kind of like cockroaches in a nuclear holocaust ;-)

Mar 21, 2006, 8:20:00 AM  
Blogger marin_explorer said...

As my seismic engineer told me, just because my house stays put does not mean the hillside above and neighboring homes won't fall on top of it and you cannot insure against earth movement or landslides.

As some homeowners on Summit Road (near LP epicenter) discovered, they couldn't rebuild any damage due to shifts in the underlying hillside; the county would not issue permits. And speaking of falling, you can build on bedrock, but what happens when "bedrock" above you gives way? This wasn't in the news, but I personally witnessed boulders up to the size of freight trains come down a mountainside in '89. If Tam ever shakes hard enough, I don't want to live too close.

Mar 21, 2006, 8:36:00 AM  
Blogger Matt Norris said...

While we could debate all day about the necessities of earthquake insurance based on structure design and other characteristics of a property, the underlying issue is that even if people really DID need it (and there are people in that area who do), they can't afford it.

Actually, I wonder if banks require earthquake insurance to fund loans on properties out there? I work in Missouri. We have the New Madrid fault here, and the predictions for what would happen if there is another large quake on that fault are pretty dire, but there is no requirement for earthquake insurance.

That is interesting, considering the requirements for flood insurance if your home resides in a flood-plain. I wonder why flood insurance is a requirement, but earthquake insurance is not?

Mar 21, 2006, 8:39:00 AM  
Anonymous rejunkie said...

I am also puzzled by the comments about earthquake insurance being expensive -- it is far less than property tax and less than most people's auto policies. Compared to the median $3000 Bay Area mortgage payment, $100-200/month should be peanuts by comparison. Any homeowner in CA who does not have a policy is taking an extraordinary risk IMO. Also, always ask for a seismic report during escrow so you know exactly what the risks are. Just as I would not advocate buying in a flood plain, I would also not buy in an area with high shaking intensity.

Mar 21, 2006, 11:35:00 AM  
Blogger Rob Dawg said...

Even -if- the insurance paid as promised the coverage sucks. 13.8% have coverage because of things like a 15% deductible. $200,000 in my case. Oh hey, there's a deal, $100,000 ($300k to replace structure) coverage as long as I kick in the first $200,000. Big earthquake? I tell you it was a miracle, not so much as a crack but the very next day with the water turned off the fire got out of control, total loss, very sad. Wink wink.

Mar 21, 2006, 11:45:00 AM  
Anonymous Anonymous said...

"Compared to the median $3000 Bay Area mortgage payment, $100-200/month should be peanuts by comparison."

it should be. but this just goes to show how stretched people are. people have been stretching to buy a house, any house, and are so much so that they are paying well in excess of 50%of thier income on mortgage payments. this is just more evidence that this thing is going to blow.

Mar 21, 2006, 11:57:00 AM  
Blogger sf jack said...

"...this just goes to show how stretched people are. people have been stretching to buy a house, any house, and are so much so that they are paying well in excess of 50%of thier income on mortgage payments."

Exactly.

Mar 21, 2006, 12:58:00 PM  
Anonymous rejunkie said...

Robert-

I don't understand your math.

My policy (underwritten by the California Earthquake Authority) is $600 a year (cheaper than I thought) and has a deductible of $46000 (15%) but they will pay up to $305k on rebuilding a 1380SF house, which seems pretty reasonable to me. Better $46k out of pocket than $300k, right?

So, at $600 a year, I would come out ahead by NOT being insured after only 508 years. Yeah, earthquake insurance is stupid.

Mar 21, 2006, 4:14:00 PM  

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