Cure Rates

Ruthless incurable defaulters are in your neighborhood. Will tide of falling prices expose those swimming naked?

6 Indiana   Irvine, CA 92606  kitchen

Asking Price: $655,000
Address: 6 Indiana Irvine, CA 92606
{adsense-ir}

A hot summer night, fell like a net
I’ve gotta find my baby yet
I need you to soothe my head
Turn my blue heart to red

Chorus:
Doctor, doctor give me the news
I’ve got a bad case of lovin’ you
No pill’s gonna cure my ill
I’ve got a bad case of lovin’ you

Bad Case of Loving You — Robert Palmer

{book2}

Late summer thread, on the internet
Have you read your IHB yet?
They want you to pay their debt
Turn their world black from red

Geithner, Geithner give me the news
I’ve got a bad case of owin’ you
No postpone is gonna cure my loan
I’ve got a bad case of owin’ you

Bad Case of Owin’ You — Irvine Renter

Late payment date, don’t you fret.
I haven’t found your loan yet.
I need you to apply my mod,
Cure your loan, keep the facade.

Banker, Banker singing the blues
I’ve got a bad case of moddin’ you
Mod harm is gonna cure your ARM
I’ve got a bad case of moddin’ you

Bad Case of Moddin’ You — Irvine Renter

In Shadow Inventory in Orange County, I wrote the following about cure rates:

Cure Rate

When a mortgage holder gets behind on payments, they often “cure”
the deficiency — well, at least they used to. The cure rate in early
2007 was 45%; It recently fell to 6.6%.The
cure rate is the ratio of the number of loans cured divided by the
number of delinquent loans in the system. It is a measure of the
percentage of loans each month that leave Shadow Inventory. It is a
direct measurement of one of the methods of exiting the system — the
other being foreclosure. When a property goes delinquent, what isn’t
cured is a foreclosure.

Cure rates are very low right now because there is so much shadow
inventory in the system that has no chance of curing. This makes the
denominator of the calculation larger than it should be (Loans Cured /
Total Delinquent) because delinquent loans are not becoming REO on
time. There are about 15,000 loans in Preforeclosure Inventory that
should be REO but due to foreclosure moratoria and other policies,
Shadow Inventory (Preforeclosure Inventory plus REO) has been growing.
This is consistent with anecdotal reports I have heard.

Today, I want to take a closer look at cure rates and relate the micro-economic decisions of individuals to the macro-economic statistics.

Cure Rate and Equity

Defaults are loan disease. There are many causes of the disease, from unemployment to loss of market value, but there is only one symptom that lenders care about — defaults. There are two important dates concerning defaults; (1) the date when lenders consider a borrower to be a default problem which is 60 days after payment was due, and (2) the date when the Notice of Default is permitted to be filed which is 90 days after payment was due.

The lenders do not control the first date — when the borrowers actually quit paying — but they do control the second date — when they file a notice of default. What is customarily a 30 day gap has extended by months. Part of our famed Shadow Inventory is trapped in this moratoria gap.

Patients who are in good health cure from disease better than those in poor health. Borrowers whose finances are strong — have equity — will cure at better rates than those who are underwater or facing a rental savings enticement. Many who see better futures in different circumstances will walk away from the debts and succumb to the loan disease. In borrowers terms, the cure for loan disease is to quit paying.

Curing Default

There are many factors that influence who will cure their loan and who will not. One of the most important of these factors is their equity position.

When people have equity in their homes, they cure at very high rates. Either the loan officer will modify the loan, or they will force sale. The owner generally will choose to sell and obtain their equity to live on. If you have a borrower in default with a low Loan-to-Value (LTV), they will cure either by loan modification or open market sale at nearly 100% rates.

As LTVs get higher, percent equity or Equity Position gets lower. As the equity position gets smaller a number of negative factors work together to lower cure rates quickly:

  • Lenders feel less security extending credit.
  • Loan modifications are more difficult to obtain.
  • Success of loan modifications declines.
  • It becomes more difficult to sell, particularly when equity falls to zero.
  • Absent faith in appreciation, borrowers have little incentive to cure.
  • If savings by renting is reasonable, borrowers have incentive not to cure.

The combination of these factors means that cure rates fall off to nearly zero as homeowners go underwater. (BTW: We will have stories of people who bought in 2006 who paid their mortgages for 25 years to get back to the value they paid. These loan (lone?) survivors will be like the Japanese WWII veterans who come out of the jungle after all these years, and they are still fighting the war.)

The equity position changes as prices change. The more prices fall in a market, the more people default and fail to cure. This adds inventory which further depresses prices; a downward spiral ensues. Have you taken a careful look at the Case-Shiller Index for Las Vegas? You see exactly what happens when you hit the downward spiral.

LasVegasCaseShilller

If there is a reason for lender collusion to withhold inventory, it is their collective fear of recreating Las Vegas in every market in America. They have not begun to face the staggering losses they will take in Orange County.

Default Rates

Default rates would also graph very much like cure rates because the same reasons that people may not cure a loan are also reasons they may wish to default. Going underwater and having rent savings available will push and pull people out of their homes. Financially, it is often the right thing to do.

This means that house prices get a double whammy; when property owners go negative-equity, they (1) default and (2) fail to cure. They become ruthless incurable defaulters adding inventory to the downward spiral — like today’s featured property owner.

6 Indiana   Irvine, CA 92606  kitchen

Asking Price: $655,000

Income Requirement: $163,750
Downpayment Needed: $131,000

Purchase Price: $1,150,000
Purchase Date: 10/4/2006

Gain (Loss) after 6% Commission: -$534,300
Percent Change: -43.0%
Annualized Appreciation: -14.7%

Address: 6 Indiana Irvine, CA 92606

Beds: 5
Baths: 3
Sq. Ft.: 3,450
$/Sq. Ft.: $190
Lot Size: 8,191 Sq. Ft.
Property Type: Single Family Residence
Style: Contemporary
Stories: 2
Year Built: 1998
Community: Walnut
County: Orange
MLS#: P702865
Source: SoCalMLS
Status: Active
On Redfin: 1 day
New Listing (24 hours)

In CUL-DE-SAC. Largest plan in complex. Huge drive way! Over $200k in upgrades with brand new re-designed kitchen and state of the art appliances. Re-built bathrooms upstairs and downstairs. Newly built opened stairwell unlike any other in this plan. Combination of hardwood & 22 inch Italian tile floors downstairs and all mahogany wood upstairs. Crown molding throughout entire home. Bonus HUGE loft with custom sink area for entertainment upstairs! 1 Bedroom downstairs that can be office and 4 spacious bedrooms upstairs, perfectly situated; all upstairs bedroom has walk-in closets!

{adsense-ir}

The owner of this property put $230,000 down. That must hurt.

52 thoughts on “Cure Rates

  1. USCTrojanCPA

    I submitted an offer for this property and the listing agent indicated that he had received over 20 offers already. Gotta love when they throw out that low teaser price on these short sales. Looks like a nice home but will the short sale close? Who knows.

    1. cara

      Gotta love those teaser priced short sales. If it was only on the market 1 day, I’m guessing no way the bank’s negotiator will accept the price, even the highest bidder. It’ll come back in a few months with a “bank approved price” and sell quickly later, just not to this bidder.

      OTOH, is sitting in a short sale contract while waiting for the market to correct further on the off-chance that you hit the jackpot really that bad of a plan? Hopefully the successful bidder put in a short sale deadline after which they can walk away with their escrow money and void the contract.

      1. Geotpf

        This house will either sell for a significant amount over asking, or it won’t sell at all, get foreclosed upon, and become an REO eventually.

          1. DarthFerret

            NewportSkipper: “It’s in backup offers.”

            That doesn’t mean the bank will accept the price. It just means that the owners have received an offer that’s acceptable to them.

            -Darth

          2. Geotpf

            Pretty much. All that means there’s a least one offer in the hopper, almost certainly more than one, probable dozens. Doesn’t mean the bank or banks will approve it.

          3. with vase

            I’ve noticed the banks and everyone is rigging the
            system right now. Out of 10 homes going to
            foreclosure auction only 1 or 2 go to bid completing
            the process the other 8 back to beneficiary where the bank sits on it and the others postponed so these clowns get more free rent. BTW a lot of these short sales that look like they supposedly sell with there “backup offer” status actually end up at the trustee sale.

      2. Eat that!

        Yes, sure lots of offers. Any of them over $1.15M by any chance? No, why not? Wasn’t the home “worth” that much recently?

  2. MalibuRenter

    I don’t believe there is collusion among lenders. There are too many of them. I think it has to do both with the volume of problem loans and with having to show losses earlier vs later. Banks are still waiting for the next deal, the next bailout, or even “for the market to turn”.

    The market will turn, but not in the direction they are hoping, at least not in coastal CA.

    1. Chris

      “Banks are still waiting for the next deal, the next bailout, or even “for the market to turn”.”

      And you honestly think our good old gubbermint is not there to oblige (bailout, stimulus, whatever)?

      The market has turned. However, it’s probably not what many in this blog had hoped for.

  3. MalibuRenter

    Previously, default and loss given default were treated as pretty much separate. As with many crises, you are asserting that typically uncorrelated numbers start to become highly correlated.

  4. winstongator

    The US market will not mirror LV. LV’s problems are very much rooted in oversupply. In those cases of massive oversupply, selling is not a good cure for even fairly high DP cases.

    Say you bought for $684k in 2007, with 50% down. Sale goes thru in June 09 for $325k. That’s still a short sale, especially considering potential non-payments accrued.

    When there is a big supply/demand imbalance it will take huge price decreases to generate sales, as is seen in many areas. Also, those areas tended to have employment profiles skewed towards home construction, RE in general, and mortgage banking. Those businesses have crashed further crushing demand. Triple down with LV & Miami is that tourism is way down too.

    There should be a way to model excess artificial demand through excess leverage & poor lending standards, pulling a year+ lagging supply, and the impact of the rug pulling of the artificial demand. Oh wait, we don’t need to model, we can just observe.

  5. Kelja

    HUGE driveway is a selling point? Probably, when an extended family of migrants move in they need the space for their work trucks and beater cars. Or, the driveway could be used for a forever garage sale.

    1. lb renter

      “forever garage sale”,love the term, that is really a problem in some neighborhoods. The city I used to live in allows only 4 garage sales a year, one a quarter because of the “forever garage sale.”

    2. Bitter Renter

      Of course the realtor wrote “drive way” rather than “driveway”, so maybe they’re actually talking about the street leading to the house. ;-P

  6. ConsiderAgain

    “Purchase Price: $1,150,000”
    “The owner of this property put $230,000 down. That must hurt”

    How many people can really afford to carry a $500k+ mortgage? Not to mention the $920k these people signed up for.

    Even though this is golden SoCal, that is a lot of debt for the majority of people anywhere in the country.

  7. d92782

    this is a delusional price, in the other direction for once. Say whatever you want about Irvine and the recession but someone will pay $900K plus for this house.

  8. NewportSkipper

    They already have. Comps are 10 Connecticut @ $887,000 and 2 Tennessee @ $900,000. They’re both smaller too. This home needs a mere 27% appreciation to reach its former price. That’s not going to take 30 years except in The Twiglight Zone.

      1. NewportSkipper

        I heard it here. Ok, he said 25 years, not 30.

        “BTW: We will have stories of people who bought in 2006 who paid their mortgages for 25 years to get back to the value they paid.”

    1. bigmoneysalsa

      BS. You are right assuming that there is no more depreciation from here. But if the value continues to fall to the levels that IrvineRenter is predicting, and then appreciates at about the rate of inflation, then 25 years is completely plausible.

    2. bltserv

      Welcome. You just entered the Twilight Zone.
      You would have said the same thing about prices falling this far 2 years ago.

  9. NewportSkipper

    I just came across this new listing of your recommended realtor. You know you would have some unkind things to say if you profiled this. Isn’t it ungrateful of him to put out such poor quality work while maintaining a permanent position on your home page? Does he even read this blog?

    “Amazing views from this recently remodeled ocean view penthouse direclty across from the Montage. This property is next to park including tennis cours, baskeball court, located in a short distance form grocery store, you cannot imagine a better location! This property would rent for thousands weekly— it can be yours all year round for merely $1500/month! Outstanding property and outstanding location! One of a kind Laguna Beach almost oceanfront. Located across the street from the 5 Star Montage Resort on Pacific Coast Hwy. Lease includes assigned parking, utilities included, and Outstanding white water views. This is a great property.”

    direclty?

    is next to park?

    cours?

    baskeball?

    located in a short distance?

    form grocery store?

    ,you cannot imagine?

    included…utilities included

    Outstanding?

    1. NewportSkipper

      “Lease includes assigned parking, utilities included, and Outstanding white water views.’

      That’s really nice of the owner to include the white water views in the lease!

    2. NewportSkipper

      And it’s not like he just had a bad day either:

      “‘ PRICE REDUCTION’ Portola Hills with Killer Views!!! 5 bedrooms and 4.5 bathrooms and freshly painted interior with a down stairs bedroom and private bath and a guest bath. The livingroom has high volume ceilings and is adjoined to a large formal dining room. Huge gourmet kitchen with granite counter tops and profressionally refinished cabnits. Large bedrooms, Master bedroom has spacious retreat with fireplace and walk in closet. All these rooms boast magical views of the the mountains. 3 car garage and resort style association with low fee’s and a neighborhood park and blue ribbon distinguished school.”

      Killer Views?

      down stairs?

      livingroom?

      profressionally refinished cabnits?

      While you’re at it: please tell him that you don’t begin a sentence with a numeral.

      http://www.word-mart.com/html/number_and_numeral_writing_tip.html

      If you’re going to shame the industry into becoming more profressional, start at home.

      1. Minimorty

        I havent agreed with much you have said in the forums so far, but I couldnt agree more with you on this. I just dont get it.

        1. Bitter Renter

          Hear, hear. I pointed out a bunch of stuff like this in Shevy’s listings awhile back but my comments were deleted and we were told that critiquing Shevy’s listings was not allowed here. I’m glad IR hasn’t pulled your comments (yet), Newport.

          1. DarthFerret

            Wow, that’s messed up. One of the trademarks of this blog is the harsh critique of unprofessionalism by realtors, so that would be rather hypocritical if one realtor was made exempt because he bought advertising on the site. Wouldn’t that be the very definition of selling out?

            I can’t help but think that this is only part of the story. Sorry, but without having witnessed the incident in question, I do have to give IR the benefit of the doubt. Not saying that you’re wrong; just saying that I need to reserve judgment for now.

            -Darth

          2. Bitter Renter

            It’s possible IR has silently dropped the edict that any criticism of Shevy’s listings is verboten here, but he certainly hasn’t made any announcement to that effect. He deleted the entire day’s post where this discussion occurred, so yeah, you’ll just have to trust that I’m not making this up.

    3. HydroCabron

      Before I choose my last reatlor, I cheked Her other listing for lose Grammar, bad speling and Unecesary Capitolization.

      I colud not find ANY MISTAKES ,so I hired her And did not Regret IT!

      If your a Realtor and cant WRITE, you LOOSE!

  10. NickelDime

    This place has a clear view of the 261 fwy. Backs to Harvard and Walnut.

    It better have triple-paned windows. And even if it did, I’d rather rent a “quiet apartment” (is there such a thing?) than be saddled with this rattle-trap.

    1. NickelDime

      Sorry – meant to say 261/Jamboree. The 261 is hardly “free”, though it is in that particular patch.

  11. IrvineRenter

    Greenspan Bubble Theory Draws 4.8 Million Shrugs: William Pesek

    Sept. 16 (Bloomberg) — As Alan Greenspan tirelessly makes the rounds to save his legacy, Singapore is reminding us why the former Federal Reserve chairman’s efforts aren’t working.

    Mr. “We Can’t Detect Bubbles” probably never thought he could learn a thing or three from an economy of 4.8 million people. This week, Singapore’s National Development Minister Mah Bow Tan unveiled measures to prevent excessive price swings in the real-estate market.

    The reason: The Asian country sees the very signs of rampant speculation in home buying that central bankers such as Greenspan long argued couldn’t be spotted or headed off. Funny how tiny Singapore can do it and the mighty Fed can’t.

    Mah, in perhaps a Freudian slip, seemed to note the irony. He said Singapore’s measures were meant to “temper the exuberance in the market.” Remember it was in December 1996 that Greenspan made the words “irrational exuberance” a euphemism for bubble.

    The world could learn from Singapore’s speculation- management efforts. The U.S. can learn the most.

    This suggestion may raise blood pressures in the laissez- faire crowd. It’s worth noting that Singapore, for all its quirks, scores highly in measures of economic freedom. A Cato Institute report this week ranked Singapore among the 10 freest economies, grading it higher than the U.S. or Switzerland.

    Full of Bunk

    The point here isn’t to celebrate Singapore’s economy or politics. Nor is it to say a $182 billion economy is a model for a $14.2 trillion one. It’s to show that central bankers are full of bunk when they say bubbles can’t be identified.

    This is blasphemy to free-market fundamentalists. Yet why did Yale University’s Robert Shiller see what the Greenspans of the world either couldn’t or refused to? That goes both for the technology-stock meltdown in 2000 and the housing one seven years later. How come Nouriel Roubini in 2006 predicted the very credit crisis the supposedly omniscient Greenspan missed?

    One reason is dogged ideology. Being steeped in a history of Ayn Rand and Ronald Reagan meant Greenspan probably never saw a government regulation he didn’t want to scrap. Perhaps hubris was part of it. In the 1990s, Greenspan was a celebrity, showing up in People magazine. It’s dangerous to believe your own press.

    Singapore’s Example

    The good news is that Asia has few of these problems. Central banks and finance ministries in the region were slower to deregulate than the U.S. was. Monetary officials in Asia never became the larger-than-life powers that they did in, say, the U.S. or Germany.

    That’s not to say Asian central banks don’t dig in their heels. The global crisis that tarred Greenspan’s standing has been good to Yaga Venugopal Reddy. As Reserve Bank of India governor from 2003 to 2008, Reddy resisted allowing the kind of leveraging and risk-taking that killed Bear Stearns Cos. and Lehman Brothers Holdings Inc.

    “If America had a central bank chief like Y.V. Reddy, the U.S. economy would not have been such a mess,” Nobel Prize- winning economist Joseph Stiglitz was quoted as saying in the New York Times in June.

    While hindsight may be 20/20, forecasting and central banking are anything but. It’s also true that one investor’s dangerous asset bubble can be another’s perfectly rational bull market. There comes a point, though, when central bankers need to take away the punchbowl.

    No one is saying bubble management is easy. It’s often more art than science. Yet today’s growth is more about easy money than genuine demand. The quality of growth matters as much as the quantity.

    Asia learned that lesson 12 years ago, just as the U.S. is today. The difference, of course, is that Greenspan’s bubbles were global phenomena. The Fed’s low-rate policies fueled speculation in high-risk assets. By 2003, speculative capital flows into Asia reached a record high, surpassing the previous peak in 1996. They had the Fed written all over them.

    You can stick with the idea that bubbles are mythical forces than can’t be tamed. Or, for a different view, you could visit Singapore.

  12. Kevin Simpson

    Is there any possibility of prices going even more down? Situation is very hard nowadays in real estate market.

  13. IrvineRenter

    Where are the subprime perp walks?

    Three years after the housing bubble popped, prosecutors have yet to bring a major case tied to the subprime fiasco. What gives?

    NEW YORK (Fortune) — Where are the perp walks for the subprime mortgage executives that dragged us into this mess?

    Three years after the housing bubble popped, federal prosecutors have yet to bring a case against the executives whose firms took part in some of the worst excesses of the subprime mortgage market.

    It’s not like there’s a shortage of abuses to investigate. The landscape is littered with the wreckage of financial institutions that crashed under the weight of bad loans, costing shareholders and taxpayers billions of dollars.

    “Many” lenders that went bust were cooking their books before they collapsed, according to a 2007 FBI report. Meanwhile, top officers at many mortgage shops were pocketing hefty paychecks and stock sale proceeds.

    And though it may be early to judge the law enforcement response — corporate fraud cases can take a long time to assemble, thanks to their complexity and limited enforcement resources — some observers are nonetheless struck by the lack of high-profile prosecutions.

    “The perp walk has been remarkably absent during this crisis,” said Steven Ramirez, a law professor at Loyola University Chicago, referring to the practice of parading a criminal defendant before the press on the way to court. “I don’t think it’s because of a lack of criminal activity.”

    http://i2.cdn.turner.com/money/2009/09/15/news/subprime.perpwalk.fortune/angelo_mozilo_f.03.jpg

    Trivial pursuit?

    Bank reports of mortgage fraud have quadrupled since 2004, according to FBI data. The agency says 80% of mortgage fraud loss cases involve industry insiders, and the cost of the cases it kept track of last year was well in excess of $1 billion.

    The Justice Department and the FBI have reported some success in bringing some low-level fraudsters to justice.

    Prosecutors in California last year indicted six people in a scheme to defraud Long Beach Mortgage, a subprime mortgage shop that was part of Washington Mutual, the giant Seattle-based lender that collapsed last year and was acquired by JPMorgan Chase (JPM, Fortune 500).

    One defendant was sentenced to 15 months in prison and four others entered guilty pleas, Justice said. One participant in the scheme was a Long Beach employee who received $100,000 for making sure the firm funded fraudulent loans, the Justice Department said.

    But some students of white collar crime are skeptical of the notion that the big subprime lenders were primarily victims of mortgage fraud.

    Prosecuting low-level cases without holding highers-up accountable risks “trivializing” white collar crime — and paving the way for the next round of financial shenanigans, said Henry Pontell, a criminology professor at the University of California at Irvine.

    “We really have learned no lessons from the savings and loan crisis,” he said, referring to the wave of bank failures in the 1980s that led to a number of notable fraud convictions. “The most germane one is that fraud plays a central role in these episodes. It acts as an accelerant for financial bubbles.”

    The only major criminal prosecution to come out of the financial crisis so far is a case due to go to trial next month against two former Bear Stearns hedge fund managers who are accused of securities fraud.

    The biggest civil enforcement action is one the SEC filed in June against Angelo Mozilo, the former CEO of mortgage lender Countrywide.

    The SEC accused him and two other Countrywide executives of insider trading and securities fraud, contending they misled investors by claiming Countrywide was lending prudently when it was making loans Mozilo himself labeled toxic in an internal email. Mozilo’s lawyer called the allegations “demonstrably false.”
    Mad as hell

    Pontell says proof that fraud was rife at the big subprime mortgage houses resides in the lenders’ files. Questions about borrowers’ income or assets were answered, in some cases, by taping computer-generated figures to blank, pre-signed documents.

    “These people were so brazen, they never bothered to take the cut-and-paste documents out of the files,” Pontell said. “Arresting those guys is like catching the fish that jump into the boat.”

    But as shameless as the mortgage fraud might have been, connecting back office corruption with the executive suite isn’t easy.

    “The problem is finding the executives’ fingerprints on the consumer files,” said Peter Henning, a law professor at Wayne State University. “Angelo Mozilo may have set the tone at Countrywide, but there is no way you’re going to find his fingerprints on any of those mortgages.”

    1. tonyE

      Low Level Fraudster:
      Dumb Crimes,
      Lots of evidence,
      Cheap Lawyer,
      Jail Time

      High Level Fraudster:
      Gray area crimes,
      Circumstantial evidence,
      Political Connections
      Teams of High Priced Lawyers,
      No jail time.

      Very few High Level Fraudsters ever go to jail. The few that do go made dumb mistakes, had political enemies and/or were careless.

  14. Pwned

    Correct me if I’m wrong, but it seems like if a bank accepts a buyer’s offer for a short sale in these markets, that’s just another way of the bank saying “Thanks, suckers!”

  15. IrvineRenter

    The Final Demise Of A Speculative Housing Bubble

    The speculative mania in housing has been extended by massive Federal Reserve and government intervention; the government now owns or guarantees 2/3 of U.S. mortgages.

    While speculative bubbles may pop in terms of sales and valuations, the psychology that underpinned the mania lives on for some time–especially if government extends the speculation with massive interventions.

    I sincerely doubt the average American understands the full measure of Federal intervention to prop up the U.S. housing market. The numbers casually dropped (with little context, of course–this is pure MSM “coverage,” after all) in the Wall Street Journal report No Easy Exit for Government as Housing Market’s Savior (WSJ.com) are truly mind-boggling:

    To keep funds flowing to the housing market, the government bailed out Fannie Mae and Freddie Mac last year and now effectively owns the mortgage finance giants and their combined $5.4 trillion in loan portfolios. To keep mortgage rates low, the Federal Reserve is on track to purchase nearly $1.5 trillion in debt issued or guaranteed by the government’s various mortgage arms and another $300 billion in Treasurys, which set the benchmark for home lending.

    What the reporters fail to mention is the value of all U.S. mortgages is about $10 trillion– meaning the U.S. government now guarantees over half of all mortgages just with Fannie and Freddie.

    But wait–it gets worse–much worse:

    Since the beginning of the year, the Fed has purchased $836 billion of mortgage backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae, the federal body that securitizes FHA loans. The purchases have helped push down interest rates on mortgages guaranteed by the firms from nearly 6.5% last October to 5.25% today, according to HSH Associates, which tracks the mortgage market.

    The Fed is likely to decide to carry on buying until it reaches the $1.25 trillion target it set in March, and then taper off gradually.

    So the Fed is buying $1.2 trillion in toxic, doomed mortgages, fully 12% of the entire mortgage market of the U.S., just this year alone. And why would the Fed print all that nice new money and exchange it for toxic mortgages worth a mere fraction of their original value? To clear the sludge off Fannie and Freddie and Ginnie’s books, so they can underwrite trillions more in questionable mortgages.

    This is an astonishing level of government intervention to prop up a housing market which remains highly speculative.

    1. HydroCabron

      It is heartening to see psychology front and center in this article.

      I made a list of false statements a few months back, after the Alcoholics Anonymous addiction questionnaire, but inverted. That is, the larger the number of statements you believed, the higher your level of real property Kool Aid intoxication.

      It went something like this:

      1) Real estate has a fundamental value apart from its uility to dwellers and productive businesses.

      2) Real estate will most likely beat inflation over any long-term period.

      3) $100,000 of housing debt at 6%, which reduces to an effective rate of 4% after tax deductions, is of less concern than $10,000 of credit card debt, or a $10,000 car loan, at 4%.

      4) The tax advantages of mortgage debt outweigh the cost of paying interest. It is better to pay $1,800 a month in mortgage interest to
      enjoy the $600 per month tax break than it is to rent for $1,200 per month in the first place. (Shorter version: it is worth spending $2
      to lower your taxes by $1.)

      5) Maintenance costs on a house increase the value of that house, and can be ignored when considering the cost of ownership.

      6) $1,500 per month in rent is money down the drain. The loss of a $60,000 down payment in 18 months is not. (Stolen from a recent comment here.)

      7) It doesn’t matter how much mortgage debt you carry. What matters is whether you can make the payments.

      8) Real estate is a special asset class, subject to different rules for risk and return than commodities, equities, and bonds. In particular, real estate is the one asset class where the common man has an advantage over professional investors, no matter the sophisticated time-series and other statistical tools, and no matter
      the insider connections the professionals enjoy. This is why part-time amateurs will usually make at least a small profit, without much time or effort. The professionals may control stock, bond, and commodities markets, but in the world of real estate, Joe Average is king.

      9) Houses are more than a consumer good. They are not just a roll of paper towels you buy at the grocery store, to be put to use and depreciated to nothing. To the contrary, their relative permanence, dependence on location, and potential for upgrading and customization make them a special asset apart from any other.

      10) It would be great to have your daughter marry a man with $250,000 a year in income and an $800,000 mortgage on a $1.2 million dollar house. It would be not so great for her to marry a renter with the same income.

      11) If a friend or relative rents, there is reason for concern about their long-term financial stability. One should try to help them by touting the tax advantages of ownership and the peace of mind and social status that ownership brings. Be careful not to talk down to them or make them feel inferior at social gatherings.

      12) If a property brings generates a certain rent today, it will always generate an equal or greater rent in the future.

      13) Decreases in real-estate prices only reflect economic recessions, and occur only in isolated 2- to 5-year stretches.

        1. HydroCabron

          Have at it. You might want to edit or streamline these. A few of them overlap others – it’s a judgment call as to how many to include, and whether to merge a couple of them.

          The short version of 4) should read: “It’s better to spend $2 to save $1 than it is to spend $1 in the first place.” Although plenty of people still believe that it’s better to spend $2.50 to save $1 than it is to spend $1, as long as the $1 you’re saving is in taxes.

          As to my own delusions, I think that, deep down, I still believe 1) and 3), even though I can demonstrate to my own logical satisfaction that they are false.

          I’m not a fan of questionnaires, but I came to this from an original belief that the bottom will be in when most people believe it’s better to rent. That led to a longer list of beliefs, because if any mania has ever rested on a compound set of interlocking delusions, it’s the real estate bubble. The number of strange statements which people do not question is quite large.

          Anyway: Do as you please with this list or the idea behind it. Many of your entries here cover these and similar beliefs.

          Maybe a 12-step program, with anonymous meetings at YMCAs and churches across the country, is not far behind?

    2. newbie2008

      I only wish that the people were tired of jumping in the speculation game. The housing prices in Irvine have gone up this summer and the stock market and related indexes are way up. Ben B. and other cheer leaders now saying the we coming out of the recession. It sound like his calls 3 to 6 years ago saying the the house prices were at the correct levels and only a few markets would have corrections leading to lower prices.

  16. Sunny Jim

    I have been a reader of this blog from afar (New Jersey) for a long time now, and this is the first time I am posting, just to drop in with this note of appreciation and thanks.

    Visiting this comment section is like attending a top-notch college class – it is smart, informative, exciting and funny.

    Cheers.

  17. try2011

    How much is this house worth in today’s market? My co-worker made an offer of $780K for 65 Briar Ln, 92602 but failed. Is this house better than 65 Briar Ln?

  18. John

    I think This is going to be difficult to have this property sold, even there is a talks of prices of houses will rise up in 2010. It’s still needs consideration on the price.

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