Arizona Officials Apportion Bailout Funds and Wrestle with Moral Hazard

Arizona officials are trying to help house debtors with bailouts. They recognize the moral hazards, and they struggle selecting whom to save and whom to let lose their houses.

Today's featured property is a Trustee flip in Woodbury scheduled for sale on 30 March 2010.

Irvine Home Address … 215 Groveland, Irvine, CA 92620

Resale Home Price …… $549,000

T-sale Home Price …… $571,912

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Sweet dreams are made of this

Who am I to disagree?

I travel the world

And the seven seas–

Everybody's looking for something.

Some of them want to use you

Some of them want to get used by you

Some of them want to abuse you

Some of them want to be abused.

Eurythmics — Sweet Dreams

Sweet dreams come from HELOC abuse. Every house debtor and kool aid intoxicated knife catcher is riding the dream of endless appreciation and unlimited spending power. Sweet dreams indeed.

What happened to the American Dream? Has a "better, richer, and happier life" come to mean money for nothing? Consumption without production? Gain without contribution?

Microcosm of Housing Crisis on an Arizona Street

Published: March 22, 2010

[Gary Setbacken, right, talks to his neighbors in the Tatum Ranch community of Cave Creek, Ariz. Mr. Setbacken and his wife, who arrived in 1993, paid down their mortgage even as home prices skyrocketed.]

CAVE CREEK, Ariz. — … Arizona is one of five states that, with money from Washington, hopes to help at least some of these people hold on to their homes. Under a new, federally financed pilot program for the hardest-hit housing markets, state officials will decide who will get a homeowner bailout, and who will not.

The idea is as controversial in Washington as it is here. Do the neighbors next door who lived beyond their means — the ones who, say, bought that house they could not afford, or who binged on home equity loans to buy new cars and flat-panel TVs — really deserve to be bailed out with taxpayer dollars? Do they deserve to have some of their debts forgiven? And is that fair to the cautious ones who paid their mortgages?

I am amazed those questions are not rhetorical. Someone, somewhere believes HELOC abusers should be given a pass — forgiveness without consequence. At least a few officials — the few whose primary job is not to enrich lenders — are concerned about moral hazard and do not want to help those that do not deserve it.

For the people of Cave Creek, the answers will fall to state officials like Michael Trailor, the director of the Arizona housing department.

A former real estate developer, Mr. Trailor knows firsthand about the perils of the property market.

“I feel for all of them,” Mr. Trailor said of the struggling homeowners. “But we do not have the funds to help all of them. If we can help 6,000 people, which ones should we help?”

The government never fails to reinforce my cynicism; they develop a program to keep house debtors paying for a house with no equity praying for a bailout that isn't coming. More people will win the lottery than will be helped by this program or any other.

If lenders keep people in place long enough, debtors will be invested in their own poor decision, and they will endure. It will take forever for house debtors to pay off these monster loans. As each debtor gives up and sells, it adds supply and prevents appreciation from saving other debtors.

The federal government will pay for pilot programs in Arizona, California, Florida, Michigan and Nevada with $1.5 billion from the federal banking rescue. That figure is a small fraction of the funds that would be needed to help all of the people at risk. Arizona, for instance, received $125 million. If it allocates $30,000 of aid for each residence, 4,166 homeowners would benefit. But the Phoenix area is bracing for as many as 50,000 foreclosures this year alone.

Mr. Trailor said he was reluctant to help homeowners with “self-inflicted wounds,” like those who overspent or cashed out the equity in their homes during the bubble years. He wants the banks to match the public money being used for debt forgiveness, and he is focusing on people whose incomes have fallen but who still hold jobs.

He is considering an approach known as “earned forgiveness,” where the state and the banks promise to forgive mortgage debt later on, but only if the homeowners stay in their homes and keep making their payments.

OMG! How much more obvious can they be. Prove you're worthy of debt slavery by making onerous payments with no hope of equity, and the government will modify your loan in a way that keeps you in your house and maintains your fantasies of appreciation. What a deal!

Delusion is the new American Dream.

Three out of four abuse their HELOCS

Do you remember to old Trident gum ads, "Four out of five dentists surveyed…?" Well, Three out of four neighbors surveyed for this article were HELOC abusers. This is one typical street in a typical suburban town. From the many cases I have documented here, do you think Irvine is any different?

New Heroes

The new reality is evident on East Montgomery Road, where the bust is playing out in a variety of ways.

There are the Setbackens, at 4355, who arrived in 1993 and paid down their mortgage even as home prices skyrocketed. [lower right couple.]

I think you all know how I feel about what these people did; they observed the insanity around them and failed to participate. They passed up hundreds of thousands of dollars in consumer spending, and now they are going to keep their house while others search for rentals. They are true heroes and great role models.

Rationalizing their own bailout

Across the street are the Chatburns, Tim and Leslie. They also arrived in the 1990s, before prices exploded, but struggled recently to keep up with the bills after an injury kept Mr. Chatburn out of work.

Mr. Chatburn, an air-conditioning repairman, used to say that bailing out his neighbors would be unfair, but he changed his mind after watching news programs about the rescues of big financial companies like the American International Group.

“I started thinking about all this money we paid as taxpayers to the banks,” he said, “and I thought, ‘Why don’t we take care of our own a little bit?’ ”

Why don't we take care of our own? Because they are HELOC abusers! Let me buy a house and spend foolishly so I can reach into his pocket and see how he feels.

And notice the bullshit about how an injury added $100,000 to his mortgage. Perhaps, if he was injured and unable to earn as much money, they should scale back on lifestyle expenses and even downsize. No, that would require sacrifice. It is much more expedient for house debtors to live as entitled and pass the bills on to us.

Ms. Carter, at 4344, arrived in 2005, as the bubble was inflating. She took out tens of thousands of dollars in home equity for repairs and other items, and by this year, she was underwater on her mortgage by $86,000. A single mother, she moved out this month, days before her home was sold in a short sale, which meant her mortgage lender allowed her to sell for less than the value of her mortgage and the lender took the loss.

What "other items" did she purchase? What was she entitled to that she could not afford?

And then there is the young couple with a toddler, at 4343. They moved out on the same day as Ms. Carter, before a scheduled foreclosure of their home that was $115,000 underwater. The couple, who asked not to be named, also bought near the peak and took out a home equity loan to pay off their student loans and other debts. Then, a year ago, they stopped paying their mortgage, after both of them lost their jobs for a time. They now have office jobs again.

This couple really benefited from the bubble. Their student loans could not be bankrupted out of, but since they paid it off with a HELOC — a debt obligation removed in bankruptcy — they could wipe the slate clean. Of course, like everyone else who did what they did, they are hoping they never hear from either their former lender or the tax man and they will not need to declare bankruptcy. What becomes of their $115,000 debt?

Who should we help?

The Arizona official faces an easy decision about who to help. Have you noticed that the people you would feel good about helping are those that do not need it? And those people who you do not feel good about helping — HELOC abusers — are the ones who are going to get help? The frugal couple who paid down their mortgage; I would help them out if they became unemployed. The HELOC abusers; screw them, they can move into their cars like unemployed renters.

Mr. Setbacken, a salesman, said he had warned his neighbors not to get in over their heads but they did not listen. He and his wife might have stepped up to a bigger house if they, like so many of their neighbors, had gambled recklessly on the housing market, he said.

“Everybody that I know that got themselves in trouble was because of one word: greed,” said Mr. Setbacken, 63, a former Marine who remains in tip-top physical condition. “I have no sympathy for any of them, on the financial end. When I hear about dropping the amount you actually owe, I could stick my finger down my throat.”

I could care less about the default, it is paying the bill that makes me want to puke.

… Ms. Carter said she felt guilty about leaving. With her short sale, the price of the home went down to the benefit of the new homeowner. But it dragged down prices in the neighborhood, she said.

Ms. Carter, a mother of two and a real estate agent who poses as an angel with wings on her Web site, has been through hard times before. Years ago, she considered filing for bankruptcy but then changed her mind. She said she was accountable for her actions and was making what amounted to a business decision to leave her home.

“I had to take emotion out of it,” said Ms. Carter, 36. “If I had a business, and every single month I was losing money, would I keep on paying? No, I wouldn’t.”

Strategic default is now the norm. Everyone has finally realized it makes no sense to keep paying when they are at scuba depth.

Sitting at her dining room table, before a large tank of fish, she recalled how she had made this a perfect home. It is one of the few on East Montgomery Road with grass in the yard, an expensive proposition in the desert. A Mercedes sits in the driveway.

She said she did not feel she deserved to have her debts forgiven, but added that if her mortgage had been lowered, she would have tried harder to stay. The worst part, she said, is that her decision will hurt Mr. Setbacken, who has watched out for her over the years. “For Gary, he’s going to have to deal with the ramifications of what I’m doing because I’m bringing his property value down,” she said. “I pray at church. I feel horrible for what I’m doing to my neighbors.”

That guilt will disappear a nanosecond after she leaves the area. She will not keep in contact with any of those people, and she will not give them a second thought. She wouldn't worry so much about what the neighbors thought about her if she realized how little they did.

Later, after Mr. Setbacken talked to Ms. Carter — she “cried and cried and cried,” he said — he had a change of heart. In an e-mail message, he said that perhaps wealthy Americans could donate money to aid homeowners. If he had more money himself, he might help some neighbors pay their mortgage bills.

He feared that he looked heartless and sent an apologetic email to the reporter. He has nothing to be ashamed of. He is the only character in this story worthy of respect and admiration.

“I have focused on the financial issues during these times and overlooked what was more important, the emotional stress that my neighbors are feeling,” Mr. Setbacken wrote. He walked down East Montgomery Road and gave a bottle of wine to the young couple facing foreclosure. It was, he said, “to help them pack.”

That is compassion. He helped them get on their way to their new sustainable life with fewer entitlements. It is far more compassionate to help them pack than try to keep them in a home they cannot afford, particularly when someone who can afford the home is waiting for it to be vacated.

Mr. Setbacken,

I salute you.

You represent the best of American character.

Irvine Home Address … 215 Groveland, Irvine, CA 92620

Resale Home Price … $549,000

T-sale Home Price …… $571,912

Home Purchase Price … $293,000

Home Purchase Date …. 4/24/1998

Net Gain (Loss) ………. $244,597

Percent Change ………. 95.2%

Annual Appreciation … 5.7%

Cost of Ownership

————————————————-

$571,912 ………. Asking Price

$114,382 ………. 20% Down Conventional

5.05% …………… Mortgage Interest Rate

$457,530 ………. 30-Year Mortgage

$119,095 ………. Income Requirement

$2,470 ………. Monthly Mortgage Payment

$496 ………. Property Tax

$305 ………. Special Taxes and Levies (Mello Roos)

$48 ………. Homeowners Insurance

$39 ………. Homeowners Association Fees

=============================================

$3,358 ………. Monthly Cash Outlays

-$424 ………. Tax Savings (% of Interest and Property Tax)

-$545 ………. Equity Hidden in Payment

$226 ………. Lost Income to Down Payment (net of taxes)

$95 ………. Maintenance and Replacement Reserves

=============================================

$2,710 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————–

$5,719 ………. Furnishing and Move In @1%

$5,719 ………. Closing Costs @1%

$4,575 ………… Interest Points

$114,382 ………. Down Payment

=============================================

$130,396 ………. Total Cash Costs

$41,500 ………… Emergency Cash Reserves

=============================================

$171,896 ………. Total Savings Needed

Property Details for 215 Groveland, Irvine, CA 92620

——————————————————————————–

Beds: 3

Baths: 2 full 1 part baths

Home size: 1,971 sq ft

($279 / sq ft)

Lot Size: 2,100 sq ft

Year Built: 2005

Days on Market: 163

MLS Number: P709421

Property Type: Condominium, Residential

Community: Woodbury

Tract: Wdgp

——————————————————————————–

According to the listing agent, this listing may be a pre-foreclosure or short sale.

This property is in backup or contingent offer status.

Lovely home in the award winning Woodbury Community, a perfect place to live, dine and shop. Conveniently located next to the Woodbury Towncenter, I5 Frwy. and the O.C. Great Park. This luxurious home features a formal dining room, a great room perfect for entertaining, harwood floors throughout 1st level, Santa Cecilia granite counter tops, plantation shutters, recessed lighting w/ dimmers, a walk-in closet and balconies. —- Enjoy the Woodbury outdoors! Jeffrey Open Space Trails, lagoon & competition pools, tennis, basketball and volley ball courts, play parks, bbq and much more. Agents, please see remarks.

It is looking increasingly unlikely this will be an approved short and will instead become a trustee sale.

Short Sale Asking Prices

Have you noticed that short sale asking prices are low just to attract 20 offers? Today's featured property is no different. The resale comps suggest a value of about $590,000.

115 Spanish Lace — A 3 bed 1,960 SF CONDO — 2006 12/09/2009 $ 550,000
84 Townsend 1 — A 3 bed 2,100 SF CONDO — 2005 12/22/2009 $ 594,000
81 Mission — A 3 bed 1,960 SF CONDO — 2005 8/28/2009 $ 560,000
53 Chantilly — A 3 bed 1,960 SF CONDO — 2006 12/31/2009 $ 625,000

Is the bank going to sell this property as a short for less than comparable sales at $549,000?

Lenders use the short sale offer time to establish fair market value for resales which is useful information for their loss mitigation teams. Many times they are a servicer who isn't authorized to sell as a short which is why you often see properties go to foreclosure when there are short sale bids at higher prices. Knowing fair market value also gives the lender guidance on how much they can drop a bid at auction.

Irvine has been seeing action among cash buyers, and the gap between trustee sales comps and resale comps is small on the more desirable properties. The trustee sale comps suggest this property will go for about $490,000 at auction; although, we would not bid that high. Even at a $571,912 trustee flip price, the maximum bid is probably too low to get the property.

84 TOWNSEND — A 3 bed Condominium — 2005 9/23/2009 $ 502,200
92 TOWNSEND — A 3 bed Condominium — 2005 12/3/2009 $ 451,000
68 TOWNSEND — A 3 bed Condominium — 2005 2/3/2010 $ 501,000
89 WINDING WAY — A 3 bed Condominium — 2005 2/10/2010 $ 515,597
77 CANAL — A 3 bed Condominium — 2005 2/17/2010 $ 430,000

84 Townsend was a quick flip for about a $90,000 gain. Rental parity is a surprising $585,000, courtesy of Ben Bernanke and 5% interest rates.

62 Shadowplay — 3 bed SF CONDO — 2,146 33 $ 2,900
28 Pink Sage — 3 bed A SF CONDO — 1,745 66 $ 2,800

If you believe rents and interest rates are stable, or if you see this property as a long-term personal residence, there are reasons to consider this property.

43 thoughts on “Arizona Officials Apportion Bailout Funds and Wrestle with Moral Hazard

    1. AZDavidPhx

      The real estate angel PFFFFFFFFFF

      So let me get this straight. You peddle overpriced used houses to people for money. You drink your own Kool Aid and buy an overpriced used house for yourself. You then ditch the house, but continue to peddle overpriced used houses to people for money.

      Suddenly it is a “business decision for her”. So much for that dream of home “ownership” that realtors ( little ‘r’ ) love to talk about.

      She had to remove all of the emotion. Yet this exactly what realtors do to make their money – get buyers to act on their emotions.

      We can only hope that she will go back to making an honest living on the pole and leave the house peddling to less prestigious members of society.

      1. wheresthebeef

        I love her quote: “I had to take emotion out of it,” said Ms. Carter, 36. “If I had a business, and every single month I was losing money, would I keep on paying? No, I wouldn’t.”

        I think what she meant to say is that the home was no longer a productive earner, so we had to give him his pink slip. At least this realtor sees the big picture…that house won’t regain it’s value for a long, long time. Otherwise she would have stayed put.

        Real estate angel. That is hilarious. Angel of (Financial) Death is more like it.

        1. AZDavidPhx

          Yes! Homeownership is now a “Business Decision”! If the house is not earning money like a good business should well then you just hit the road, Jack. Gosh, I guess that nice car of hers sitting in the driveway must still be bringing in the bacon because she didn’t send that worldly possession back to the non-performing asset junkyard.

          She just felt horrible and cried and cried to the neighbor. DRAMA. Boo Hoo Hoo Go cry in a rental.

          She could not care less about “the neighbors” it’s just her own ego she feels sorry for.

    1. IrvineRenter

      BofA to start reducing mortgage principal-sources

      ” WASHINGTON, March 23 (Reuters) – Bank of America will on Wednesday announce plans to start forgiving mortgage loan principal for troubled homeowners who owe more than 120 percent of their home’s value or are battling ever-expanding “negative amortization” loans.

      According to a summary of the program obtained by Reuters, Bank of America pledged to offer an “earned principal forgiveness” of up to 30 percent in two stages. The lender will first offer an interest-free forbearance of principal that the homeowner can turn into forgiven principal annually over five years, provided they stay current on their payments.”

      It is another dangling carrot. To qualify for principal reduction, the borrower needs to be hopelessly underwater, which means they are better off walking. Further, the principal reduction only occurs if they overpay for five more years at which time BofA is betting prices will have recovered enough that principal reduction will be unnecessary.

      This hope for principal reduction 5 years from now benefits only BofA.

      1. AZDavidPhx

        It basically sounds like another shell game brought to us by the Banking Cartel of the United States aimed at strategic defaulters. Notice that if you lost your job and can’t slave well then you will not be able to qualify for this program.

        It’s not a real no strings free lunch principal reduction. You have to slave away for 5 years to make interest payments on your hopeless loan and at the end you will only be 80% underwater.

        It’s a good strategy. The banks know we are looking at a Japan decades long real estate bust – but the average tool on the street thinks a recovery is just a foregone conclusion and on the way soon just as predictable as the time between winter and spring.

        1. Chris

          Bingo! The keyword here is ‘slave’.

          Without indenture servants, um….ooops….I meant homeowners, banks can never decrease or get rid of their uncollectible accounts receivable.

          Whew…thank God for mark-to-fantasy.

      2. cara

        There’s forebearance on that principal amount in the meantime, so no, you won’t be making over-large payments for those 5 years. Or not necessarily.

        If they immediately get the effective loan amount that you’re paying interest and principal on down to 100% of the current value, and then forgive the foreborn principal after 5 years, it’s not necessarily debt slavery. At a minimum it’s not any worse than buying outright now, except for the 5 year time commitment. That’s a big commitment.

        It’s not also not clear to me that you’re reading the principal reduction to 100% of the value after 5 years correctly. There’s no way to know from the article if that’s 100% of today’s value or 100% of the value in 5 years which is your conclusion.

        All in all, there are specifics here that are unclear, and that make all the difference on whether this makes sense for both parties or not.

        1. IrvineRenter

          You are correct. Without seeing the actual contract, I do not know how the details will work out. I do have a difficult time imagining that this program — designed by the bank — does anything other than benefit the bank.

          If I were the bank, I would convince people to pay as much as possible and look to the government to pay the rest. If I dangle a carrot of principal forgiveness if the value has not reached the loan balance after 5 years, many will keep paying. After 5 years on an amortization schedule, the loan balance should be smaller, and some appreciation may occur, so the actual amount of any principal forgiveness would be small.

          There is no way I would combine this with principal deferment because it increases the likelihood of me actually writing down principal.

          Also, I would write a provision into the agreement where I could game the appraisal or defer principal again later. In short, if I were the lender, and if I created the program, I would screw the borrowers. I don’t think BofA is going to be any different. I could be wrong. Perhaps they have a social conscious and want to be magnanimous with borrowers… not.

          1. cara

            Principal deferrment is definitely part of the picture based on that article.

            “The lender will first offer an interest-free forbearance of principal that the homeowner can turn into forgiven principal annually over five years, provided they stay current on their payments.”

            Interest free forebearance.
            Can turn into forgiven principal.
            Sure sounds like my reading is “right”.
            But that assumes that Reuturs got it right. Which is questionable given the preliminary nature of the report.

            Keep in mind that the carrot has to be tempting enough for borrowers to take it. Otherwise the “program” is just optics because it won’t have enough takers.

            The purpose for BofA is having a whole book of underwater business that will go from non-performing to performing AND have write-off that don’t need to be taken fully now. If it can also stem a new wave of foreclosures that would lead to further depression in their collateral, all the better.

            Keep in mind it’s also a very thin slice. Must be over 120% underwater, but if you’re over 130% LTV then the program doesn’t fully restore you to break even. If it’s a strategically chosen enough slice…

          2. E

            Debtmonkeys were dumb enough to put themselves into the position they are now in. Throw a vague promise of “Hey we’re willing to work with you!!!”, and they’ll fight their way to the rope that they’ll hang themselves with.

            Banks are playing them for the suckers they are.

        2. AZDavidPhx

          So let me get this straight. I owe 100K on a house worth 50K.

          BoA calls me up and says they love me and want to help. They say

          “Well Mr. AZDavidPhx, how would you like to pay interest on a 70K mortgage rather than pay interest on a 100K mortgage?”

          OK

          “And since we love you so much here at BoA, we will even sweeten the deal by taking that interest money on the remaining 30K that you did not pay and deduct that amount from your loan balance IF YOU CONTINUE to be a good little lemming and don’t default on your moral obligation to serve us your master”

          Am I understanding correctly? The bank is basically saying they are willing to take a little less interest from the debtor? I assume the rest will come from the taxpayer coffers.

          I fail to see how this is at all helpful to a severely underwater house debtor. It seems like one of those cashback schemes that the credit companies would do. Spend a dollar to save 30 cents.

          1. cara

            Calculated Risk has an update on it.

            It’s only for certain originations.
            CR on BofA principal reduction plan

            “this is for specific loans only (Countrywide subprime, Option ARMs and a few others), and BofA estimates this will apply to about 45,000 borrowers for a total of about $3 billion in principal reduction. ”
            (much more in the post)

      3. Unclear

        Two things are unclear to me:

        1. Is there a principal reduction every year for 5 years (assuming bank conditions are met)?

        2. “Bring home value to 100% of loan”. Is that 100% of today’s value or 100% of the whatever value the home will have in 5 years?

        Technical questions but important ones.

        1. AZDavidPhx

          It’s nothing more than the usual monthly payment innovation. The are resurrecting the teaser payment by “deferring” up to 30% of the debtors negative equity allowing him to reduce his monthly payments by paying interest on the non deferred amount.

          Of course he is still paying interest to the banks – just not as much.

          They will then calculate how much money the debtor got out of paying and reduce his overall principal by that amount.

          As far as I can tell the amount of savings to the debtor is peanuts compared to the interest that the banks are raking in on the smaller amount.

          At the end of the fifth year the debtors house value has declined another 20% and he is right back where he started. He would have been better off telling the bank to shove it, go rent for 50% his mortgage cost, and save the rest.

          This serves no purpose other than to string people along with false hopes of a price recovery.

          Ridiculous.

          1. AZDavidPhx

            I meant up to 100% of the debtor’s negative equity or 30% of the principal – whichever is the smallest amount of course.

            So if I owe 100K on a house now worth 50K then I can potentially get a 30K reduction of my principal.

            Of course that is probably impossible because there is no way that the deferred interest is going to add up to 30K over 5 years on a 100K loan. Probably end up being more like a 5K reduction in the end.

  1. Planet Reality

    “If you believe rents and interest rates are stable, or if you see this property as a long-term personal residence, there are reasons to consider this property.”

    Ahhh, progress, starting to get a little bit more realistic and consistent in the message.

    In our next session we will analyze the identity crisis of this blog, namely how it is worsening, and steps to keep readers and convert them into customers.

      1. matt138

        IrvineRenter, I assume, has spent countless hours on this blog and is doing a great service educating anyone who reads it. He should be commended and compensated. Intelligent people will make the connection between taking his advice and becoming a client as a way to increase the chances of becoming successful long term owning real estate.

        Unfortunately, the real estate agents who make the most money are full of shit and propaganda and keep their clients in the dark as much as possible. That is one key reason why so many are losing their shorts as we speak. This is a poor long term business model, short term can be quite lucrative though.

  2. AZDavidPhx

    I read this story yesterday. I loved Mr. Chatburn’s Two-Wrongs Make a Right logic. He used to feel that bailing out his neighbors was wrong until he saw “NEWS programs” that talked about the “AIG bailout”. Oh and the fact that he himself is now underwater because of his struggles to keep up with his own bills. He is all for the Hypocrisy now if it means getting to live at the expense of everyone else to pay his bills.

    I loved his phrase: “Why don’t we help our own first”

    WE?

    What is this WE business?

    What Mr. Chatburn really said was: “Why doesn’t AZDavidPhx help Mr. Chatburn first”

    That’s what he was saying. Volunteering the responsible people who did not live above their means to help him pay his cable bill.

    The answer to IrvineRenter’s question is “Yes”. Money for nothing is the new entitlement. This is outright Socialism being called for by this guy and he doesn’t even know it. When he gets back to work and his taxes go up to pay for it all, he will switch back into small government free market Capitalism mode – but for now big Socialism is AWESOME.

  3. Freetrader

    LOL! I read this article (here in Shanghai) this morning — and said to myself “This should be in the IHB”. Yep. I thought the same thing about Mr. Setbacken. He only put $2,000 down, but he’s been paying it off and has resisted tempation. As for their neighbors the Chatburns — well, it must be nice to pay your mortgage every month for nearly 20 years — and owe $100,000 more than when you started out! I wonder what they did with the money.

    As for Ms. Carter — well, sometimes there are just no words. Obviously a total dumbass (especially for going public with her stupidity) and a sorry (but sadly typical) example of a realtor. The fact that there are no barriers to entry in that business is one of its main problems. Ethical, competent realtors must be a tiny minority.

    1. AZDavidPhx

      Did you notice how the solutions being proposed by each party involved having someone else pay or “donate” money?

      WTF kind of nonsense is this?

      Letting house prices actually correct to real market value so people can buy houses with real down payments and actually own via payoff of less debt is just beyond the comprehension of the common man.

      No, let’s not let that house fall to 50K where someone can put down 10K and payoff in 10 years. Nope, let’s keep it at 200K and let other people donate their money to help pay for it while the debtor slaves for 30 years instead of 10.

      These are the solutions you get when your population is heavily leveraged. The clear thinking minority are ignored while the tyrannical majority pursue their own self interests at the expense of the responsible.

      1. Freetrader

        The only logic behind it seems to be ‘playing for time’ until the real estate bubble re-inflates or inflation catches up with current prices. I think the only real result is just a deferral of pain — which is exactly how Japan got to where they are now.

  4. Marc

    Not sure what you base your rental parity considerations on, but rents are falling. I am renting in Irvine and our rent has been lowered by 30% over the last 3 years. I expect to see another 10-15% when we renew this summer. The Irvine company has more and more vacant units which will further drive down prices. $2000 for a 2BR (which is what the better communities are charging) is not realistic anymore. Just look for a 2BR in Irvine on Craigslist: just on March 23 there were several hundred units listed

    1. IrvineRenter

      Rents will continue to be weak as long as the economy is soft. Even when it picks up, I don’t see rents shooting up quickly. Rents have been more resilient in more desirable areas — as one would expect — but they are being pressured by weakness in neighboring areas.

      1. Woodbury Renter

        I agree, I asked for $300/month reduction at least renewals and will ask for a further $200/month reduction at the next renewal in a couple of months. We are taking great care of this home and would be hard to replace.

        1. Another Irvine Renter

          I got $100 off on renewing for a 2500 sf TRock unit at $2800. My neighbor was at the same price before moving out. Let’s have a poll of curent Irvine rents.

          Woodbuyr Renter, how big and how much? Did you git your $300/month reduction?

          TIC offer a friend a renewal letter with $80 discount per month on a 2 bd attached apt. He was very happy until he found out that the detached 3 bd unit got $300 off after negotation.

      2. LNS

        I’m a reporter, working on an article about tactics for negotiating rent. I’d love to chat with you (or any other renters on the board) who’ve been successful getting their rents lowered. If you’re willing to chat, please send me an email: lscherzer@smartmoney.com. Thanks.

  5. JCT1

    The details is at BA website…

    Earned Principal Forgiveness

    Bank of America is taking an innovative “earned principal forgiveness” approach to HAMP modifications of the NHRP-qualifying mortgages that are at least 60 days delinquent with current loan-to-value (LTV) ratios of 120 percent or higher.

    * An interest-free forbearance of principal that the homeowner can turn into forgiven principal over five years resulting in a maximum 30 percent decrease in the loan principal balance to as low as 100 percent LTV.
    * In each of the first five years, up to 20 percent of the forborne amount will be forgiven annually for borrowers that remain in good standing on their mortgage payments.
    * Forgiveness installments for the first three years are set at the 20 percent level.
    * In the fourth and fifth years, the amount of forgiveness will be dependent upon the updated value of the property, so that the LTV will not be reduced below 100 percent through principal forgiveness.

    This solution will be considered when it provides a more positive outcome under the net present value test than under the standard HAMP guidelines.

    http://newsroom.bankofamerica.com/index.php?s=43&item=8662

    1. mike in irvine

      “maximum 30 percent decrease in the loan principal balance to as low as 100 percent LTV.”

      Is an important point.

      Will principal reductions have an impact on the appraisals or comps..probably not, so a !@#$ who did not pay his mortgage gets off scott free while the people who wait still end up overpaying for homes they buy.

      It also implies that the Treasury and Banks will do everything to prop up the home prices. I was hoping that prices would drop in Irvine not i am sure they will stay flat or increase.

  6. flyovercountry

    I don’t have any hostility towards bank programs that are designed to tempt people into continuing to pay on hopeless underwater homes.

    I hope banks do more of that… It puts the consequences of bad loan decisions right onto one of the parties that made the bad decision. When home debtors pay more on their underwater loans, it reduces the costs borne by responsibile home owners and tax payers.

    1. HydroCabron

      It’s difficult to argue with you here.

      Sure, quick defaults would speed the return to sane pricing, but it’s pleasing to think of the owners

      Economically, it’s a wash: reduced demand one way or another, either from shrinking credit

      I think many of the large banks will die anyway, but not until a few years of waiting for appreciation have passed without result. At some point even the federal government will see that there’s little point to the exercise. We aren’t there yet, however.

      1. HydroCabron

        Should read: “but it’s pleasing to think of the owners paying for their own sins, instead of other taxpayers.”

        (The thing was correct the first time, but I typed the wrong captcha – I am cursed to never get a post right in these comments.)

  7. Woodbury Renter

    I really don’t see how this home could have been originally purchased in 1998. Woodbury wasn’t even a gleem in TIC’s eye 12 years ago.

  8. MrB

    “Later, after Mr. Setbacken talked to Ms. Carter — she “cried and cried and cried,” he said — he had a change of heart. In an e-mail message, he said that perhaps wealthy Americans could donate money to aid homeowners. If he had more money himself, he might help some neighbors pay their mortgage bills.”

    While Mr. Setbacken is a great American, I would not say that he represents the best of American character. My interpretation of the above statement is that Mr. Setbacken was emotionally moved by Ms. Carter and so he effectively said that people with more money than him could donate money to help out the home owners. If he really wanted to help, he could always take out a HELOC on his current equity and use that to help his neighbors. But no…his heart was pulled and he promoted the idea that someone else can fix it. It’s this kind of slippery slope thinking that get us in trouble.

    Now, I’m not saying that my heart would not be pulled and that I would not make the same statement as Mr. Setbacken. I’m just saying that he’s not necessarily the best that America has to offer. The best American will have the courage to “hold the line” when the line must be held.

    1. newbie2008

      Mr. Setbacken can offer Ms Carter and her two children shelter in his house at no cost to low cost. This way will cost the taxpayers no money and MAY save Mr Setbacken some money and he may get help in keeping up the yard and house work. It looks like a win win win for Mr Setaken, Ms Carter and the taxpayers.

      And the house looks as if it’s big enough for more than 5 people. The space per person will be more than most people have in Irvine as renters or house debtors.

  9. newbie2008

    It looks as if all the walk away/short sellers already got big breaks. 1. payment of the unforgivable student loan to a forgiven house loan 2. Years of high living borrowed money which may be forgiven upon FC and default. The only ones that have not been given big breaks are the savers who paid a large down payment or used the save money only to loss it in the stock market. The wise savers have very little to show for it (only loss money without getting new cars, vacations, etc.) The foolish borrows still have their home equiity paid cars, vacation memories, saving for a year or more of free rent and the possibility of a bailout. The savers are out the loss in the stock market with no talk of a bailout for them. Not even free rent.

    After all this and more, I decided to save less. The banksters and govt. are going to take it anyways.

    Thank you IrvineRenter for yesterday’s post. It was the wisest advice for the stock market that I’ve ever read (both in business publications and study at Cal and other unversities).

  10. Soylent Green Is People

    Should be required reading for anyone who believes strategic defaulting is simply a “business decision”. I enjoy asking people who think contracts aren’t worth the paper they are printed on “tell your kids after investing too much in them don’t see any return so your’re going to walk away….” is that all right? How this differs from a financial commitment is unclear to this writer.

    To those people in genuine sufferance, forbearance. For those people with self inflicted wounds, foreclosure, and quick.

    My .02c

    Soylent Green Is People.

    1. IrvineRenter

      I don’t see strategic default as going back on any contract. Strategic default is exercising the borrowers contractual right to forego payment in exchange for the underlying collateral the borrower possesses. The lender may prefer the borrower pay under the repayment plan terms, but the borrower has either option, the exercise of which is completely at the discretion of the borrower.

      The lender also has the contractual right to allow the borrower to forego repayment and allow them to stay in the home indefinitely, which they are doing now. The failure to foreclose is the only think holding up pricing.

  11. Gemina13

    It’s interesting to see this play out in Phoenix. The housing and rental markets are anemic; the people who are buying are, for the most part, investors who dream of a reinflated bubble where they’ll be able to rent a 1500 sq. ft. tract shack for $1300/month.

    Those who still have their homes have seen prices fall by as much as, or more than, 50%. Keep an eye on this, IR. I guarantee there’ll be a mad rush for these forgiveness programs in their first few months, until prices continue to drop, and strategic defaulting looks less like a cop-out and more like the only way out.

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