Lenders Start More Foreclosures to Catch Up with Delinquencies

What are we going to do with all the delinquent borrowers? Should we forgive their debts? Should we forgive $476,500 in HELOC abuse?

Irvine Home Address … 14 Foxglove, Irvine, CA 92612

Resale Home Price …… $586,550

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Nirvana — Milk It

Everyone is milking the system. I can't blame them. If I were a loan owner, and if I knew the end were coming, and if the lender were encouraging me to squat to protect their asset, I would squat indefinitely. If given the choice between paying rent or living for nothing, few are going to move out of a free house — a house they still feel like they own — to move into a rental. I don't know that entitlement dependency is good for the spirit long term, but short term, no housing cost is certainly good for the pocketbook so many people squat until the sheriff comes.

What are we going to do with all the borrowers in default?

Shadow inventory is a huge issue worth revisiting periodically. I wrote Shadow Inventory Orange County and Shadow Inventory Revisited and most recently I noted the S&P Reports Three Years to Clear Shadow Inventory and the Market Slices First Wave of Knife Catchers. When you look at the options for dealing with delinquencies, none of them look plausible.

  1. Loan Modifications have proven to be a dismal failure, and these programs will continue to fail; therefore, it is not reasonable to assume we will amend-pretend-extend our way out of this mess. And dancing until rising prices save the market isn't going to happen either.
  2. Rising prices do not absorb inventory. Rising prices can occur as a result of a lack of inventory, but buyers will not push through a massive overhead supply and make prices go up. That is fantasy thinking. Without rising incomes and a robust economy, absorbing shadow inventory will be difficult even at lower prices.
  3. Cash buyers do not take over. Cash buyers can buoy prices in small neighborhoods, but the supply of cash buyers is limited, and few homeowners have cash equity to move up because the market collapse eliminated equity from lower rungs on the property ladder. Those who have defaulted are eliminated from the buyer pool, and the calvary of cash-heavy first-time buyers is not going to ride over the hill and save us.
  4. Inflation will not save the market. Does anyone really think they will be seeing 10% YOY raises any time soon? If we do see inflation, it will come in the form of rising prices, which lower our standard of living, and in the form of currency devaluation which robs everyone of their wealth. If house prices are maintained by reducing the buying power of currency by 50%, I don't see how that is a benefit.
  5. Foreclosing on all the homes that should go through foreclosure will crush prices to the stone ages and keep them there for eternity. The people foreclosed will not be able to buy, so investors will need to convert them to rentals to shelter the recently foreclosed. This scenario is already taking place in Las Vegas, Phoenix, and Riverside County.

I really don't see the end game here. A quick recovery to peak prices followed by double-digit appreciation is not going to happen. Stabilization of prices is tenuous if millions of properties must go through the meat grinder. The areas least impacted by foreclosures will still face the substitution effect as beaten down neighborhoods attract bargain hunters.

If we push every defaulting borrower out and remove them from the potential buyer pool for five years, we will not have enough buyers to absorb the supply. If we don't push defaulting borrowers out, we encourage moral hazard on a grand scale. Once all sanity is lost, the taxpayer funded bailouts will continue to grow as we bail out every form of borrower foolishness. We don't have many good options.

For now, lenders are beginning to foreclose in earnest, but they are still falling behind the defaults and creating more shadow inventory.

Foreclosure starts up nearly 20 percent in California

DISCOVERY BAY

March 15, 2010 4:33am

  • But despite foreclosure inventories, foreclosure sales drop
  • ‘The disconnect between delinquencies and foreclosure sales continues to widen’

After reaching the lowest level in a year in January, Notice of Defaults, the start of the foreclosure process, increased by 19.7 percent in February, according to a report Monday from ForeclosureRadar Inc., a Discovery Bay-based foreclosure information company that says it tracks every California foreclosure.

The number of properties scheduled for foreclosure sale remained near record levels in February, yet foreclosure sales, either “Back to Bank” or “Sold to Third Parties,” dropped by 11.9 percent total.

“The disconnect between delinquencies and foreclosure sales continues to widen,” says Sean O’Toole, founder and CEO of ForeclosureRadar.

In short, we are building shadow inventory.

“While efforts to slow foreclosures are clearly working, it remains unclear that anything has yet addressed the core problem of excess household mortgage debt,” he says.

Nothing is being done because lenders see excessive household debt as a virtue to be preserved and policymakers don't care.

After four consecutive months of decline, Notice of Default filings bounced up by 19.7 percent to 31,004 statewide. Filings of Notices of Trustee Sale, which sets the date and time of the foreclosure auction, increased slightly as well, rising 3.6 percent to 28,195 filings, according to ForeclosureRadar.

Foreclosure sales are the last step in the foreclosure process and result in the property being transferred from the homeowner either back to the bank, or to a third party, typically an investor.

Foreclosure sales decreased 11.9 percent in February, with the portion going “Back to Bank” dropping by 14.3 percent and the portion to third parties dropping by 2.7 percent.

“Despite our prediction that we may see a wave of cancellations as the [Obama] Administration pushed to make trial loan modification permanent, cancellations remained flat, likely indicating that the Home Affordable Modification Program conversion drive is failing,” says Mr. O’Toole.

I am surprised Mr. O'Toole predicted a government bailout program had a chance at success. He must not watch the workings of government very closely. His observation is correct: the program is failing.

Despite the increase in Notice of Default filings in February, ForeclosureRadar’s estimated number of properties in Preforeclosure dropped 8.0 percent due to the relatively high number of Notice of Trustee Sale filings, it says.

Properties exiting the foreclosure process nearly matched the number of new Notice of Trustee Sale filings, leaving the number of properties scheduled for sale in February flat compared to January. Year-over-year, the increase in properties scheduled for sale “is a dramatic 126.3 percent, as more and more homeowners have found themselves on the brink of foreclosure,” the report says.

Banks continue to resell their bank owned (REO) property in “a timely manner,” with their inventories also flat from January to February, says ForeclosureRadar.

The courthouse steps remain highly competitive with discounts to market value dropping from 17.5 percent in January to 15.2 percent in February, the report says. “Despite fewer foreclosure sales overall in February, as well as smaller discounts due to competitive bidding, third party investors purchased more foreclosures, at 23.2 percent, than at any other time since we began tracking trustee sales in September 2006,” it says

Trustee sales are the action. Increased liquidity in this market is a dream for lenders. Once they begin catching up on their shadow inventory backlog, investors will be there to mop up the mess.

HELOC Abuse

You do have to wonder how a property that has doubled in value ends up as a short sale.

  • This property was purchased on 4/24/1998 for $293,000. The owners used a $263,500 first mortgage and a 29,500 downpayment.
  • On 10/9/2001 they opened a HELOC for $96,000.
  • On 8/6/2002 they opened a HELOC for 93,500.
  • On 8/25/2003 they refinanced the first mortgage for $322,700.
  • On 11/24/2003 they opened a HELOC for $70,000.
  • On 6/14/2004 they opened a HELOC for $125,000.
  • On 2/18/2005 they opened a HELOC for $282,500.
  • On 5/23/2007 they refinanced the first mortgage for $592,000.
  • On 6/8/2007 they opened a HELOC for $148,000.
  • Total property debt is $740,000.
  • Total mortgage equity withdrawal is $476,500.

Foreclosure Record

Recording Date: 06/11/2009

Document Type: Notice of Sale (aka Notice of Trustee's Sale)

Foreclosure Record

Recording Date: 03/04/2009

Document Type: Notice of Default

JP Morgan/Chase wrote that last HELOC. WTF were they thinking?

Given the pattern of HELOC abuse, why would you loan these people money? Oh yeah, real estate prices always go up.

Even with all we have seen, the ignorance and sheer stupidity of lenders still amazes me.

Irvine Home Address … 14 Foxglove, Irvine, CA 92612

T-Sale Home Price … $586,850

Home Purchase Price … $293,000

Home Purchase Date …. 4/24/1998

Net Gain (Loss) ………. $258,639

Percent Change ………. 100.3%

Annual Appreciation … 6.0%

Cost of Ownership

————————————————-

$586,850 ………. Asking Price

$117,370 ………. 20% Down Conventional

5.05% …………… Mortgage Interest Rate

$469,480 ………. 30-Year Mortgage

$122,206 ………. Income Requirement

$2,535 ………. Monthly Mortgage Payment

$509 ………. Property Tax

$122 ………. Special Taxes and Levies (Mello Roos)

$49 ………. Homeowners Insurance

$133 ………. Homeowners Association Fees

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

$3,347 ………. Monthly Cash Outlays

-$435 ………. Tax Savings (% of Interest and Property Tax)

-$559 ………. Equity Hidden in Payment

$231 ………. Lost Income to Down Payment (net of taxes)

$98 ………. Maintenance and Replacement Reserves

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

$2,683 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————–

$5,869 ………. Furnishing and Move In @1%

$5,869 ………. Closing Costs @1%

$4,695 ………… Interest Points

$117,370 ………. Down Payment

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

$133,802 ………. Total Cash Costs

$41,100 ………… Emergency Cash Reserves

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

$174,902 ………. Total Savings Needed

Property Details for 14 Foxglove, Irvine, CA 92612

——————————————————————————–

Beds: 4

Baths: 2 full 1 part baths

Home size: 2,092 sq ft

($282 / sq ft)

Lot Size: 3,040 sq ft

Year Built: 1967

Days on Market: 77

MLS Number: P716613

Property Type: Single Family, Residential

Community: University Park

Tract: Cc

——————————————————————————–

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

4 Bedrooms,2.5 Bath,convenient floor plan,now shown by appointment only,Masterbedroom with two balconies,seperatedfamily kitchen area,gated side& backyard provide privacy,highly ratedtop schools,convenient location to shop,school & market,inside laundry

Trustee sale opportunity

Today's featured property is scheduled for auction on April 1, 2010. The short sale listing is for $590,000, but if we obtain the property at auction, we would sell it at $586,850. The comps suggest the resale value is above $600,000. The outlier, 20 Queens Wreath Way, is directly on the 5. The other 4 comps are better with 32 Foxglove being closest.

20 Queens Wreath Way — A 4 bed 1,896 SF SFR — 1965 5/05/2009 $ 455,000
18 Bayberry Way — A 4 bed 2,700 SF SFR — 1967 9/29/2009 $ 650,000
10 Wintersweet Way — A 4 bed 2,231 SF SFR — 1966 9/03/2009 $ 658,000
32 Foxglove Way — A 4 bed 2,000 SF SFR — 1967 8/04/2009 $ 650,000
26 Wintersweet Way — A 4 bed 2,145 SF SFR — 1966 1/28/2010 $ 658,000

This would be a reasonable deal by current market standards.

56 thoughts on “Lenders Start More Foreclosures to Catch Up with Delinquencies

  1. cara

    I’d give this one more like an F, I think we’re approaching the limit of lender foolishness here. Maybe that’s wishful thinking. But a new HELOC every year is definitely gaming the system.

  2. Sean

    IHB, I am afraid you’re wrong – foreclosure and bankruptcy are the solutions. Foreclose on all the delinquent borrower – make the goal a trustee sale within 6 months of initial default. This does 2 things.

    First, it starts to counteract the current problem created by the combination of Obama mandated modifications and bank inaction, which encourages both strategic defaults and permasquatter defaults, because people correctly recognize that they can live with a housing cost of zero for up to 2 years right now. THAT is a large part of delinquencies continuing to increase. No one fears that default means you’re out on the street within 6 months anymore.

    Second, as soon as the foeclosure inventory crushes prices, guess what? Sales will increase. Demand is elastic and totally price dependent. By driving prices down, you will create new buyers on the demand curve and the marketplace will absorb much of the overhang and reach a new supply/demand/price equalibrium within 2 years and then resume appreciation on a fundamental basis, just like 1993-1996, when 1997 marked the return to normal (however shortlived normal proved to be). Foreclosed “homeowners” will rent, creditworthy renters will buy homes, etc. Morons who funded the nonperforming loans will get their just rewards.

    If we had started the market based inventory clearance process a year ago, instead of indulging the extend and pretend fantasy, we’d be halfway there by now.

    1. Chris

      Foreclosure and bankruptcy are actually **normal** results of an overinflated housing bubble that popped.

      Unfortunately, we’re currently not in a **normal** market IYKWIM 🙂

  3. awgee

    Agree with Sean.

    If foreclosures crush prices, present creditworthy renters will become buyers. Foreclosures are a free market force and in a free market prices will decrease or increase to demand. Foreclosures will not cause an excess of supply except maybe very temporarily. One needs only to look at the last couple of years and see what foreclosures did to lower end sales.

  4. Hank

    I would like to second Cara’s observation. Also, I think more focus needs to be directed on the lenders enabling this idiocy. I like how you highlighted JP Morgan-Chase as the guilty party issuing the last HELOC, but what about the others? I mean, come on; these banks have to realize there is no way anyone can pay back these loans.

    1. AZDavidPhx

      That’s the dirty little secret – these loans are never supposed to be paid off. The house is just supposed to be a never ending mortgage revenue stream to the banks. Keep all the people slaving away to the impossible debt using their wealth to run a global ponzi scheme to enrich Wall Street elite.

      The banks know that people can’t pay off these loans and that’s just how they like it.

      Notice that every scheme they keep trying is all about keeping the debt increasing. If the people won’t do it themselves then Government will do it for them.

      It’s all about enriching the wealthy and keeping a large supply of obedient workers competing for labor so as to keep wages low as possible. It’s not rocket science.

  5. christian

    Default is the just the extension of the neg-am loan craze, if the banks will let you live in a house for less that the interest on the place, why not live in it for free for 2 years. That sounds like a deal!

  6. Walter

    I would like to third Cara’s observation.

    A different subject, but providing insight to what all these bailouts do to our society: a friend of mine owns a catering company. As unbelievable as this sounds, he is finding hiring quality drivers just as hard as the boom times. Reason, many of the applicants are collecting unemployment and they turn down the job saying why work for you for $10 – $12 an hour when I am getting $8 an hour watching TV and playing my X-box.

    1. Swiller

      And they are right….who wants to work a crappy catering job for a few measly more bucks an hour?

      It’s all about entitlement. I went to a party a few weeks ago where my boss and I were the only fulltime workers. The rest of the 8-10 people there were all on government handouts…everything from disability, worker’s compensation, unemployment benefits, foodstamps, and social security.

      There’s quite a few agencies handing out our tax dollars. Until that ends, of course no one will work sh1t jobs for rich banana republicans to amass even more wealth, we need to cut off the defacrats main bribery to get votes.

      1. Walter

        In addition he pays mileage and you get to keep the tips. In the end the hard workers sometimes clear over $300 a day. He has many happy employees and while finding good people takes some work, he has enough employees on staff 80% of the time and will let the current employees rack up over time to fill the gap.

        Hey, someone has to make some money to pay taxes so the rest can fiddle with the X-Box all day…

  7. John

    At the beginning of this crisis, I thought at some point, these banks would have to flood the market with foreclosures.

    But now, from what I’ve seen, I think these banks will keep holding these houses on their balance sheets as long as they can (particularly the high end ones), to a point where the shadow inventory is extremely high, then they are going to use that fact as leverage and demand govt. bailout again (essentially holding taxpayers hostage again). Their reasons for a required bailout are:

    1) if they flood this market with foreclosure now, price drops will be catastrophic. We know that a slight majority of Americans are homeowners and they don’t want to see that, and

    2) if they don’t flood the market, then big banks will fail (and we all know that Bernanke wouldn’t want big banks to fail, right?)

    1. Planet Reality

      That’s about right.

      The bottom line is that the banks collapse if they are forced to recognize the losses.. so what do you think they are going to do? More extend and pretend and more government bailouts.

      Of course some bank may decide to go suicidal and break up the banking cartel by recognizing all of their losses and going into insolvency, good luck with that theory. If for some suicidal reason and bank took on that strategy, the bank would be sold to a former Goldman sachs executive faster than you can say ZIRP.

      1. Planet Reality

        I expect the government bailouts will continue to have little impact on undesirable areas of the US.

        The major impact is in desirable areas. All of the bailouts and all of the money sloshing around in the system goes directly to premium areas.

        1. HydroCabron

          True, yet some still persist in the foolish notion that market forces will have some affect in these swanky regions.

          The government attempts to prop up the undesirable areas failed because the market does have the final say there.

          The desirable areas are an entirely different ball game. They are full of light, bright, and gracious homes, owned by only the best people. Even when these folks lose their jobs, they will continue to pay from their ample savings, or will sell their properties to foreign cash buyers eager to own a high-class and exclusive property, suitable for entertaining and raising a good family. Such buyers will be more than happy to cover the HELOC appreciation on all desirable homes, since that reflects the true earning potential of these elegant properties.

          It is different in the sophisticated communities. Prices there will never go down, thanks to government intervention and those well-heeled move-up buyers from undesirable areas, flush with cash from the sale of their old undesirable home and ready to pay what it takes to enjoy fine living.

          1. avobserver

            Nice whiff of sarcasm. We need that.

            Housing market in places like Riverside tanked faster because of lack of industries and jobs. Riverside economy was pretty much supported by the construction/housing industry during bubble era. Once bubble burst so went their whole local economy, and buyers dried up immediately (That’s why fundamental does matter). And there is no substitute effect as IR often stated. Very few would want to spend 3-4 hours commuting to work no matter how cheap Riverside houses are in comparison to OC.

            But within OC it is a different story. Irvine will probably always command a premium over some of the adjacent areas for a variety of reasons. Let’s say a house in Irvine would be priced 20% higher than a comparable house in Mission Viejo (hypothetically speaking). For a house priced at $800K in MV, people would be willing to pay $960K in Irvine. But if the house price in MV drops to $600K, the price in Irvine will go down to $720K (still 20% higher than MV). Substitute effect makes sure no local market is immune to a broad housing market correction.

            Personally I can tolerate a 10% price differential, i.e., buying in Irvine vs another city like Laguna Niguel or Aliso Viejo, due to convenience to work and better public school for my kid. Anything more than that would be ridiculous. Heck, for that kind of money I can send my kid to a private school or get a top notch tutor. And would you drive an extra 20-30 minutes a day if it means saving $10K a year on mortgage payment and property tax? I would.
            The buffer zone provided by large down payment buyers and artificially low supply in some of the higher premium market such as Irvine should be gone in a couple of years. Don’t forget we are only 3rd year into this housing crisis, and things tend to be more capricious at early stages as people have to absorb and digest a new reality while trying to figure out the new rules of the game. Both gov’t and individuals tend to be hyperactive in this environment to either try to counter the onslaught of the housing decline or find ways to take advantage of the situation. From 2013 and onward, the futility of all these effort and activities will become more apparent to everyone, and the broad housing market decline will hopefully show a more predictable pattern.

            But in the not too distant future even the substitute effect could break down if we are heading toward a “City of God” (love the movie) housing market, where you have either nice gated community with armed guards, or slums. But that won’t happen until the middle class in this country is thoroughly destroyed – we are definitely heading that direction but it may take a couple of decades to reach that point.

          2. Geotpf

            Housing market in places like Riverside tanked faster because of lack of industries and jobs. Riverside economy was pretty much supported by the construction/housing industry during bubble era. Once bubble burst so went their whole local economy, and buyers dried up immediately (That’s why fundamental does matter). And there is no substitute effect as IR often stated. Very few would want to spend 3-4 hours commuting to work no matter how cheap Riverside houses are in comparison to OC.

            There most certainly is a substitution effect.

            The drop in housing prices meant people who could only afford Anaheim previously could now afford Irvine. And people who could only afford Corona can now afford Anaheim. And people who could only afford Riverside can now afford Corona. And people who could only afford Moreno Valley can now afford Riverside. And people who could only afford Hemet could now afford Moreno Valley.

            It was never Irvine to Riverside (or beyond)-there were many baby steps in between.

            Of course this means Hemet’s housing prices are completely in the toliet being at the end of the process. (In fact, pretty much each step east dropped more than the one before, percentage-wise.)

            This also means that Irvine’s prices took the least hit.

          3. avobserver

            You missed my point. There is no substitution between OC and Riverside. Most people would not move to Riverside no matter how low prices fall over there because the long commuting is prohibitive.

            But substitution effect is strong in places not geographically far apart. How much of a premium a buyer is willing to pay for Irvine over a nearby city, say, Lake Forest or Laguna Hills, depends on the added features and benefits Irvine has to offer. For comparable properties Irvine will carry a premium over Aliso Viejo or Laguna Niguel, and houses on the west side of I-5 tend to be priced higher than the east side of I-5. Buyers pay higher price for extra benefits, but only to a certain extend. As I said earlier, I prefer buying in Irvine over Laguna Niguel, but the price premium I am willing to pay to live in Irvine is NOT unlimited (In my case 10%). If the price gap is greater than 10% I will buy in Laguna Niguel, period. Loss of potential buyers ensures Irvine premium over LN, or LN premium over MV will always stay in check, and price drop in less desirable areas will eventually drag down prices in premium areas in similar magnitude (in % terms).

            Since price correction starts from lower end, the cascading effect of the substitution dictates that premium market like Irvine will get hit the last, but NOT least.

          4. oc bear

            I’m always amazed at number of foreign cash buyers who want to live only in Irvine. Apparently they are the only ones who believe that they aren’t making any more land, prices in Irvine never go down, and never been a better time to buy.

          5. tonyE

            We got two, not one but TWO! 99 Ranch markets…. that’s likely the highest per capita ratio in the whole West Coast.

        2. nefron

          Who says California is desirable?

          Oh, that’s right, the weather trumps everything, including the high cost of living and the urgent need to appear successful – which together beget lying, cheating, stealing, and all sorts of unethical behavior. Add in a healthy dose of entitlement – since the neighbors all look like they have the perfect life, I’m entitled to it, too – and that’s what you get, a big, frickin housing bubble that you blow up to finance the whole thing.

          Yeah, California living, can’t beat it.

          1. Planet Reality

            80-90% of California is crap.

            The premium areas are governed by the top 10-20%. Sure there are posers in premium areas like Irvine. When they drop out there is someone in the top 20% to take there place. It is possible to be sucessful and move from the bottom 80% into the premium bracket. This is why premium areas perform like Irvine has the past 2 years, with people buying based on income and 20+% down payment loans.

            You are welcome to pretend that people buying in Irvine now don’t have the income and large down payments. Don’t let me ruin your fantasy.

          2. confused

            Is anyone disputing that people buying in Irvine now have high incomes and large down payments?

          3. Sub-Genius

            I have a high income but I still won’t buy here. Mainly because I can rent for much less than owning, and because I don’t want to be tied down to a sterile commuter city like Irvine.

        3. norcal

          Well, the undesirable areas didn’t suffer the incredible price leaps that the desirable ones did. So in a way they’re not in as much trouble now. Not so far to fall, or already near the bottom.

  8. HydroCabron

    “The people foreclosed will not be able to buy, so investors will need to convert them to rentals to shelter the recently foreclosed.”

    You need to work on your willing suspension of disbelief, in accordance with the Lily Tomlin doctrine “No matter how cynical you get, you can’t keep up.”

    For the present, former debtors with abysmal credit are renting, but I have this feeling that once defaults and bankruptcies are abundant on the credit reports of middle-income earners, the lenders, abetted by government guarantees, explicit or implied, will reach out to them, giving them nearly the same rates as those who behaved responsibly.

    There will always be money to lend to the “normal” borrower, and if horrid credit histories become normal, then such normal folks will be given money.

    1. Swiller

      It’s already happening. I’ve visited a few apartment communities to inquire about rent. I asked if having a foreclosure was grounds for refusal to rent and was surprised when the manager said heavens no, there’s actually SPECIALS going on right now to get people in and plenty of those people have lost homes. No special extra deposits, no nothing, treated just like everyone else.

      Credit ratings are foolish. Think about it, when you borrow money you go into DEBT, and unless it’s an initial loan to invest in something that is going to produce income, or to buy a home at or near rental parity, it’s foolish. Credit cards and jacking up your balance just enriches the banksters.

  9. Sac_Boomer

    I.R. I take no joy in pointing this out……
    “calvary of cash-heavy first-time buyers is not going to ride over the hill and save us. ”
    Are we to expect horses on crosses riding to our rescue? I find your writing to be well researched and fully thought out, so a spelling error is always an outlier. Damn you spell check!

    In another vein, can someone link John Stewarts’ description of our recent banking history from last night. It was brilliant.I think his writers read this blog.

    SB

    1. IrvineRenter

      That is funny. I had to read that back two or three times before my eye finally registered the error. I kept reading “cavalry” even though the word written is “calvary.” I will leave that error for posterity.

      If I were clever, I would have claimed I meant to use that word to describe the religious fervor of kool aid intoxication.

      I am not that clever….

  10. zubs

    I need some advice,

    a friend of mine is thinking of getting a loan mod for a house that is worth $420,000 now, while his mortgage is $520,000 at 6.25%. He makes about $180,000 / year, so I don’t think HAMP will work for him because 180,000 X 31% = $5,580/month.

    He currently only pays like $3,200/month, so he can afford the monthly nut easily.

    He actually just wants to get that 6.25% mortgage down to the 5% level, but due to being underwater, no one will touch it.

    So now he talked to a firm that does loan mods, and they said even though he makes a lot of money and can afford his mortgage, they can still get a loan mod from his lender Citibank. The loan mod firm wants $4,000 and then $1200 if they get the mod. I think it’s a scam..what do you think?

    I told him to investigate strategic default, but he wants to keep the house.

    1. Soylent Green Is People

      Heard and interesting pitch today at the Laguna Hills OCAR Broker Preview that may help convince your friend.

      Of the 12 new homes to be pitched only 1 was listed as a Short Sale. When the Agent came up to talk about the home, she said it was a 2009 mod that failed, and that the buyer could not make the payment, deciding to SS now. I overheard the Agent later telling someone that the Mod took a 6k (really, $8k with taxes and HOA) payment down to $4k (again, plus $2k more in taxes and HOA), but that even at 4k the owner felt it to be a useless venture when they could rent for $3,500 “all in”. This tells me then that it isn’t a distressed sale, but a strategic default.

      By the way, did you know that loan mods turn Purchase Money non-recourse loans into to recourse loan transactions?

      My .02c

      Soylent Green Is People.

      1. zubs

        Thanks for your story.
        I’m wondering if the loan mod people can actually use HAMP on people who make a lot of money but want to decrease their monthly nut even more.

        I read the HAMP site, and it says a mortgage will be reduced to 31% of gross income. I wonder if it would be fruitful to investigate HAMP fraud as this lawyer told my friend that they can do some magic tricks with his expenses to get him a mod.

        1. Soylent Green Is People

          The average HAMP mod debt to income ratio is 59%. The 31% was a suggestion, not a mandate.

          My favorite post to date on HAMP mods. Well worth a read.

          http://www.calculatedriskblog.com/2010/03/hamp-applicants-tanned-and-juiced.html

          It goes without saying that the first thing I will do after becoming President for Life is kill all the lawyers. Hope your friend got that boast on tape. It’s full of judicial repremand goodness.

          My .02c

          Soylent Green Is People

          1. norcal

            The point of the Calculated Risk posting was that HAMP is for people who can demonstrate hardship, not strategic defaulters. HAMP goes through your bank statements and checks to see if you’ve actually cut back no your expenses prior to contacting them – or if you’re just like these folks who want to cut their monthly nut at public expense.

          2. zubs

            When a person sees that a lot of people are getting money for nothing, while they keep paying their taxes and mortgage, they would be a fool to pass up the free money.

            Strategic default is morally wrong, but the government already put so much moral hazard in the bailouts, that it is now acceptable to many people who would have not done it otherwise.

            If the government is giving away money, and your neighbors are taking it and driving up prices, are you going to take it too? I’ll take it.

    2. 115% LTV

      Isn’t there a program other than HAMP that allows for 115% or 120% LTV refinance? I think I saw something about that somewhere. Just an idea to follow on…

      1. OrangeRenter

        Yes, if you have a FannieMae or FreddieMac loan, you can do a streamlined refi (with any major lender) up to 125% LTV.

        PS Those loan mod scumbag bastards are lying. They’re not going to get a HAMP mod when the current payment is already less than 31%, nor any other mod the bank offers… Unless they dummy-up the income and expensed – which, I guess, is what you pay then 4k to do.

    3. tonyE

      Strategic default? WTF? The fellow makes them money and has no problems making the payment.

      If people like that do a strategic default I hope their credit tanks, they lose their jobs, get a hefty tax bill and get thrown in jail.

  11. ockurt

    I think we looked in this tract a couple of years ago. Thank god we didn’t buy then…I think the prices were in the low $700’s. The one we looked at I know the previous owner had paid around $800-900k…yikes.

    Even though these are listed as SFR, they have common walls and some do not have AC. Many have mold/exterior problems due to the atriums many have. The interior designs are kind of cool though.

  12. HydroCabron

    Has the NAR begun lobbying the government toward increasing the flow of foreclosures?

    At some point, the leadership of the NAR must be concerned for the well-being of their members, who can’t be doing well under these low sales volumes.

    Does the NAR prefer that home prices remain as high as possible, so that it’s easier to peddle housing as an investment, or are they interested in keeping the little realtors from starving?

  13. Muzie

    “The courthouse steps remain highly competitive with discounts to market value dropping from 17.5 percent in January to 15.2 percent in February, the report says. ”

    “Today’s featured property is scheduled for auction on April 1, 2010. The short sale listing is for $590,000, but if we obtain the property at auction, we would sell it at $586,850.”

    You sell it for 586,850$, but according to that piece of data you’ll buy it for 500,320$ on average. That’s 86,000$ profit just for holding a house for a few months while a buyer comes through with the deal. The buyer gets a whopping 4,000$ discount.

    Of course any hard lender should jump on this deal. It’s pretty much the same as flipping houses except the risks are minimized since buyers are pre-screened before bidding at the auction instead of after.

    Of course no one is forced to take the deal, so I’m not going to give flak for it. It just does look like an extremely unbalanced deal to me. The buyer could fail to come through with his loan but if any reasonable amount of pre-screening is done the risks are going to be minimal. And the promise of renovations if there’s issues is extremely vague at best.

    I can’t help but wonder how this attempt to grab a quick 10-14% return every few months flipping houses to buyers without cash is any different from all the greed that permeated the housing bubble in the first place. Despite all the platitudes about putting people in good homes, this is all about capturing a virtually riskless spread, nothing more.

    I guess if the deal is really that good for hard money lenders then eventually others will bring some competition so the discount is more than a piddly 2%.

    1. cara

      Nope, if the spread is that high, then more “hard-money lenders”/flippers will come onto the scene at the courthouse steps, raising the winning bid and reducing the spread.

      Unless… this spread is already too narrow for normal flippers, hence why IR’s lender wants the guarunteed sale (so that they don’t need as high of a margin).

      1. Muzie

        If few or no people try it out for a 2% discounts, them the hard money lender might be more eager to deepen the discount. The whole scheme falls apart without a bagholder…. er, buyer to sell the house to. Without a pre-screened buyer it becomes a vanilla flip, which is way riskier. Frankly I think in this market the elimination of the risk in finding a suitable buyer quickly would have been worth way more than 2%.

        I’m not entirely sure this is the right audience for this business either. Yes, many people here want to buy houses, but many are inveterate fence sitters. Somehow 2% doesn’t seem like it would do the trick for someone who’s still reading the blog after all this and is still sitting on the fence.

        1. confused

          “If few or no people try it out for a 2% discounts, them the hard money lender might be more eager to deepen the discount. The whole scheme falls apart without a bagholder…. er, buyer to sell the house to. ”

          I was under the impression that this is a service for buyers not a service for hard money lenders. The whole thing STARTS with a buyer.

          1. IrvineRenter

            “I was under the impression that this is a service for buyers not a service for hard money lenders. The whole thing STARTS with a buyer.”

            Yes, if the buyer is a bagholder, they signed up for it by initiating the process.

        2. Hank

          Not everyone’s a fence sitter. I bought a year and a half ago. But then again, I’m not in California, either. I’m in Texas where we’ve got a relatively stable market and much more reasonable home prices. Even so, I bought during the height of the credit crunch because the right property became available. It was a distressed forclosure (read: “needs lots of elbowgrease”) and my wife and I are doing most of the repair work ourselves. This allowed me to purhase around 20% below market and either close to or below rental parity. If I lived in California, I’d be reading this blog every day just to keep me innoculated against the prevailing Kool Aid MentalityTM. This blog is good for much more than just real estate advice – the social commentary in it alone is worth the read. Also, the financial commentary such as today is priceless. With so much disinformation out there the truth is worth reading for its own sake alone. Also, today’s commentary helps to plant seeds of financial planning such as don’t depend on assets that can appreciate/depreciate over short durations for long term retirement or other financial planning. Cheers!

    2. IrvineRenter

      “It just does look like an extremely unbalanced deal to me. The buyer could fail to come through with his loan but if any reasonable amount of pre-screening is done the risks are going to be minimal.”

      The risks are minimal. that is why hard money players are willing to get involved. If they don’t make the loan, they buyer does not get the property. Whatever return is required to get the hard money lender to act is what the deal takes. The market determines the balance.

      “And the promise of renovations if there’s issues is extremely vague at best.”

      This is a sales objection. I have not detailed on the blog the commitments we are making or how we intend to fulfill them.

      “I can’t help but wonder how this attempt to grab a quick 10-14% return every few months flipping houses to buyers without cash is any different from all the greed that permeated the housing bubble in the first place.”

      The greed that drove prices up during the housing bubble was retail flipping causing a constriction of supply. The trustee sale market is the mechanism for cleaning up the mess created by the bubble. Activity here lowers prices and increases supply which is the opposite of what inflated the bubble. Did you see any resale flippers during the bubble selling properties below comps?

      “Despite all the platitudes about putting people in good homes, this is all about capturing a virtually riskless spread, nothing more.”

      I can do both. I can put people into houses below comps by offering hard money lenders low-risk spreads. I think I do both a service, but others may disagree.

      “I guess if the deal is really that good for hard money lenders then eventually others will bring some competition so the discount is more than a piddly 2%.”

      I am not sure where you got 2%. The discussion this week has been 3%. If I raise the discount — something I am considering — I lower the bid at auction and decrease the likelihood of success. Also, I create a situation where my customers are encouraged to resale flip. What do you think would happen if I started selling people houses for 10% under comps? People would resale flip them.

      1. muzie

        Does this activity really lower prices? It seems to me it connects more buyers to the auctions who would not otherwise have access to it, which increases demand.

        Don’t get me wrong. Despite my snappy comment, I can’t say I know a lot about the risks involved for a hard money lender, and it’s nothing personal. But then again, as a potential customer, 3% (my bad on the 2%) just doesn’t seem that enticing to me, especially if the house is bought sight unseen. I do wonder if a wider discount wouldn’t get you further ahead by making it up on volume. Think market maker.

        1. cara

          The sale from the hard money lender to the buyer will be recorded as a comp. So in that sense, because it’s lower than the rest of the comps, yes, it may help slowly pull down prices. At least it’s not hurting that process.

        2. flyovercountry

          To me, it sounds like there are 2 main risks for the hard money lender:
          – The house will have more problems than realized, which means the rehab costs eat into the profit. (possibly eliminating it)

          – The buyer cannot or will not close the deal, which means the hard money lender has to remarket the property, which means they take on more market risk for selling the property at a profitable price, and also means that they are carrying the property longer which reduces the how many times they can turn over their capital.

          I think it’s a great experiment to see what the market clearing price is for some of these homes.

  14. TO Renter

    Hi Irvine Renter,

    I recently enjoyed a classic rock tune which I am sure you could use in your blog.

    Baker Street by Gerry Raferty
    released 1978 and still a great tune!

  15. newbie2008

    The state of the US is as many companies. Have a dog of a program ruining your company? Declare it a great success and get others to promote it to other companies. Soon the other companies will be in worse shape than your company.

    The US did that to Japan, so they could enjoy a “lost generation.” The Ponzi scheme was exported world wide. Now the US govt and banksters need to teach another country how to run an enlightened economy, i.e., a Japan II. Only countries that silly are in the middle east that need the US military to stay in power for another generation.

    Any takers? We have takers for the loan modification and high priced house for new FHA financing. Who will be left holding the bag? It will not be the US banksters but will likely be the taxpayers and “home owners” with conversions of their current non-recourse loans to small recourse loan with a larger second non-forgivable loan.

    I just haven’t figured how to ethically profit for the new Ponzi scheme.

  16. TheYenGuy

    I have two comments.

    The first comment is on the total property debt is $740,000; I believe that the bank(s) allowed such buildup of debt because it was profitable for them to do so. I believe they securitized the loans into collateralized debt obligations, CDOs, which they leverage up ten to forty times the underlying loans and sold these to other banks, and insurance companies and pension funds as well as to insurance companies; but then got stuck with a fair amount of over-indebted property like the one you showcase.

    The second comment is that the end of Quantatative Easing means banks are going to start to sell their shadow inventory more and more.
    1) Banks have been holding houses on their balance because FASB 167 and 168 enable them to mark-to-fantasy rather than mark-to-market, resulting in a large amount of shadow inventory.

    2) You relate that “For now, lenders are beginning to foreclose in earnest, but they are still falling behind the defaults and creating more shadow inventory” as ForeclosureRadar reports that “despite foreclosure inventories, foreclosure sales drop and the disconnect between delinquencies and foreclosure sales continues to widen … Foreclosure sales decreased 11.9 percent in February, with the portion going Back to Bank dropping by 14.3 percent and the portion to third parties dropping by 2.7 percent.”

    3) The Fed is on track to shut down a $1.25 trillion mortgage-securities-buying program at the end of this month. The program has lowered mortgage rates; but this week the benchmark 10 year interest rate broke out higher … http://tinyurl.com/ycpks9s ….. and the value of US Government Bonds fell as investors became risk adverse to Sovereign Debt of all types, that of the United States as well as that of Greece, as can be seen in the five day chart of the debt ETFs, IEF, TLT, and ZROZ … http://tinyurl.com/yak428e. US Government bonds fell as follows: 10 Year Notes, 1%, US Treasuries, 3%, Zeros, 6% for the week.

    With the Fed’s Quantative Easing gone, the run-up in bank stock values and stock market values is over, the banks realize “the game is over” so as to speak, and thus as you relate “For now, lenders are beginning to foreclose in earnest”.

    4) Wall Street Journal in article Repurchased Loans Putting Banks in Hole reports that lenders such as Bank of America Corp., J.P. Morgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. will brave stiff headwinds this year as they face demands to buy back defectively underwritten mortgages (at the insistence of Freddie Mac and Fannie Mae; an this is causing banks to place these properties up for sale).

    Annual reports filed by major mortgage lenders show big surges in the volume of loans being repurchased in 2009.

    Wells Fargo said it bought back mortgages with balances of $1.3 billion, triple the 2008 total of $426 million. Losses on bought-back loans doubled to $514 million from $251 million in 2008, according to the San Francisco company.

    Bank of America repurchased $1.5 billion of first-lien mortgages that were sold off by the Charlotte, N.C., bank through securitizations but are tied to faulty underwriting, up sharply from $448 million in 2008.

    As of Dec. 31, J.P. Morgan had set aside $1.7 billion to meet repurchase claims from investors, a 55% jump from $1.1 billion a year earlier.

    Last year, lenders bought back about $20 billion of loans with faulty underwriting, according to Barclays Capital estimates. About half of the total was written off because the loans were delinquent.

    The rising tide “is definitely a surprise,” said Ajay Rajadhyaksha, head of U.S. fixed-income and securitized strategy at the Barclays PLC unit.

    “Most investors haven’t really focused on this issue and are surprised on how much impact this could have, including on earnings.”

    4) And you relate “but they are still falling behind the defaults and creating more shadow inventory”.

    In my article The Ben Bernanke Portfolio Tops Out … http://tinyurl.com/ybdpnb7 … I relate that The RevenueShares Financials, RWW, represents Ben Bernanke’s portfolio; it rose strongly this week at a time … but the overall US stock market, VTI, fell on Thursday and Friday to end week at 21.84, portending a transition from bull to bear market.

    I see stocks and bonds falling rapidly in value; and in this deflationary climate, I foresee few real estate purchasers.

    The banks, if they want to sell from their massive shadow inventory are going to have to make exceptional price reductions.

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