A new bill circulating in Congress would encourage accelerated default on a grand scale and crush California's housing market.
Irvine Home Address … 247 ORANGE BLOSSOM Irvine, CA 92618
Resale Home Price …… $217,900
I haven't ever really found a place that I call home
I never stick around quite long enough to make it
It's just a thought, only a thought
But if my life is for rent and I don't learn to buy
Well I deserve nothing more than I get
Cos nothing I have is truly mine
Dido — Life For Rent
Dean Baker of the Center for Economic and Policy Research was one of the early public voices who called the housing bubble. He accurately noted the disparity between rent and payments and concluded housing prices were not sustainable. Like me, he was a renter looking to buy as prices were ramping up, and like me, he noted that since it didn't make sense for him personally to buy, it didn't make sense for anyone else either. Being an economist at an influential think tank, he was in a position to research and write about the issue and be heard.
I really like Mr. Baker's proposal, but I have been afraid to write about it because I don't think lawmakers fully understand what passing his legislation would do to the housing market. I would very much like to see it become law, but if it does, every inflated housing market in the country would crash very hard as loan owners accelerate their defaults. If lawmakers are educated to this fact by me or the banking lobby, they will not pass this good legislation. But I am only a blogger, so perhaps they will ignore me. Let's hope so.
by CHRISTINE RICCIARDI — Wednesday, September 22nd, 2010
In the wake of reform enacted to promote homeownership, analysts at the Center for Economic and Policy Research are saying that ownership may not be the smartest option. In a report released today, The Gains from Right to Rent in 2010, the CEPR suggests that giving homeowners the right to rent their house at a fair market price could be a game changer in the nation's foreclosure crisis.
The report dissects the benefits of a drafted bill, H.R. 5028, also known as The Right to Rent. Under the legislation, homeowners entering the foreclosure process would be able to occupy their homes for up to five years, while paying rent to a lender. Rent would be based on fair market price as determined by an independent appraiser and adjusted annually.
Think about the effect of this law from the perspective of an underwater homeowner making a payment that exceeds a comparable rental. Why would anyone in that position keep paying their mortgage if they knew they could default and stay in their home for five years? Further, wouldn't these owners also believe that they would be given a chance to repurchase the house after 5 years when their credit is improved? If this law is passed, every market inflated above rental parity would crash to that price level because of a rush of accelerated default.
"This would give homeowners an important degree of security, since they could not simply be thrown out on the streets," wrote Dean Baker and Hye Jin Rho, co-director of and research assistant at CEPR. "This policy should also benefit neighborhoods in the most hard-hit areas, since they would not have large numbers of vacant homes following foreclosures."
This policy probably would benefit the hardest hit areas because there would be less turnover of the housing stock. Riverside County would benefit greatly while Orange County would be crushed.
The CEPR report, which compares the costs of owning a home and renting in 16 major metropolitan statistical areas around the U.S., found that homeowners would see substantial reductions in costs by becoming renters if they rented in a bubble-inflated market. Savings are much less, however, if the market was not affected by the housing bubble.
For example, in the Los Angeles MSA, homeowners would save $1,586 per month by becoming a tenant. The median home price in 2006 and 2007 was $608,600. Based on that number, CEPR found the monthly cost of ownership as $3,128 versus $1,420 to rent.
New York/New Jersey, Sacramento, San Diego and San Francisco savings are all over $1,000.
The tremendous savings being touted here are real, and they represent a loan owner's incentive to accelerate their default. Most loan owners believe house prices will go back up and they will get appreciation and HELOC riches: they are making a strategic repayment. Once the incentives change, fewer will make the oversized payments. Instead of continuing to make a strategic repayment, most will opt to strategically default. It's only the false belief that their investment will yield results that keeps most of these people paying now.
In Detroit, however, the marginal saving is only $89 between owning and renting home. MSAs including Baltimore, Chicago, Cleveland, Minneapolis, Philadelphia, Phoenix, and Tucson had a difference of less than $500.
“With roughly one-in four mortgages underwater, the loan modification plans put forth so far have done little to help homeowners facing foreclosure,” said Baker. “Right to Rent, on the other hand, would benefit millions, provide families with real housing security, and could go into effect immediately.”
And it would lower house prices to rental parity.
And it could fill adequate demand. According to a survey done recently by Apartments.com, 60% of respondents said they prefer renting to buying a home. Almost 30% said they had never rented before but are currently looking for an apartment.
The CEPR report includes an appendix with cost analysis for 100 MSAs around the country. Amounts for houses are based on costs for a house that sells at 75% of the median house price. The basis for rental costs is the Department of Housing and Urban Development's Fair Market Rent for a two-bedroom apartment. The calculations used assume the homeowner faces a marginal tax rate of 15%. View the full report here.
Permanent Rental Parity
Despite the problems created with implementation of a right-to-rent law, the impact would be long lasting and very positive because most first mortgages would be limited to rental parity. Right now, the excess mortgage payment going to the bank represents money not being spent in the local economy. When a loan owner in California is paying a 50% DTI, very little is left over to stimulate the economy — and have a life. Without appreciation and HELOC abuse, high DTIs are detrimental to California, and a HELOC based economy is an unsustainable Ponzi Scheme.
Since the incentive to default exists for mortgage payments above rental parity, lenders will stop underwriting those loans. If you were a lender, and if you knew the borrower could default at any time and stay in the property for 5 years and only have to pay you rent, wouldn't you keep the payment at or below rental parity? A right to rent law would stabilize the housing market in a way no other government program has succeeded in doing. Unfortunately for lenders, the implementation of this law will take the remaining air out of the housing bubble.
I strongly support the idea of keeping house prices at rental parity because it discourages Ponzi living and puts the economy on a sustainable footing. I proposed a similar idea in The Great Housing Bubble:
There is one potential market-based solution that would require no government regulation or intervention that would prevent future bubbles from being created with borrowed capital: change the method of appraisal for residential real estate from valuations based exclusively on the comparative-sales approach to a valuation derived from the lesser of the income approach and the comparative-sales approach. Both approaches are already part of a standard appraisal, so little additional work is necessary–other than appraisers will have to focus on doing the income approach properly. In the current lending system, the income approach is widely ignored. … When the fallout from the Great Housing Bubble is evaluated, it is clear that the comparative-sales approach simply enables irrational exuberance because the past foolish behavior of buyers becomes the basis for future valuations allowing other buyers to continue bidding up prices with lender and investor money. Prices collapsed in the Great Housing Bubble because prices became greatly detached from their fundamental valuation of income and rent. This occurred because the comparative-sales approach enables prices to rise based on the irrational exuberance of buyers. If lenders would have limited their lending based on the income approach, and if they would not have loaned money beyond what the rental cashflow from the property could have produced, any price bubble would have to have been built with buyer equity, and lender and investor funds would not have been put at risk. There is no way to prevent future bubbles, and the commensurate imperilment of our financial system, as long as the comparative-sales approach is the exclusive basis of appraisals for residential real estate.
My approach was to change the appraisal system to limit loans to rental parity, but Dean Baker's idea of right to rent would have the same effect. If loans are limited to rental parity, so will house prices — unless we suddenly become a nation of savers and manage to inflate a bubble with equity…. not going to happen.
Sold to Countrywide at the peak
This wasn't really sold to Countrywide, but borrowing the full value had the same effect. The owners extracted every penny of equity, and Countrywide (B of A) will end up with another REO. In effect, they bought the property in mid 2007 but didn't know it.
- This property was purchased on 10/23/1998 for $88,000. The owners used a $66,000 first mortgage, and a $22,000 down payment.
- On 3/5/2003 they refinanced with a $150,000 first mortgage.
- On 7/30/2007 they refinanced with a $296,000 first mortgage. These owners were not regular HELOC abusers, but they did manage to double their mortgage on two occasions.
- Total mortgage equity withdrawal is $230,000. That is great for a 1 bedroom condo.
Recording Date: 07/19/2010
Document Type: Notice of Default
Some might disagree with my giving them a "D" for mortgage management. With only two refinances, I think these people really believed they were living within their means and only spending part of their appreciation. It doesn't appear thoughtless or reckless — stupid, but not reckless.
Irvine Home Address … 247 ORANGE BLOSSOM Irvine, CA 92618
Resale Home Price … $217,900
Home Purchase Price … $88,000
Home Purchase Date …. 10/23/1998
Net Gain (Loss) ………. $116,826
Percent Change ………. 132.8%
Annual Appreciation … 7.8%
Cost of Ownership
$217,900 ………. Asking Price
$7,627 ………. 3.5% Down FHA Financing
4.31% …………… Mortgage Interest Rate
$210,274 ………. 30-Year Mortgage
$41,642 ………. Income Requirement
$1,042 ………. Monthly Mortgage Payment
$189 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$18 ………. Homeowners Insurance
$230 ………. Homeowners Association Fees
$1,479 ………. Monthly Cash Outlays
-$94 ………. Tax Savings (% of Interest and Property Tax)
-$287 ………. Equity Hidden in Payment
$12 ………. Lost Income to Down Payment (net of taxes)
$27 ………. Maintenance and Replacement Reserves
$1,137 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$2,179 ………. Furnishing and Move In @1%
$2,179 ………. Closing Costs @1%
$2,103 ………… Interest Points @1% of Loan
$7,627 ………. Down Payment
$14,087 ………. Total Cash Costs
$17,400 ………… Emergency Cash Reserves
$31,487 ………. Total Savings Needed
Baths: 1 bath
Home size: 814 sq ft
($268 / sq ft)
Lot Size: n/a
Year Built: 1976
Days on Market: 62
Listing Updated: 40419
MLS Number: I10079989
Property Type: Condominium, Residential
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Located in a desirable community. Just down the road from Irvine Spectrum, to UC Irvine and walking distance to Irvine Valley College. It is a one bedroom/one bath downstairs and a big loft upstairs. Kitchen have new granite countertop and tile floors. Bathroom have new tile floors as well. And have wood floors in other rooms. Amenities such as tennis courts, basketball court, swimming pool, childrens playground.
The realtor needs to work on subject-verb agreement and basic grammar.
Where the local renters are