Lenders are in a no-win situation with regards to future house prices.

Irvine Home Address … 10 BLUE Riv Irvine, CA 92604

Resale Home Price …… $779,000

I've come to help you

With your problems

So we can be free

I'm not a Hero

I'm not a Savior

Forget what you know

I'm just a man who's

Circumstances went beyond his control

Beyond my control,

We all need control

The problem's plain to see

Too much technology

Machines to save our lives

Machines de-humanize

Styx — Mr. Roboto

In our quest for efficiency, we have eliminated much of the human element from our mortgage finance system. With automated models for loan qualification, payment processing, and now foreclosure, we have turned the system over to machines and computer algorithms. Most of what we have done in this area has been an improvement, but have we gone too far?

The Housing Bust Lobby

Obama is right to resist the foreclosure wails from the political left.

OCTOBER 19, 2010 — WSJ Opinion

More than three years into the housing bust, the foreclosure mitigation lobby apparently wants to keep the fun going. That will surely be the result if the political uproar over bank "robo-signers" becomes a moratorium on foreclosures.

So far the Obama Administration, to our surprise and perhaps its own, has behaved with admirable sobriety despite the wailing from the political left. Housing Secretary Shaun Donovan indulged in some familiar bank-bashing in an op-ed on the weekend, but he also says a moratorium would be a mistake. Perhaps this is because he knows something about mortgage contracts, including that bank process errors don't add up to an injustice to homeowners who haven't been paying their mortgages for months or years. He also notes that stopping a foreclosure creates unintended victims—such as the potential new buyer.

That is one of the first acknowledgments of the plight of new buyers I have seen in the media. Everyone is so focused on helping out the deadbeats being foreclosed on that we forget that a new buyer — a buyer willing to pay the mortgage — is waiting to move in to their new home. The idea that delinquent borrowers should have their debts forgiven because of a procedural error is ridiculous.

The alleged scandal here is that "robo-signers" for mortgage servicing companies have been signing foreclosure authorizations based on assurances from colleagues, rather than reviewing the files themselves. Some banks and mortgage servicing companies were also sloppy in maintaining records on the ownership of loans. This supposedly leads to horrible consequences for borrowers, though the evidence remains elusive.

The New York Times appeared to have produced a front-page victim on Friday—a woman fighting eviction from her $75,000 home at the hands of lender GMAC. The woman has not paid her mortgage in two years while remaining in the house. Some may view this as a case of rough treatment, but we doubt New York Times subscribers can receive the paper for two years after they stop paying for it.

All the squatters should move out first, then they can sue the lender for whatever they want. If they have a legitimate claim, they will be compensated, and if they don't have a legitimate claim — and we all know none of them do — then they can pound sand.

One left-wing financial blog has compiled news accounts that as many as seven people have unfairly suffered a foreclosure, despite making all payments. That's right, seven in a nation of more than 310 million. Our Journal colleagues also found a borrower who apparently paid her bills but was still charged additional fees by Senator Chris Dodd's favorite mortgage company, Countrywide Financial. As we said last week, whether the number of legitimate victims is seven or eight or more, anyone who paid on time and still suffered at the hands of a bank should be made whole. But on the record so far this is not a case of widespread fraud or injustice.

On the issue of maintaining the documents to establish ownership of a mortgage debt, it's not surprising that the process is messy, given that Fannie Mae and Freddie Mac helped design it. But securitization errors are also process flaws, and they do not entitle everyone to a free house.

Joseph Mason, a Wharton fellow and finance professor at Louisiana State University, states it plainly: "There is no question whether the contracts each party signed were valid. The Borrower owes the money they used to buy the property. The Lender has a claim to that money. Mere delays in providing the right documentation of a perfected collateral claim will not change the situation."

Part of me feels sad for the millions of distressed borrowers who are clinging to yet another false hope for debtor salvation. How many people are lapsing back into denial of their current circumstances because of stories like these? There is no hope that this pre-election emotional nonsense will result in delinquent borrowers getting debt relief. If this story gets people to make three or four more payments, does that benefit anyone other than the banks?

Sloppiness in some financial back offices does not come close to justifying a national foreclosure moratorium. By some estimates such a freeze could cost more than $2 billion per month, and given how involved the unwilling taxpayer has become in mortgage finance, this damage won't necessarily be limited to bank shareholders. This is a nightmare for anyone who wants a healing housing market and investors willing to lend to the next generation of homeowners. It also raises false hopes among delinquent borrowers.

More losses absorbed by taxpayers, more delays in reaching the bottom in prices, and more false hopes that will be dashed later: what a mess.

Backers of a moratorium claim they are upholding the rule of law, while we have allegedly abandoned it in opposing a freeze. This argument has it backwards. We say that disputes over private contracts should be decided on an individual basis under the law. The moratorium crowd wants to use the individual cases as a political lever to enact policies that effectively change the terms of existing contracts—e.g., more loan modifications, reductions in loan principal via bankruptcy court, or a moratorium.

As for the state Attorneys General who are promoting this foreclosure fracas, watch how few of them merely seek to force banks to document ownership, and how many try to muscle banks into settlements with unrelated benefits for the AGs' favored constituencies.

The moratorium lobby also argues that keeping people in homes they can't afford will somehow help the economy. This is of a piece with more than three years of failed policies intended to prevent housing markets from finding a bottom. These policies—begun under George W. Bush and continued under President Obama—have succeeded mainly in prolonging the agony and delaying a recovery.

In a slow-growth, high-unemployment economy still mending from a financial crisis, there are only so many trillion-dollar markets the politicians can destroy without sending America back into recession. Mr. Obama has often seemed indifferent to the economic consequences of political decisions, but on this issue he has correctly perceived the horrendous cost of blowing up the mortgage market again.

The ramifications of this policy go even deeper. The basic conundrum facing the banks is to foreclose or not to foreclose. If they foreclose, and if they process the sales, prices will crash. If they don't foreclose, more borrowers will quit paying, and prices will remain high, but few people will actually be paying them as squatting becomes the norm (Squatting Becoming a Way of Life for Many Delinquent Borrowers).

How The Foreclosure Mess Could Create a Downward Spiral for Housing

Monday, 25 Oct 2010 — John Carney

The mortgage mess that lead to foreclosure freezes by several large banks across much of the country may slow down the ability of banks to issue new mortgages, which could push the housing market into a sharp downward spiral.

Even as banks begin to lift their voluntary moratoriums on foreclosures, the paperwork problems—banks discovering that they often were not producing valid proof of ownership in foreclosure proceedings—that led to the freezes have the potential to stymie new lending.

The paperwork problem is curable. Banks can go back through the chain of ownership of loans and liens to correct lapses.

But this process is time consuming and costly, especially when some of the original mortgage lenders or intermediary owners of the mortgages have gone bankrupt or been merged into other banks.

In the meantime, borrowers who have defaulted on their loans will likely be able to keep their homes for longer than they otherwise could. (Thinking About Accelerated Default? The Average Squatting Time Is Up to 449 Days) What’s more, banks are likely to find that more foreclosure actions are contested by borrowers as the public and attorneys eager to collect legal fees by fighting foreclosures become more aware of the documentation problems.

I wonder how many people will give their last dollars to attorneys to fight for hopeless dream of regaining their lost property?

All this means that banks will find themselves with more bad loans on their books. The normal pace of run-off of bad loans—delinquency to default, default to foreclosure, foreclosure to sale—has meant banks have not been able to recover revenue on non-performing loans for upwards of a year and a half in much of the country. The new pace of run-off will likely mean that banks are stuck with the non-performing loans for far longer.

The longer it takes for banks to exit bad loans and recover cash, the higher the level of bad loans on the books of banks will get. As the non-performing loan portfolio grows, banks will need to set aside an increasing amount of capital to balance. This will, in turn, mean banks will make fewer home loans until the backlog of bad loans can be cleared up.

In short, the foreclosure crisis has the potential of creating a liquidity crisis for home loans. The actual number of defaults is not necessarily increasing—it’s just taking longer than usual to clear the old non-performing loans. But this means that banks aren’t generating revenue from the foreclosures. It also means that the loan portfolios will appear to be worsening as the percentages of non-performing loans grow.

This process of a liquidity crunch for the mortgage market could be short-circuited if both investors and regulators are willing to provide some relief to banks. Regulators at the FDIC and the Fed could grant dispensation to banks to keep making new loans despite spiking non-performance rates in the home loan portfolio.

We have already granted banks dispensation by allowing amend-extend-pretend. What more do we need to do? Perhaps we should just let them loan out money to anyone with a pulse to fill the buyer pool. Oh, wait, we tried that once, didn't we?

Investors too could look beyond the temporary drop in recovery rates and rising default levels—although this is far from guaranteed. Investors could also panic at the bad numbers and sharply sell-off bank stocks. Bank executives are likely to fear the latter—which would mean that even if regulators grant relief, banks could still hold back when it comes to extending new home loans.

The only reason banks hold back on writing new loans is because there aren't enough creditworthy borrowers available. Anyone who is not already over-indebted, has a job, and has good credit can borrow plenty.

A liquidity crunch in the mortgage market would hit home sales hard. Buyers would discover credit harder to come by and more expensive, which would push down the price of homes even further. Coming after a summer with particularly brutal home sales numbers, this could set the stage for a sharp decline in home prices across much of the country.

This is, in fact, what is happening today. As I noted Monday, the Home Price Drop was Sudden and Dramatic.

And that’s when things will get really scary. A sharp decline in home prices would put even more borrowers underwater. Many buyers who are already underwater but hoping for a home price recovery might lose that hope. Default rates would grow, putting even more pressure on the banks to slow down lending. The further slowdown on lending would put more downward pressure on home prices. Rinse. Repeat.

In short, we could be looking at a downward spiral on home loan lending and home prices, thanks to sloppy paperwork by the banks that, in the rush to make new loans during the housing bubble, failed to make sure they were meeting legal requirements for perfecting and transferring mortgage interests in homes. It’s a mess the banks made—but the price of which may be visited upon many homeowners.

The downward spiral is what took out the subprime areas. Will the alt-a and prime be next? It's starting to look that way.

Tale of Two Borrowers

IT WAS the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.

The period of the housing bubble was a time of contrasts. The belief was that prices were normal and that they would rise forever; the reality was that prices were inflated and rising based on foolish emotion and greed.

Today's featured property is the tale of two successive HELOC abusing owners. The first spent $100,000 of his equity but still found the greater fool to give him even more. The second owners spent $120,000 of their equity only to go into default as their imagined equity evaporated.

• Owner number one purchased this property on 11/28/2000 for $425,000. He used a $297,500 first mortgage and a $127,500 down payment.
• On 7/15/2002 he refinanced with a $350,000 first mortgage.
• On 4/14/2003 he refinanced with a $397,500 first mortgage.
• Mortgage equity withdrawal was $100,000 which was most of his down payment.

The property records are unclear, but based on the HELOC information of the next owners, it looks like the property was sold on 7/19/2004 for $655,000. Despite the first owner withdrawing and spending his down payment, he still walked away with double what he put into the property. I think that kind of borrower behavior is foolish, but when people were rewarded for it during the bubble, I can see why everyone started doing it.

The next owners pick up with a $131,000 HELOC on 7/19/2004. Assuming this was a purchase money mortgage that represented a 20% of the purchase price, this property sold for $655,000. This couple increased their HELOC to $250,000 on 11/16/2005 and withdrew $129,000. They imploded in spring of 2009, and two loan modifications later, they are trying to sell.

Foreclosure Record

Recording Date: 07/09/2010

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 06/28/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 09/18/2009

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 08/18/2009

Document Type: Notice of Default

Loan owners in California have become accustomed to spending their equity. In their minds this is now an entitlement. It's one of the perks for living in California and taking on those oversized mortgages. As long as this belief persists, and as long as lenders enable this foolishness, we will continue to have cycles of booms and busts that periodically enriches everyone and imperils the banks.

Irvine Home Address … 10 BLUE Riv Irvine, CA 92604

Resale Home Price … $779,000

Home Purchase Price … $425,000

Home Purchase Date …. 10/28/2000

Net Gain (Loss) ………. $307,260

Percent Change ………. 72.3%

Annual Appreciation … 6.2%

Cost of Ownership

————————————————-

$779,000 ………. Asking Price

$155,800 ………. 20% Down Conventional

4.23% …………… Mortgage Interest Rate

$623,200 ………. 30-Year Mortgage

$147,462 ………. Income Requirement

$3,058 ………. Monthly Mortgage Payment

$675 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$65 ………. Homeowners Insurance

$38 ………. Homeowners Association Fees

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

$3,837 ………. Monthly Cash Outlays

-$718 ………. Tax Savings (% of Interest and Property Tax)

-$862 ………. Equity Hidden in Payment

$236 ………. Lost Income to Down Payment (net of taxes)

$97 ………. Maintenance and Replacement Reserves

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

$2,591 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,790 ………. Furnishing and Move In @1%

$7,790 ………. Closing Costs @1%

$6,232 ………… Interest Points @1% of Loan

$155,800 ………. Down Payment

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

$177,612 ………. Total Cash Costs

$39,700 ………… Emergency Cash Reserves

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

$217,312 ………. Total Savings Needed

Property Details for 10 BLUE Riv Irvine, CA 92604

——————————————————————————

Beds: 4

Baths: 3 baths

Home size: 2,900 sq ft

($269 / sq ft)

Lot Size: 5,400 sq ft

Year Built: 1975

Days on Market: 70

Listing Updated: 40457

MLS Number: U10003725

Property Type: Single Family, Residential

Community: El Camino Real

Tract: Dc

——————————————————————————

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

Beautiful expanded and remodeled Plan 5. Downstairs Bedroom expanded with private entrance. Kitchen fully upgraded with granite counter tops, butcher block center island, stainless steel double dishwasher, new micro/convect oven, and stainless range. All new windows and upgraded base and crown. Recessed lighting, laminate wood floors and slate floors and granite counter in guest bath.

Major US Banks are distressed and closer to collapse than most realize.

Irvine Home Address … 3 RAINBOW Fls #53 Irvine, CA 92603

Resale Home Price …… $613,750

Look into my eyes

Now you're getting sleepy

Are you hypnotized

By secrets that you're keeping?

I know what you're keeping

I know what you're keeping

Got a secret

Can you keep it?

Swear this one you'll save

Better lock it, in your pocket

Taking this one to the grave

If I show you then I know you

Won't tell what I said

Cause two can keep a secret

If one of the m is dead…

The Pierces — Secret

The banks, the federal reserve and our government have been trying to conceal the true level of distress with our banking system. The policies being put forth in Washington only serve to extend this crisis and inhibit economic growth. First, let's take a look at how much REO the banks already have.

JPMorgan, Wells Fargo and BofA each hold more than $20 billion in foreclosures

by KERRY CURRY — Friday, October 22nd, 2010, 4:05 pm

JPMorgan Chase, Wells Fargo Bank and Bank of America each reported more than $20 billion in single-family mortgages currently foreclosed or in the process of foreclosure as of midyear, according to Weiss Ratings.

In addition, for each dollar these banks held of mortgages in ?foreclosure, they had additional exposure to more than $2 in mortgages that are 30 days or more past due.

"Although only some portion of the past-due loans will ultimately go into foreclosure, these figures tell us that the biggest players are not only in deep, but could sink even deeper into the mortgage mayhem," said Martin D. Weiss, chairman of Weiss Ratings.

As readers here know, part of the reason for the banks having so much REO is because Banks are being Forced to Repurchase Bad Bubble Loans.

Among all U.S. banks, JPMorgan Chase has the largest volume of mortgages in foreclosure or foreclosed with $21.7 billion. It has $43.4 billion in mortgages past due.

Bank of America has a somewhat smaller volume of foreclosures ($20.3 billion), but it has a larger pipeline of past-due mortgages — $54.6 billion. Thus, overall, including all foreclosed and delinquent categories, Bank of America has the largest volume of bad mortgages among U.S. banks, with $74.9 billion, while Wells Fargo has the second largest with $68.6 billion.

Other banks, despite their large size, are less heavily exposed. Citibank has $6.3 billion in foreclosures and $19.2 billion in past-due mortgages, or a total of $25.6 billion. The volume held by other large banks, such as U.S. Bank, PNC Bank, and SunTrust is smaller.

"In addition to the volume of bad mortgages, the vulnerability of each bank to the foreclosure crisis depends on the capital and loan-loss reserves it has set aside to cover losses and other factors such as its earnings, liquidity, reliance on less-stable deposits, and the quality of its overall loan portfolio," Weiss said.

Among banks with $1 billion or more of mortgages already foreclosed or in process of foreclosure, Wells Fargo has the greatest exposure to bad mortgages in proportion to its capital. For each dollar of Tier 1 capital, the bank has 75.4 cents in bad mortgages, or a ratio of 75.4%. The equivalent ratios for JPMorgan Chase, Bank of America and SunTrust are 66.8%, 66% and 57.6%, respectively.

The issue of bank REO is critical to the housing market because How The Lending Cartel Disposes Their REO Will Determine the Market’s Fate. What's worse is that bank REOs are not the only problem as GSE Foreclosures Shatter Record Highs, Keep Climbing.

Also, for every home in REO, there are four that are delinquent on their mortgage and tied up in shadow inventory (Shadow Inventory Signals Three Years of Falling Prices).

Triple Down: Fannie, Freddie, and the Triumph of the Corporate State

October 27, 2010 — The Institutional Risk Analyst

"JOHN BULL can stand many things but he cannot stand two per cent." That aphorism, quoted by Walter Bagehot, a 19th-century editor of The Economist, expressed savers' traditional distaste for very low interest rates. For the first three centuries of the Bank of England's existence, 2% was indeed as low as the central bank was willing to let interest rates fall. Not even the Depression, nor the long Victorian period of stable prices, induced the bank to go any further. Some minimum return on capital was deemed to be required.

Buttonwood

The Economist

September 16, 2010

… Because President Barack Obama and the leaders of both political parties are unwilling to address the housing crisis and the wasting effects on the largest banks, there will be no growth and no net job creation in the U.S. for the next several years. And because the Obama White House is content to ignore the crisis facing millions of American homeowners, who are deep underwater and will eventually default on their loans, the efforts by the Fed to reflate the U.S. economy and particularly consumer spending will be futile. As Alan Meltzer noted to Tom Keene on Bloomberg Radio earlier this year: "This is not a monetary problem."

Government Props Weakened the Housing Market and Delayed the Recovery

Indeed, the public embrace by the Federal Open Market Committee of further quantitative easing or "QE", instead of calling for the immediate restructuring of the largest zombie banks, actually threatens to push the U.S. into a deeper and far more dangerous economic path. According to the Q2 2010 Bank Stress Index survey conducted by IRA and our review of the Q3 2010 earnings results, the financial condition of smaller lenders is actually improving. While the FDIC now has over 800 banks on its troubled list, the righteous banks for which we currently have "positive" outlooks in The IRA Advisory Service are showing better earnings and less credit stress.

Part of the reason for the improvement is that the FDIC and state regulators have taken a very hard line with smaller banks, pushing many into resolutions and distressed asset sales. But for the healthy lenders that survive and investors that buy failed banks, there will be a lot of money left on the table — profits that will come back into earnings via recoveries and other windfalls and help to boost the private economy. Resolution and liquidation is how a free market economy regenerates. The trouble is, the approach taken with the large banks and the GSEs is precisely the opposite of that applied to smaller lenders. The policy of the Fed and Treasury with respect to the large banks is state socialism write large, without even the pretense of a greater public good.

Forget Treasury Secretary Tim Geithner lying about the relatively small losses at American International Group (AIG), the fraud and obfuscation now underway in Washinton to protect the TBTF banks and GSEs totals into the trillions of dollars and rises to the level of treason. And the sad part is that all of the temporizing and excuses by the Fed and the White House will be for naught. The zombie banks and GSEs alike will muddle along until the operational cost of servicing bad loans engulfs them. Then they will be bailed out — again — or restructured. …

Living in a Post Bubble World: What's Next?

Pictures of Deflation

Comments by Christopher Whalen American Enterprise Institute October 6, 2010

Is the Subprime Crisis Over?

• No. The improvement in bank loan default rates is a mirage. The use of loan modification to make bad credits appear “current” is an economic fraud perpetrated by Washington that is already becoming apparent via foreclosure moratoria.
• Mounting cash flow stress on all lenders is reaching crisis levels. Non-payment by borrowers and mounting foreclosure backlogs are creating the conditions for the collapse of some of the largest U.S. banks in 2011.

Chart 1: Efficiency

• First stage of the banking crisis involved stress on liquidity due to market contagion. TARP, the Fed, FDIC responded with liquidity and debt guarantees.
• The second stage involved stress on capital via charge- offs and loan loss reserves, both of which drove banks into record levels of loss.
• The third stage of the banking crisis involves degradation of bank operating efficiency as restructuring accelerates, expenses rise and lenders involuntarily become non-operating REITs.

Lenders are becoming non-operating REITs. In the first story, we documented that the banks now own billions in non-performing real estate. At some point, banks no longer operate by making loans and collecting interest, they operate by buying property at foreclosure and collecting rent just like a REIT. When you buy bank stocks, are you really buying a disguised REIT? I think you are, except that REITs are generally well managed, and bank portfolios are not.

Chart 2: Net Interest Income

• Many on Wall Street believe that net interest margin or NIM among U.S. banks is at record levels. They are right, but not in the way that many investors and analysts expect.
• Unfortunately, measured in dollars, the NIM of the banking industry has been cut by a third over the past three years due to the Fed’s zero interest rate policy. Banks are literally dying from lack of yield on assets due to the Fed’s ZIRP.

The long-term problem with lowering interest rates to boost bank profits is that the yield curve flattens and the banks margins get squeezed. When banks could borrow at 0% and loan money for mortgages at 6%, the margins were helpful, and the banks had opportunity to recover; however, over time, competition drives down long term rates and flattens the yield curve. Banks are still borrowing at 0%, but now they can only loan at about 4.25%, a significant decline in margin.

Chart 3: Non-Interest Income

• In 2005-2007 period when the subprime frenzy peaked, non-interest revenue for U.S. banks reached a record $80 billion. Expenses, conversely, were muted as defaults disappeared, but are now growing rapidly.
• Since 2007, the non-interest revenue of all U.S. banks has fallen by over $10 billion. Non-interest expenses at U.S. banks will continue to increase due to residential and commercial foreclosures.

If bank portfolios weren't so poor operated, the non-interest income would be rising and non-performing loans would be converted to performing rentals.

For example, right now in Las Vegas, I can buy properties and obtain a 9% return based on rental cashflow, so I know the banks can too. If they began renting out their REO, they can obtain income superior to the loan interest they would obtain on a 4.25% note. In fact, I think they are rather foolish for not renting out more of their REO in beaten down markets like Las Vegas.

Chart 4: Exposure at Default (EAD)

• U.S. banks continue to shrink their unused credit lines to limit exposure to default. The shrinkage in EAD is also a function of slack demand for credit in a deflating economy.
• The combinations of still-record default rates and rising servicing costs related to foreclosures is making banks hyper-cautious about credit. The muddle along policy of Obama and Geithner = no net credit growth.
• Chart on the following page shows unused credit lines for BAC, C. JPM and the large-bank peer group created by The IRA Bank Monitor. Note all have greatly reduced EAD.

Conclusions

• The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults. We are less than 1⁄4 of the way through the foreclosure process. Laurie Goodman of Amherst Securities predicts that 1 in 5 mortgages could go into foreclosure without radical action.
• Rising operating costs in banks will be more significant than in past recessions and could force the U.S. government to restructure some large lenders as expenses overwhelm revenue. BAC, JPM, GMAC foreclosure moratoriums only the start of the crisis that threatens the financial foundations of the entire U.S. political economy.
• The largest U.S. banks remain insolvent and must continue to shrink. Failure by the Obama Administration to restructure the largest banks during 2007-2009 period only means that this process is going to occur over next three to five years – whether we like it or not. The issue is recognizing existing losses — not if a loss occurred.
• Impending operational collapse of some of the largest U.S. banks will serve as the catalyst for re-creation of RFC-type liquidation vehicle(s) to handle the operational task of finally deflating the subprime bubble. End of the liquidation cycle of the deflating bubble will arrive in another four to five years.

I guess that means I will have plenty of properties to recycle over the next several years.

Live the Irvine HELOC abuse lifestyle

Let's be real honest about Californian's love affair with real estate: everyone here wants to spend the free money that comes out of the walls. People here believe house prices go up by magic, so all they have to do is buy and they get rich. Of course, if that believe is widely held, it is self-fulfilling — to a point. Trees cannot grow to the sky.

The owner of today's featured property regularly went to the housing ATM to spend the deposits left by the appreciation gods. in the process, he borrowed himself into oblivion, and now he is selling short after 14 years of loan ownership. He is probably pissed because no greater fool was willing to step forward and overpay for his run down property.

• This property was purchased on 5/3/1996 for $360,000. The owner used a $207,000 first mortgage and a $153,000 down payment.
• On 4/4/2002 he refinanced the first mortgage for $202,000. For the first six years of ownership, he had the mortgage going in the right direction.
• On 10/7/2003 he obtained a new first mortgage for $251,000. That $49,000 was his first taste of kool aid, and it changed his financial life.
• On 6/24/2005 he refinanced with a $338,000 first mortgage.
• On 4/25/2006 he got a $432,000 first mortgage.
• On 6/14/2007 he refinanced with an Option ARM for $595,000.
• Total mortgage equity withdrawal is $388,000 plus negative amortization.
• Total squatting time is about a year so far.

Foreclosure Record

Recording Date: 02/01/2010

Document Type: Notice of Default

Realistically, they will put off foreclosing on this guy as long as they can. The banks are praying prices will come back with sufficient volume to clear out guys like this. That isn't happening, and it isn't going to happen.

Irvine Home Address … 3 RAINBOW Fls #53 Irvine, CA 92603

Resale Home Price … $613,750

Home Purchase Price … $360,000

Home Purchase Date …. 5/3/1996

Net Gain (Loss) ………. $216,925

Percent Change ………. 60.3%

Annual Appreciation … 3.6%

Cost of Ownership

————————————————-

$613,750 ………. Asking Price

$122,750 ………. 20% Down Conventional

4.23% …………… Mortgage Interest Rate

$491,000 ………. 30-Year Mortgage

$116,181 ………. Income Requirement

$2,410 ………. Monthly Mortgage Payment

$532 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$51 ………. Homeowners Insurance

$490 ………. Homeowners Association Fees

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

$3,483 ………. Monthly Cash Outlays

-$396 ………. Tax Savings (% of Interest and Property Tax)

-$679 ………. Equity Hidden in Payment

$186 ………. Lost Income to Down Payment (net of taxes)

$77 ………. Maintenance and Replacement Reserves

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

$2,671 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,138 ………. Furnishing and Move In @1%

$6,138 ………. Closing Costs @1%

$4,910 ………… Interest Points @1% of Loan

$122,750 ………. Down Payment

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

$139,935 ………. Total Cash Costs

$40,900 ………… Emergency Cash Reserves

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

$180,835 ………. Total Savings Needed

Property Details for 3 RAINBOW Fls #53 Irvine, CA 92603

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 2,246 sq ft

($273 / sq ft)

Lot Size: n/a

Year Built: 1976

Days on Market: 96

Listing Updated: 40459

MLS Number: S625787

Property Type: Condominium, Residential

Community: Turtle Rock

Tract: Gh

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Based on our analysis of the description, this listing may be a short sale or in a stage of pre-foreclosure.

Rare Below Market Opportunity in Prestigious Turtle Rock / Irvine This is a pre-approved short sale that can close quickly. The approval includes a significant credit repairs, new paint, flooring and fixtures. A great opportunity for the buyer looking for a home in the prestigious Turtle Rock community of Irvine. The home has 2,246 Sq Ft of living space, plenty of closet space and storage, crown molding throughout and need only misc. repairs, new paint, flooring and court yard landscaping. Make an offer now and select the paint colors, new flooring and fixture styles. Enjoy the walking paths, great schools and excellent location while buying a home with immediate equity.

The approval includes a significant credit repairs? I would think a short sale would include significant credit destruction….

Some of the biggest participants in the housing bubble are now apologizing for the wanton destruction their actions inflicted on ordinary families.

Irvine Home Address … 4 TONADA Dr Irvine, CA 92620

Resale Home Price …… $519,900

Two vibrant hearts could change.

Nothing tears the being more than deception,

unmasked fear.

"I'll be here waiting" tested and secure.

Nothing hurts my world,

just affects the ones around me.

When sin's deep in my blood,

you'll be the one to fall.

Avenged Sevenfold — Unholy Confessions

Confession is good for a troubled conscience. Many people made huge fortunes duping ordinary families into transactions that ultimately cost them their good credit and their family homes. Last week I noted that Countrywide’s Mozilo Should Go to Jail. Now, a former Freddie Mac employee has come forward to confess that ruining lives was his job, and he was better at it than he would have liked to be.

Housing Guy Apologizes For Housing Bubble

by Chana Joffe-Walt and Adam Davidson — October 22, 2010

Fannie Mae and Freddie Mac have worked for decades to help more Americans become homeowners. Now one former Freddie Mac employee has asked us for the opportunity to apologize for doing such a good job of fulfilling that mission.

Jacob Kosoff used to work as an economist for Freddie Mac's "Mission Department." His job was to look at the loan data each month and promote homeownership. He says his team was full of true believers who called themselves "housers."

This guy was a missionary for the cult of kool aid.

"I thought subprime was the best thing in the world," he says.

It was not until the spring of 2008, just months before Freddie would be bailed out by the federal government, that Kosoff began to question his fundamental belief that owning a home was better than renting.

He mentioned his concerns in the office.

"It was a bit like announcing there was no God — like the idea that housing was like God," he says. "Buying is always better. Listen to your mom, listen to your minister, listen to the government, listen to politicians. Everyone says it's better."

This shows how deeply embedded kool aid has become in our society.

There's one thing in particular that Kosoff would like to apologize for.

While at Freddie Mac, Kosoff managed an online calculator designed to help people determine whether to rent or buy a house. In fact, it's still online — you can see it here.

You plug in the cost of rent, cost of renters insurance, and the price of an equivalent home. Then it asks you to punch in an estimated appreciation rate for the home — how much you think the home's price will change over time. But if you plug in a negative number — if you estimate that the home will lose value — the calculator gives you an error message:

Freddie Mac

"I'm sorry that I didn't send an e-mail or work a little harder to get that fixed so the calculator can allow for the possibility of reality," Kosoff says — the reality that housing prices sometimes decline.

Kosoff wonders if some people used the calculator to come to a very bad decision: to buy an overpriced house with a subprime mortgage when they should have rented instead.

Or course people bought based on the results of this calculator. That was the whole point. All the online rent versus buy calculators — with the exception of ours — are designed to ignore costs and exaggerate benefits in order to induce people to buy. These calculators are generally sponsored by some person or entity whose livelihood depends on coercing people to buy.

Freddie Mac says it plans to fix the calculator to allow for the possibility that housing prices do not always go up — a reality we are all living through right now.

Many people have asked me why I don't put in the ability to project forward for inflation of costs and appreciation. There are several related reasons, but the primary among them is that any projection of the future will invariably exaggerate the benefit of ownership. Nearly all prospective buyers and existing homeowners think house prices go up faster than they do. House prices usually track wage growth (about 3%), but most people believe house prices go up two or three times that fast. Many accept that California house prices go up 6% to 10% a year as a truism. It's not.

Steady side income

Orange County is a hotbed for entrepreneurs. Many people either make their living or supplement their living from entrepreneurial activities. Nearly every homeowner in California — or at least all the ones who have been selling their homes over the last 4 years — have been living like entrepreneurs with a steady side income. When people make $80,000 a year and their house provides $40,000 a year, they get to live the OC lifestyle. People from the outside don't get out house prices until they see how paying those prices enables Californian's to live.

• Today's featured property was purchased on 5/29/1998 for $199,500 according to my records. I think this number is in error because there is a $202,950 first mortgage on the property. In all likelihood, that was an FHA loan, and the real purchase price was $210,000.
• On 4/21/1999 they obtained a stand-alone second for $11,631.
• On 9/17/2001 they refinanced the first mortgage for $229,800.
• On 12/3/2001 they got a $45,000 HELOC.
• On 7/9/2003 they refinanced the first mortgage for $271,000
• On 12/9/2003 they refinanced with a $305,000 first mortgage.
• On 6/18/2004 they opened a HELOC for $122,000.
• On 7/20/2006 they opened a HELOC for $100,000.
• On 9/28/2006 they opened a HELOC for $52,882.
• On 9/28/2006 they opened a HELOC for $47,118. Notice the simultaneous HELOCs. That is mortgage fraud.
• On 2/20/2008 they refinanced the first mortgage for $400,000.
• On 7/3/2008 they refinanced again for $399,400.
• On 12/5/2008 they refinanced with a $398,500 first mortgage. I have to wonder if someone in the family is a mortgage broker.
• On 4/23/2009 they refinanced with a $410,000 first mortgage.
• That is 13 refinances or HELOCs in a 10 year period.
• Total mortgage equity withdrawal is $207,050.

What amazes me about this behavior is that banks continued to support it as late as April of 2009. Isn't it obvious that this borrower has gone Ponzi? I suppose lenders love customers like this as they generate huge fees, but this behavior is exactly what caused banks to loan out too much money to the wrong people during the housing bubble. Apparently, lenders haven't learned anything from that experience.

Irvine Home Address … 4 TONADA Dr Irvine, CA 92620

Resale Home Price … $519,900

Home Purchase Price … $192,000

Home Purchase Date …. 6/17/1988

Net Gain (Loss) ………. $296,706

Percent Change ………. 154.5%

Annual Appreciation … 4.4%

Cost of Ownership

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$519,900 ………. Asking Price

$103,980 ………. 20% Down Conventional

4.23% …………… Mortgage Interest Rate

$415,920 ………. 30-Year Mortgage

$98,415 ………. Income Requirement

$2,041 ………. Monthly Mortgage Payment

$451 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$43 ………. Homeowners Insurance

$285 ………. Homeowners Association Fees

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$2,820 ………. Monthly Cash Outlays

-$335 ………. Tax Savings (% of Interest and Property Tax)

-$575 ………. Equity Hidden in Payment

$158 ………. Lost Income to Down Payment (net of taxes)

$65 ………. Maintenance and Replacement Reserves

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$2,132 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$5,199 ………. Furnishing and Move In @1%

$5,199 ………. Closing Costs @1%

$4,159 ………… Interest Points @1% of Loan

$103,980 ………. Down Payment

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$118,537 ………. Total Cash Costs

$32,600 ………… Emergency Cash Reserves

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$151,137 ………. Total Savings Needed

Property Details for 4 TONADA Dr Irvine, CA 92620

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Beds: 3

Baths: 2 full 1 part baths

Home size: 1,800 sq ft

($289 / sq ft)

Lot Size: 1,891 sq ft

Year Built: 1977

Days on Market: 93

Listing Updated: 40459

MLS Number: S626236

Property Type: Single Family, Residential

Community: Northwood

Tract: Sd

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** REDUCED $20,000 ** you are looking to live in Northwood, this is a must see! Large living room with fireplace, Huge dining area, Family room, Wood flooring, New carpeting, Open kitchen, Large secondary bedrooms, Fireplace in master bedroom, Newer double paned windows & Oversized two car garage.