Monthly Archives: March 2011

Enormous shadow inventory; option ARM foreclosure rate surpasses subprime

Reports were released from First American CoreLogic and Lender Processing Services on the current state of shadow inventory and the mortgage market.

Irvine Home Address … 33 ERICSON AISLE Irvine, CA 92620

Resale Home Price …… $419,000

How do you think I'm going to get along

Without you when you're gone

You took me for everything that I had

And kicked me out on my own

Are you happy are you satisfied?

How long can you stand the heat?

Queen — Another one bites the dust

How are people going to get along without their own ATM machines? Chasing free money induced many to pay peak prices, and now the lender has taken everything that they had and kicked them out to the street. I doubt they find the forbidden fruit of HELOC riches very satisfying under an ocean of debt.

Shadow inventory of foreclosures drops 11% from one year ago: CoreLogic

by JON PRIOR — Wednesday, March 30th, 2011, 10:02 am

Real estate data provider CoreLogic said 1.8 million properties make up the shadow inventory of foreclosures, down 11% from one year ago.

Analysts consider the shadow inventory as the major force against a recovery in the U.S. housing market. It is made up of mortgages in at least 90-days delinquency, in foreclosure or already repossessed by the lender as REO. These properties continue to drag down home prices, forcing more borrowers underwater and ultimately into default. Standard & Poor's recently put the principal balance remaining on the shadow inventory at $450 billion.

The 1.8 million homes represent a nine-month supply of inventory. Healthy real estate markets usually hold a six-month supply. Of the shadow inventory, nearly half are in some stage of serious delinquency. The rest is split almost evenly between properties in foreclosure or REO.

CoreLogic said while some portion of the shadow inventory can be carved away through modification or short sale, “only a small share can be effectively remediated from the shadow supply,” leaving the rest for liquidation through REO.

For the first time, CoreLogic studied net present value, or NPV, calculations, and expected severity and redefault rates for modifications and short sales. Analysts came to the conclusion that these loss-mitigation efforts could cut the shadow inventory in half. But communication difficulties between the borrower and the servicer could make that prediction too optimistic.

CoreLogic found in addition to the shadow inventory, there are nearly 2 million mortgages that are current but underwater.

The highest levels of the shadow inventory remain in New Jersey, Illinois and Maryland. While mostly lower-population states such as North Dakota, Alaska and Wyoming hold the least amount of the inventory, Texas had a notably small portion.

And Shevy's home state of North Dakota has no shadow inventory at all.

CoreLogic Chief Economist Mark Fleming said despite the decline over the last year, the shadow inventory will linger for some time.

“While the trend of the shadow inventory is improving somewhat, the current level and distressed months’ supply remain very high,” Fleming said. “The short-term weakness in prices and longer-term weakness in the drivers that affect the housing market imply that excess supply will remain high for an extended period of time.

Write to Jon Prior. Follow him on Twitter @JonAPrior.

LPS' Mortgage Monitor Report Shows Enormous Backlog of Foreclosures; Option ARM Foreclosure Rate Higher Than Subprime Foreclosures Ever Reached

March 28, 2011

JACKSONVILLE, Fla. – March 28, 2011 -The February Mortgage Monitor report released by Lender Processing Services, Inc. (NYSE: LPS) shows that while delinquencies continue to decline, an enormous backlog of foreclosures still exists with overhang at every level. As of the end of February, foreclosure inventory levels stand at more than 30 times monthly foreclosure sales volume, indicating this backlog will continue for quite some time. Ultimately, these foreclosures will most likely reenter the market as REO properties, putting even more downward pressure on U.S. home values.

February’s data also showed a 23 percent increase in Option ARM foreclosures over the last six months, far more than any other product type. In terms of absolute numbers, Option ARM foreclosures stand at 18.8 percent, a higher level than Subprime foreclosures ever reached. In addition, deterioration continues in the Non-Agency Prime segment. Both Jumbo and Conforming Non-Agency Prime loans showed increases in foreclosures and were the only product areas with increases in delinquencies.

The data also showed that banks’ modification efforts have begun to pay off, as 22 percent of loans that were 90+ days delinquent 12 months ago are now current. Timelines continue to extend, with the average U.S. loan in foreclosure now having been delinquent for a record 537 days, and a full 30 percent of loans in foreclosure have not made a payment in over two years.

A 22% cure rate is abysmal. Only by comparing it to the even more abysmal 2008 numbers makes 22% sound good. Historically, cure rates are very high because borrowers used to have a rising market to sell into if they got into financial trouble. With the collapse of the Ponzi scheme, lenders were unwilling to extend credit, so borrowers couldn't Ponzi borrow to make payments. Since many borrowers were also underwater, they couldn't sell into a rising market, so they squat in comfort and wait for the bank to do something.

As reported in LPS' First Look release, other key results from LPS' latest Mortgage Monitor report include:

  • Total U.S. loan delinquency rate: 8.8 percent
  • Total U.S. foreclosure inventory rate: 4.15 percent
  • Total U.S. non-current inventory: 6,856,000
  • States with most non-current* loans: Florida, Nevada, Mississippi, New Jersey, Georgia
  • States with fewest non-current* loans: Montana, Wyoming, Alaska, South Dakota, North Dakota

Investor Contact: Parag Bhansali, 904.854.8640, parag.bhansali@lpsvcs.com. Media Contact: Michelle Kersch, 904.854.5043, michelle.kersch@lpsvcs.com

Let's walk through a few graphs to figure out what it all means.

The number of 90+ days delinquent loans continues to grow. We need to stop the increase and reduce the number to near zero. Historically, the percentage more than 90 days in arrears is very low.

To look at the chart above, one could mistakenly believe we are over the worst and delinquency rates are near historic norms. The truth is delinquencies are double historic norms, and distressed inventories are nearly eight times historic norms. How are prices supposed to go up in the face of that?

Another one bites the dust

Another one bites the dust

And another one gone and another one gone

Another one bites the dust hey

Hey I'm gonna get you too

Another one bites the dust

Queen — Another one bites the dust

Further we are making very little progress on foreclosures. For every borrower entering foreclosure, three are delinquent. We are continuing to build shadow inventory.

Notice on the chart below that foreclosures kept pace with delinquencies until early 2008. The foreclosure statistics show a peak during that time when lenders realized they were crushing the housing market and embarked on amend-extend-pretend and created shadow inventory.

What are the prospects for curing these loans? Most bulls assume cure rates of 85% or better will mop up this mess. With less than a quarter of loans curing, foreclosure is the most likely outcome for shadow inventory even if cure rates continue to improve. Distressed inventory will be with us for a long time.

And, in case you needed any reminder from me, mortgage squatting is an national epidemic with nearly 30% of delinquent borrowers enjoying over two years of free living.

There are plenty of ways that you can hurt a man

And bring him to the ground

You can beat him

You can cheat him

You can treat him bad and leave him

When he's down yeah

But I'm ready yes I'm ready for you

I'm standing on my own two feet

Queen — Another one bites the dust

To make matters worse, the Option ARMs are beginning to reset and recast putting many borrowers into delinquency.

Foreclosures related to Option ARMs increased more than any other loan program over the last six months. We are only now entering the two-year period with the most resets. Look for the delinquency rates on these loans to continue to perform poorly.

We are going to see many more distressed sales over the next several years. I question whether lenders can maintain current pricing and liquidate inventories in a reasonable timeframe. Lenders will not want to hold this property forever, and as a society, we don't want them to. The only real question is how orderly will the liquidation be? How The Lending Cartel Disposes Their REO Will Determine the Market’s Fate.

Taking their lumps and moving on

Everyone who buys during a decline should know they may have to move and sell when the resale value is down. It is an avoidable financial loss. Renting is always an option. The owners of today's featured property paid $470,000 on 6/17/2008. They put 50% down. I have no idea why why they are selling. I do know that any losses come out of what was their down payment. Ouch.

Irvine House Address … 33 ERICSON AISLE Irvine, CA 92620

Resale House Price …… $419,000

House Purchase Price … $470,000

House Purchase Date …. 6/17/2008

Net Gain (Loss) ………. ($76,140)

Percent Change ………. -16.2%

Annual Appreciation … -4.0%

Cost of House Ownership

————————————————-

$419,000 ………. Asking Price

$14,665 ………. 3.5% Down FHA Financing

4.79% …………… Mortgage Interest Rate

$404,335 ………. 30-Year Mortgage

$84,696 ………. Income Requirement

$2,119 ………. Monthly Mortgage Payment

$363 ………. Property Tax (@1.04%)

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

$87 ………. Homeowners Insurance (@ 0.25%)

$140 ………. Homeowners Association Fees

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

$2,709 ………. Monthly Cash Outlays

-$346 ………. Tax Savings (% of Interest and Property Tax)

-$505 ………. Equity Hidden in Payment (Amortization)

$27 ………. Lost Income to Down Payment (net of taxes)

$52 ………. Maintenance and Replacement Reserves

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

$1,938 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,190 ………. Furnishing and Move In @1%

$4,190 ………. Closing Costs @1%

$4,043 ………… Interest Points @1% of Loan

$14,665 ………. Down Payment

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

$27,088 ………. Total Cash Costs

$29,700 ………… Emergency Cash Reserves

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

$56,788 ………. Total Savings Needed

Property Details for 33 ERICSON AISLE Irvine, CA 92620

——————————————————————————

Beds: 3

Baths: 2

Sq. Ft.: 1424

$294/SF

Property Type: Residential, Condominium

Style: One Level, Contemporary

Year Built: 1989

County: Orange

MLS#: S651484

Source: SoCalMLS

——————————————————————————

Rare single-level three-bedroom, two-bath condominium located in the wonderful Northwood Villas tract. The large master bedroom features two closets, along with built-in custom storage, and the master bathroom offers dual-sinks and an oversize tub: perfect for unwinding after a hard day! Revel in the elegant hardwood flooring, plush carpeting, newer appliances and central cooling system. Relax in the very spacious living room by the cozy fireplace – and enjoy the great SoCal weather outside on the spacious and private wrap-around enclosed patio. One will also find a indoor laundry room. Northwood Villas is located centrally to many entertainment and shopping venues and restaurants, including the Irvine Spectrum – and the Irvine school district is rated one of the best in the U. S. Plus, it's a short drive to the huge Heritage Park, which features many tennis and basketball courts, tot lots, a large pond, county library and community center. Make this a home on your short list.

Banksters should be held accountable for ruining the housing market and economy

As the housing market crumbles, those most responsible for its demise are the ones suffering the least.

Irvine Home Address … 115 OVAL Rd Irvine, CA 92604

Resale Home Price …… $329,000

Caviar and cigarettes

Well versed in etiquette

Extraordinarily nice

Recommended at the price

Insatiable an appetite

Wanna try?

Queen — Killer Queen

The banksters taking over our country enjoy extraordinarily nice lives of caviar and cigarettes. They're insatiable greed is only surpassed by their lack of accountability. In last weeks post on shadow inventory, I came across a February story on how bankers let each other squat. It really made me angry:

Bankers allow each other to squat

One of the most infuriating facts about shadow inventory is its epicenter: the New York MSA. Boneheads in New York think their market is immune as it is one of the few where properties still routinely trade at peak prices. Little do they know that this price stability is an illusion created by shadow inventory.

Shadow inventory to push foreclosures to new heights

by JACOB GAFFNEY — Wednesday, February 2nd, 2011, 3:57 pm

“The shadow inventory in the New York MSA will take the longest to clear — 130 months as of fourth-quarter 2010. That is at least twice as long as it will take in any of the other top 20 MSAs and 2.7 times the average time to clear for the U.S. as a whole,” the S&P report states. “This is primarily due to very low liquidation rates in New York.”

What the hell is this? Very low liquidation rates? Why is that? Could it be that bankers don't want to hurt their own property values? What other reason could there be? Assholes.

The behavior of the banksters has been utterly reprehensible. They unleash a destructive Ponzi virus on our financial system for their own personal enrichment. When their Ponzi virus consumes the housing equity of a generation, they (1) give themselves huge bonuses, they (2) lobby government for handouts, and they (3) selectively refuse to foreclose on properties in their neighborhoods to preserve their own property values.

These creatures have taken greed and unaccountability to new hubristic heights.

A Lawyer's Perspective on… Promoting and Preserving Failure in America

Friday, March 18, 2011 — Capitalism Without Failure

It was with considerable sadness that I learned, during the financial crisis, that people I knew – economists, investment professionals, bankers – had given bad advice to their companies and their clients. They had not seen a housing bubble developing. They had not seen a highly over-leveraged banking system. They had not questioned the viability of an opaque derivatives industry that was growing exponentially. In fact, they had not seen any abnormal risk. And they had advised their clients and firms accordingly. As a result, their funds and their portfolios and their clients lost massive amounts of money.

I was concerned for these people. After all, their inability to call a major economic catastrophe, with plenty of warning signs, had led to horrible losses. And since plenty of people had been predicting a collapse… I assumed that my friends would all be losing their jobs, and their reputations.

That is a very reasonable assumption. Bankers should be held accountable for the problems they created. Those responsible should have lost jobs, and some of the worst should have gone to prison.

I could not have been more wrong. That's not how it works in the world of elite finance and economics. In the highest echelons of economics and banking and investing and advising, the people that succeed are not the ones that get it right. The people that succeed are the ones that do what they have to do in order to succeed.

Fifteen years ago, I completed a Masters Degree in International Economics at the Johns Hopkins School of International Studies. I had studied with a number of people that ended up working at top banks. In 2005, I had been considering a home purchase but was becoming convinced that real estate in the USA was in an unsustainable bubble. At that point, I had been working as an attorney for a number of years – so I thought I should speak to an expert. I called an economist friend of mine that had ended up at Goldman Sachs and asked him about the possibility that there was a bubble that could be bursting. He assured me that the economy was strong, and robust, and that I had nothing to worry about. He told me that economists who were worrying about potential weakness ahead, had it dead wrong and that they should be ignored. He called them “crazy”.

If I had listened to him, I would have bought a house at the height of the market – and would have lost every penny of down payment that I had managed to scrape together. Luckily, I did not listen. Instead, I considered what he said. Then I read more about what was going on and decided to take a huge risk – I decided to ignore the experts, to not to buy a home, and to risk missing out on the huge appreciation that those experts were predicting. In the end, he turned out to be wrong – not jut a little bit wrong, but absolutely and completely incorrect.

How many realtors and mortgage brokers told their clients tales that turned out to be a fantasy? And how many of those buyers made their decision based on the faulty advice? Do the realtors involved feel guilt or shame over their responsibility for the family financial catastrophes that resulted from their bad advice?

I didn't see him until after the meltdown was well behind us. I assumed he had lost his job. After all, his analysis was an absolute disaster. And he had been more than willing to share it.

Here's where my own powers of analysis failed in a major way: I assumed that he would have lost his job; instead, he had been promoted. In fact, not one person I knew in the financial industry had lost their job. I remember subsequently chatting with another Goldman Sachs economist shortly after the bailouts. He seemed completely unaware that there was even an issue with regard to how the industry had been protected. All that was really going on for him was that he had multiple nannies helping to care for his 2 young children. He was otherwise in terrific spirits.

My very fortunate friends turned out to be a perfect microcosm of what we all witnessed: the worst analysts with the worst judgment that got us into the worst financial quagmire in a century, were not only maintained – they were promoted. This happened in the private sector, academia, and in the public sector. In the public sphere, Tim Geithner and Ben Bernanke come to mind. And let's not forget Robert Rubin and Larry Summers. (And I would sincerely appreciate it if we could stop hearing from Alan Greenspan – arguably the arch-architect of our misery.)

We have done little to fix the underlying problems. We have now entrenched incompetence and largess into our system of finance at the expense of good governance.

We all know why my friends ended up on top; we bailed out their failed banks and our compromised financial system. That is wrong on many levels. But it's not as wrong as what has happened within our government. If our political economy had been functioning properly, Geithner and Bernanke would have lost their jobs – and their influence – long ago. Instead, Bernanke is arguably the most powerful individual in the world. And Tim Geithner (an alum of mine from SAIS!) is not far behind.

The United States has an incredibly resilient economy. It has withstood mismanagement and corruption on a scale that rivals almost any country in this world. It continues to putt along, notwithstanding the undermining of meritocracy, fairness, and justice – in every sphere. Unfortunately, the long-term prospects for a system that promotes the most corrupt and most compromised actors is poor.

Even the most resilient economy on earth requires the rejuvenation that comes with the removal of people with failed ideas, poor judgment, and who are corrupt. Our current leadership has taken a stand when it comes to our economy: instead of weeding out the corruption and allowing for organic economic strength to return, they are working to overwhelm the corruption-induced-failure with the economic equivalent of steroids. That can only work temporarily when the worst and most corrupt actors are allowed to thrive and maintain leadership roles. Ultimately, those compromised people and their compromised ideas will threaten our macro-economy again. We will never need principled and courageous leadership more than when that eventuality is upon us.

How do we purge the system?

Our financial services sector is too large. Contrary to popular belief on Wall Street, pushing paper does not create value. Wall Street is supposed to determine which sectors of our economy and which businesses obtain capital to expand. They are traffic cops directing the flow of money. Their activities create nothing of value directly, but they enable those who create valuable goods and services.

Unfortunately, we have let this sector of the economy take over. They believe their fiefdom will endure forever. Beyond the desire to save their own housing values in NYC, bankers believe someone will come along who makes enough to pay a huge mortgage. They plan on holding onto all their shadow inventory as long as they have to for overpaid bankster buyers to come back for NYC homes. They don't think it will take very long. If we don't stop them, they may be right.

Setting a low bar

The owners of today's featured property increased their mortgage by 50% in the 11 years they owned it. Personally, I don't think it is wise financial management to increase a mortgage balance by 50%, but it's what passes for conservative borrowing here in California.

  • The property was purchased on 7/26/2000 for $175,500. The owners used a $157,950 first mortgage, and a $17,550 down payment.
  • On 4/25/2001 they refinanced with a $165,000 first mortgage.
  • On 4/11/2003 they refinanced with a $166,322 first mortgage.
  • On 2/1/2008 they refinanced with a $222,000 first mortgage.

Their mortgage equity withdrawal was only $64,050, small by Irvine standards. As a result, they stand to get a check at closing. It will be about $75,000 smaller than it should be.

Irvine House Address … 115 OVAL Rd Irvine, CA 92604

Resale House Price …… $329,000

House Purchase Price … $175,500

House Purchase Date …. 6/26/2000

Net Gain (Loss) ………. $133,760

Percent Change ………. 76.2%

Annual Appreciation … 5.8%

Cost of House Ownership

————————————————-

$329,000 ………. Asking Price

$11,515 ………. 3.5% Down FHA Financing

4.79% …………… Mortgage Interest Rate

$317,485 ………. 30-Year Mortgage

$66,503 ………. Income Requirement

$1,664 ………. Monthly Mortgage Payment

$285 ………. Property Tax (@1.04%)

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

$69 ………. Homeowners Insurance (@ 0.25%)

$140 ………. Homeowners Association Fees

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

$2,157 ………. Monthly Cash Outlays

-$155 ………. Tax Savings (% of Interest and Property Tax)

-$397 ………. Equity Hidden in Payment (Amortization)

$21 ………. Lost Income to Down Payment (net of taxes)

$41 ………. Maintenance and Replacement Reserves

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

$1,668 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,290 ………. Furnishing and Move In @1%

$3,290 ………. Closing Costs @1%

$3,175 ………… Interest Points @1% of Loan

$11,515 ………. Down Payment

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

$21,270 ………. Total Cash Costs

$25,500 ………… Emergency Cash Reserves

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

$46,770 ………. Total Savings Needed

Property Details for 115 OVAL Rd Irvine, CA 92604

——————————————————————————

Beds: 2

Baths: 2

Sq. Ft.: 1200

$274/SF

Property Type: Residential, Condominium

Style: Two Level, Contemporary

Year Built: 1972

Community: 0

County: Orange

MLS#: S652347

Source: SoCalMLS

Status: Active

On Redfin: 5 days

——————————————————————————

2 bedrooms 2 baths remodelled home has 19' tile floors on lower level, remodelled kitchen with newer appliances, recessed lighting, scraped ceilings, ceiling fans, attached garage, enter from dining room. Upgraded bathrooms with new tub and granite sink top. large back patio has avocado, lemon and grape trees. wide open street in front of the home makes it a desirable location in the tract. walk across to the shopping center and restaurants. close to library , parks and more. association offers pool, spa, basketball court, children's play area, bar b que and pays for insurance, water, hot water and trash. lots of greenery and plenty of parking in the neighborhood. this home can easily be converted to 3rd bedroom. NO MELLO ROOS, LOW TAX RATE. REGULAR SALE RESPONSE IN 24 HOURS.

Predictions versus reality: Irvine Renter's track record

Was I right, wrong, or somewhere in between. Let's review the data, and I will let you decide.

Irvine Home Address … 184 PINEVIEW Irvine, CA 92620

Resale Home Price …… $196,000

I believe I can see the future

Because I repeat the same routine

I think I used to have a purpose

Then again, that might have been a dream

Nine Inch Nails — Every Day is Exactly the Same

Groundhog Day is one of my favorite movies. Every day is exactly the same. One of the reasons I enjoy Southern California so much is because I rarely change my outdoor plans due to the weather. Every day is beautiful. Yesterday was, and tomorrow will be as well.

It will feel like groundhog day here over the next few years as we work through the inventory issues. I will offer the same advice: don't buy unless you plan a long-term hold. I will say that until the number of foreclosures gets down near zero, and the backlog of unprocessed bad loans is complete. I don't know how these bad loans will be resolved. I believe foreclosure will resolve most of them, but we may see some form of principal forgiveness become more common before this crisis is truly behind us. I hope not.

My beginning at the IHB

Many of you may not remember that I was not an original writer at the IHB. Zovall and IrvineSingleMom were the two first writers. When they asked me to write, I just started, and I haven't stopped. I don't know where the energy or inspiration comes from, but I do enjoy exploring this artform… or is it a news media…

Back on February 27, 2007, I loudly proclaimed we were at the top of the market and that prices were going to crash. I wasn't offering a weak warning that prices might go down a little bit, I was boldly stating prices were going to crash — hard. It was going to be a catastrophe. It was important news.

Of course, when i made these proclamations, I was roundly criticized as a fool who didn't know what he was talking about (read some of the old comments). In order to provide some credibility to my assertions, I wrote a series of analysis posts:

The final post in that series aired on 11 March 2007. Predictions for the Irvine Housing Market contained the chart below.

In that post, I went on to list the main factors that will influence the timing and the depth of the decline:

  1. Percentage of Income Put Toward Housing Payments
  2. Interest Rates
  3. Foreclosures
  4. Adjustable Rate Mortgage Time Bombs
  5. Government Intervention

I wrote that back in early 2007 before we had any of the following:

  1. loan modifications which focus on DTI ratios,
  2. federal reserve buying mortgage paper to influence interest rates,
  3. foreclosures that reached maximum market absorption levels,
  4. ARM resets contributing to delinquencies which are now in shadow inventory, and
  5. The federal government nationalizing the housing market by taking the GSEs into conservatorship.

On August 25, 2008, I revisited my prediction in I Was Wrong, It’s Worse… It had the updated results through April of 2008.

The initial stages of the crash were surprising in the rapidity of the declines. Irvine's real estate market had experienced patches of weakness, but it avoided most of the 18% statewide decline in the early 90s. Predicting any decline ran the risk of stubborn sellers and sticky prices preventing a decline. By mid 2008, even the most stubborn bulls realized they had no idea what they were talking about back in 2006. They weren't just a little wrong, they were debt-up-to-their-eyes wrong about the direction of house prices.

How wrong was I?

I just obtained the updated median home sales prices for Irvine to see how my predictions compared to what really happened.

Prices did not fall as much as I predicted, not because my reasoning was flawed, but because unforeseeable and unprecedented efforts by bankers and the government delayed the drop, and may have averted a much deeper drop.

I say these events were unforeseeable and unprecedented, but some may argue that such extremes were inevitable. I have no way to counter that point. However, I can say that few predicted those events in advance of when the rumors became news. Any forecaster out there who foresaw those events and accurately gaged their impacts is far better than I am.

What happened in 2008 to slow the drop in prices?

Two events in 2008 marked important turning points for the market. First, in early 2008 nearly every housing market in the country reached and exceeded its capacity to absorb foreclosures without pushing prices lower. And second, in late 2008, the Treasury department went against 40 years of government statements and took over the GSEs and backstopped the GSEs bad debts. The public was absorbing the losses of private enterprise just like with AIG.

In the last housing bubble on the late 80s-early 90s, lenders foreclosed on delinquent borrowers without delay. There was no shadow inventory. The number of foreclosures did push prices lower, but they were not so overwhelming that prices crashed. In early 2008, the number of foreclosures simply overwhelmed the number of buyers, and prices plummeted. Banks had a decision to make: 1. keep foreclosing and push prices back to the 90s, or stop foreclosing and accumulate a shadow inventory of delinquent mortgage squatters. They chose the latter.

In late 2008, in response to a balance sheet in tatters and mounting losses, the Treasury Department took over the GSEs. by the end of the year, between the FHA and the GSEs, the federal government controlled about 98% of the mortgage market.

Once the government controlled the delivery mechanism for home loans, the only thing they needed was someone willing to buy those loans at high prices, and they could support prices at levels higher than a free market would bear. The patsy to buy home loans in a depreciating market turned out to be the Federal Reserve.

What happened in 2009 to slow the drop in prices?

When the Federal Reserve began its program to buy $1.2 trillion in mortgage-backed securities, it knew it was buying toxic crap, but the with an infinite balance sheet from the ability to print money, they are uniquely suited to absorb these losses — losses their member banks cannot afford to take. In essence, they printed enough money to paper over what was destroyed through lender losses.

Since 2009, the government has been in total control of the housing market. They remain in control to this day. There is talk in Washington about reform, but since any subsidy removal will lower prices and increase bank losses, any transition will happen slowly.

I was wrong: It's better

I was clearly wrong. Prices did not fall as far as I said they would. But how wrong was I?

If prices only fell 2/3 of the amount I projected, was I 1/3 wrong? If prices are 50% below expectations, how wrong am I. Was I at least 66% right?

46% off at the low end

Whatever becomes of the median, it is clear that prices of low-end properties have fallen dramatically. The owner who paid $342,000 for this property in 2006 certainly didn't think it would be worth less than $200,000 in 2011. He was wrong too. However wrong I am, it isn't as painful for me as it is for this former owner.

Irvine House Address … 184 PINEVIEW Irvine, CA 92620

Resale House Price …… $196,000

House Purchase Price … $342,000

House Purchase Date …. 5/17/2006

Net Gain (Loss) ………. ($157,760)

Percent Change ………. -46.1%

Annual Appreciation … -11.3%

Cost of House Ownership

————————————————-

$196,000 ………. Asking Price

$6,860 ………. 3.5% Down FHA Financing

4.79% …………… Mortgage Interest Rate

$189,140 ………. 30-Year Mortgage

$39,619 ………. Income Requirement

$0,991 ………. Monthly Mortgage Payment

$170 ………. Property Tax (@1.04%)

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

$41 ………. Homeowners Insurance (@ 0.25%)

$285 ………. Homeowners Association Fees

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

$1,487 ………. Monthly Cash Outlays

-$92 ………. Tax Savings (% of Interest and Property Tax)

-$236 ………. Equity Hidden in Payment (Amortization)

$13 ………. Lost Income to Down Payment (net of taxes)

$24 ………. Maintenance and Replacement Reserves

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

$1,195 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$1,960 ………. Furnishing and Move In @1%

$1,960 ………. Closing Costs @1%

$1,891 ………… Interest Points @1% of Loan

$6,860 ………. Down Payment

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

$12,671 ………. Total Cash Costs

$18,300 ………… Emergency Cash Reserves

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

$30,971 ………. Total Savings Needed

Property Details for 184 PINEVIEW Irvine, CA 92620

——————————————————————————

Beds: 1

Baths: 1

Sq. Ft.: 934

$210/SF

Property Type: Residential, Single Family

Style: Two Level

View: Water

Year Built: 1990

Community: Northwood

County: Orange

MLS#: S646955

Source: SoCalMLS

Status: Active

On Redfin: 49 days

——————————————————————————

Irvine Single Family Attached Home. 2 Story with large living room, tile flooring, new wall paint, new kitchen appliances, new furnace, new carpet, and more. TURNKEY! Upstairs Bedroom and Bathroom. Rear Patio and laundry closet for full sized washer and dryer. Close to restaurants, shopping, schools, and more. HOA dues include trash and water. Carport # 199.

Liar loan borrower jailed, forced to repay stupid lender

In a victory for law enforcement, a borrower who used a liar loan is going to prison. The bankers who offered this toxic product get bonuses.

Irvine Home Address … 31 RESERVE Irvine, CA 92603

Resale Home Price …… $3,499,999

I'm on a highway to hell

On the highway to hell

Highway to hell

I'm on the highway to hell

Highway to Hell — AC/DC

During the Great Housing Bubble, people knowingly lied about their income in order to buy homes. The practice was so common, the loan programs became known as liar loans. I described liar loans back in 2008:

“The Road to Hell is Paved with Good Intentions.” — Samuel Johnson. Most people who took out a “liar loan” did so to provide shelter for their families and hopefully make a few dollars speculating in real estate. Most people did not intend to defraud anyone when they took out the loan, but they ended up doing so by walking away from their payment obligations. This Highway to Hell is paved with good intentions, and it is very well traveled.

State Income Loans

One unique phenomenon of The Great Housing Bubble was the utilization of state-income loans, also known as “liar loans” because most people were not truthful when stating their income. Loan documentation is usually a routine part of obtaining financing. Lenders ordinarily require a borrower to provide documentation proving income, assets and debt. However, during the final stages of the Great Housing Bubble, loan documentation was seen as an unnecessary barrier to completing more transactions, and loan programs which circumvented normal documentation procedures flourished. The fact that these programs existed at all is a remarkable proof of the risk lenders were taking through the relaxing or outright elimination of lending standards. According to a study by Credit Suisse, 81% of Alt-A purchase originations in 2006 were stated income, and 50% of subprime originations in 2005 and 2006 were stated income. Stated income loans increased from 18% of originations in 2001 to 49% in 2006 according to Loan Performance. In a related study by the Mortgage Asset Research Institute, 60% of stated-income borrowers had exaggerated their incomes by more than 50%. …

Stated Income Loans

The stated-income loan, also known as liar loan due to the built-in incentive to exaggerate one’s income, was originally provided to borrowers such as the self-employed who most often do not have W-2s to verify income. When these loan programs were first started, they were not made available to borrowers with W-2s as the transparency of the lie would have been obvious to all parties. During the bubble rally, these loans were made available to anyone, and not just were the borrowers encouraged to lie, they were often assisted in fabricating paperwork by aggressive loan officers and mortgage brokers. Since the loan could be packaged and sold to investors who had no idea what they were buying, there was a complete lack of concern for whether or not the borrower actually made the money stated in the loan application and thereby could actually make the payments on the loan. Everyone involved was making large fees, the borrower was obtaining the real estate they desired, and for a time, the investor was receiving payments from the borrower. As long as prices were rising, everyone benefited from the arrangement. Of course, once prices started to fall, borrowers did not want to continue making payments they could not afford, and the whole system collapsed in a massive credit crunch.

Liar loans went away, but as fate would have it, the reverse liar loan appeared shortly thereafter.

Everyone is doing loan modifications now: Citibank, the GSEs, everyone. They must. … Part of the loan workout requires the borrower to demonstrate they are unable to make payments, and their income is going to be used to figure out how much principal reduction and other loan terms the bank will adjust to accommodate them. I think you can see where this is going… All the people who exaggerated their incomes to obtain more house than they can afford, are now trying to look as poor as Church mice to get the biggest mortgage principal reduction they can: the reverse liar loan. They lied to get in, now they get to lie in order to keep it. We have a great system in place, don't you think?

For every irresponsible borrower, there was a foolish lender who enabled them. Imagine this, you stand on a street corner and had out $20 bills to anyone who promises to pay you back. When most of the people spend the money and don't pay you back, were they immoral for lying to you, or were you stupid for giving them your money?

Lenders are more culpable than borrowers. The power imbalance in the lender-borrower relationship puts greater responsibility on the lender. It stands on principles of fairness that lenders should bear the brunt of the losses, the tarnished image, and other collateral damage associated with such a colossal group failure. The reality is that lenders are getting big bonuses, they aren't foreclosing on each other's houses, they are getting tax bailout money, and they are just as rich and powerful as they were before the disaster of their making. It isn't working out so well for the little guy.

In Prison for Taking a Liar Loan

By JOE NOCERA

Published: March 25, 2011

A few weeks ago, when the Justice Department decided not to prosecute Angelo Mozilo, the former chief executive of Countrywide, I wrote a column lamenting the fact that none of the big fish were likely to go to prison for their roles in the financial crisis.

Soon after that column ran, I received an e-mail from a man named Richard Engle, who informed me that I was wrong. There was, in fact, someone behind bars for what he’d supposedly done during the subprime bubble. It was his 48-year-old son, Charlie.

On Valentine’s Day, the elder Mr. Engle said, his son had entered a minimum-security prison in Beaver, W.Va., to begin serving a 21-month sentence for mortgage fraud. He then proceeded to tell me the tale of how federal agents nabbed his son — a tale he backed up with reams of documents and records that suggest, if nothing else, that when the federal government is truly motivated, there is no mountain it won’t move to prosecute someone it wants to nail. And it was definitely motivated to nail Charlie Engle.

There is no way to know what prosecutors real motivations were for bringing a case. From their point of view, with the information they had, this case looks quite different. It's always a good idea to preface these stories with a reality check because a good writer will lead you down the path before you know it.

Mr. Engle’s is a tale worth telling for a number of reasons, not the least of which is its punch line. Was Mr. Engle convicted of running a crooked subprime company? Was he a mortgage broker who trafficked in predatory loans? A Wall Street huckster who sold toxic assets?

No. Charlie Engle wasn’t a seller of bad mortgages. He was a borrower. And the “mortgage fraud” for which he was prosecuted was something that literally millions of Americans did during the subprime bubble. Supposedly, he lied on two liar loans.

Prosecutors like to get a few high-profile scalps as a deterrent to others considering similar crimes. The utility of a few important prosecutions can go far beyond the resources devoted. Apparently, someone singled out this guy to be the poster child for liar loans. I think Casey Serin would have been a better target.

“The Department of Justice has made prosecuting financial crimes, including mortgage fraud, a high priority,” said Neil H. MacBride, the United States attorney for the Eastern District of Virginia, in a statement. (Mr. MacBride, whose office prosecuted Mr. Engle, declined to be interviewed.)

Apparently, though, it’s only a high priority if the target is a borrower. Mr. Mozilo’s company made billions in profit, some of it on liar loans that he acknowledged at the time were likely to be fraudulent and which did untold damage to the economy. And he personally was paid hundreds of millions of dollars. Though he agreed last year to a $67.5 million fine to settle fraud charges brought by the Securities and Exchange Commission, it was a small fraction of what he earned. Otherwise, he walked. Thus does the Justice Department display its priorities in the aftermath of the crisis.

I wrote last year that Countrywide's Mozilo should go to jail. The facts are as presented above. Mozilo is a crook who gamed the system, took his slap on the wrist, and kept his ill-gotten booty. The penalties being doled out to the parties are grossly unfair.

It’s not just that Mr. Engle is the smallest of small fry that is bothersome about his prosecution. It is also the way the government went about building its case. Although Mr. Engle took out the two stated-income loans, as liar loans are more formally called, in late 2005 and early 2006, it wasn’t until three years later that his troubles began.

As a young man, Mr. Engle had been a serious drug addict, but after he got clean, he became an ultra-marathoner, one of the best in the world. In the fall of 2006, he and two other ultra-marathoners took on an almost unimaginable challenge: they ran across the Sahara Desert, something that had never been done before. The run took 111 days, and was documented in a film financed by Matt Damon, who served as executive producer and narrator. Mr. Engle received $30,000 for his participation.

The film, “Running the Sahara,” was released in the fall of 2008. Eventually, it caught the attention of Robert W. Nordlander, a special agent for the Internal Revenue Service. As Mr. Nordlander later told the grand jury, “Being the special agent that I am, I was wondering, how does a guy train for this because most people have to work from nine to five and it’s very difficult to train for this part-time.” (He also told the grand jurors that sometimes, when he sees somebody driving a Ferrari, he’ll check to see if they make enough money to afford it. When I called Mr. Nordlander and others at the I.R.S. to ask whether this was an appropriate way to choose subjects for criminal tax investigations, my questions were met with a stone wall of silence.)

Mr. Engle’s tax records showed that while his actual income was substantial, his taxable income was quite small, in part because he had a large tax-loss carry forward, due to a business deal he’d been involved in several years earlier. (Mr. Nordlander would later inform the grand jury only of his much lower taxable income, which made it seem more suspicious.) Still convinced that Mr. Engle must be hiding income, Mr. Nordlander did undercover surveillance and took “Dumpster dives” into Mr. Engle’s garbage. He mainly discovered that Mr. Engle lived modestly.

In March 2009, still unsatisfied, Mr. Nordlander persuaded his superiors to send an attractive female undercover agent, Ellen Burrows, to meet Mr. Engle and see if she could get him to say something incriminating. In the course of several flirtatious encounters, she asked him about his investments.

After acknowledging that he had been speculating in real estate during the bubble to help support his running, he said, according to Mr. Nordlander’s grand jury testimony, “I had a couple of good liar loans out there, you know, which my mortgage broker didn’t mind writing down, you know, that I was making four hundred thousand grand a year when he knew I wasn’t.”

Mr. Engle added, “Everybody was doing it because it was simply the way it was done. That doesn’t make me proud of the fact that I am at least a small part of the problem.”

A basically honest man who confesses to a seductress, a confession for a crime hundreds of thousands of borrowers were guilty of — and encouraged to commit by lenders — and this is who the government wants to go after? I truly hope the prosecutors had other motives. Calculated Risk also wonders why the prosecutors chose this case.

Unbeknownst to Mr. Engle, Ms. Burrows was wearing a wire.

Lying on a stated-income loan is, without question, a crime, and one ought not to excuse it even though, as Mr. Engle says, “everybody was doing it” — usually with the eager encouragement of their brokers. But the Engle case raises questions not just about the government’s priorities, but about something even more basic: did he even commit the crimes he is accused of?

Partly, I concede, Mr. Engle is easy to root for. He is a personable, upbeat man who has conquered some serious demons. Part of his Sahara expedition was aimed at raising money for a charity to help bring clean water to Africa. “Every experience in life has the ability to teach lessons if I am open to them,” he wrote on a blog as he prepared to enter prison. How can you not like someone like that?

But the more I looked into it, the more I came to believe that the case against him was seriously weak. No tax charges were ever brought, even though that was Mr. Nordlander’s original rationale. Money laundering, the suspicion of which was needed to justify the undercover sting, was a nonissue as well. As for that “confession” to Ms. Burrows, take a closer look. It really isn’t a confession at all. Mr. Engle is confessing to his mortgage broker’s sins, not his own.

Whose crime is this? Isn't the real problem with this whole prosecution that the guilty parties are not being charged? Mr. Engle committed a crime, but the lender who put him up to it is even more responsible.

Perhaps anticipating that problem, when Mr. Nordlander finally arrested Mr. Engle in May 2010, he claims to have elicited a stronger, better confession while Mr. Engle was handcuffed in the back seat of his car. Mr. Engle fervently denies this. This second supposed confession, however, was never captured on tape.

As for the loans themselves, on one of them Mr. Engle claimed an income of $15,000 a month. As it turns out, his total income in 2005, according to his accountant, was $180,000, which amounts to … hmmm …$15,000 a month, though of course Mr. Engle didn’t have the kind of job that generated monthly income. (In addition to real estate speculation, Mr. Engle gave motivational speeches and earned around $50,000 a year as a producer on the hit show “Extreme Makeover: Home Edition.”)

The monthly income listed on the second loan was $32,500, an obviously absurd amount, especially since the loan itself was for only $300,000. It was a refinance of a property Mr. Engle already owned, allowing him to pull out $80,000 of the $215,000 in equity he had in the property.

Mr. Engle claims that he never saw that $32,500 claim and never signed the papers. Indeed, a handwriting analysis conducted by the government raised the distinct possibility that Mr. Engle’s signature and his initials in several places in the mortgage documents had been forged. As it happens, Mr. Engle’s broker for that loan, John J. Hellman, recently pleaded guilty to mortgage fraud for playing fast and loose with a number of mortgage applications. Mr. Hellman testified in court that Mr. Engle had signed the mortgage application. Early this week, Mr. Hellman received a reduced sentence of 10 months, less than half of Mr. Engle’s sentence, in no small part because of his willingness to testify against Mr. Engle.

Even the jurors seemed confused about how to think about Mr. Engle’s supposed crime. When it came time to pronounce a verdict, the jury found him not guilty of providing false information to the bank, which would seem to be the only fraud he could possibly have committed. Yet it still found him guilty of mortgage fraud. “I think the prosecution convinced the jury that I was guilty of something but they weren’t sure what,” Mr. Engle wrote in an e-mail.

Like many people, Mr. Engle’s biggest mistake was believing that housing prices could only go up. When the market collapsed, Mr. Engle defaulted on the two properties, which of course is not a crime. Although his accountant tried to persuade the banks to do a complicated refinancing, they refused and foreclosed on the properties. Like many Americans, Mr. Engle wound up being punished by the market for his mistake, losing all his remaining equity along with the properties themselves. Thanks to the government, though, his punishment was far more severe than most.

So this guy lost everything, and he is being sent to prison. Amazing.

At his sentencing, Mr. Engle told the judge: “I can say with confidence that I can turn negatives into positives. I have no doubt I will make the best of it.” With his inspiring prison blog, Running in Place: A Blog About Surviving Adversity, he has already begun to do that.

Even when he emerges from prison, though, his ordeal will not be over. As part of his sentence, Mr. Engle was ordered to pay $262,500 in restitution to the owner of his mortgages. And what institution might that be? You guessed it: Countrywide, now owned by Bank of America.

Angelo Mozilo ought to get a good chuckle out of that one.

It wouldn't be quite so outrageous for this guy to be forced to pay restitution if the others who did the same thing were similarly compelled. For this one guy to get singled out for such a severe punishment when many others walk away scot-free doesn't serve justice.

That's a big mortgage

High wage earners, like the dentist who owns today's featured property, were given access to copious amounts of credit during the housing bubble. As I have stated on many occasions, high-end pricing did not get where it is by people making large down payments. Prices got so high because lenders were willing to underwrite $3,000,000 loans.

Prior to the housing bubble, loans over $1,000,000 were very rare. Since any amounts over $1,000,000 can't be deducted (assuming the AMT allowed it anyway), very few borrowers took out such large loans.

Prices in the over $1,000,000 range tended to have equity for amounts over $1,000,000. Since equity was necessary to inflate prices, high-end homes tended to be less volatile. However, once lenders started underwriting loans over $1,000,000 prices went up with the lender air, and now with the jumbo market in tatters, lenders are requiring borrowers to document their income which is reducing the borrower pool significantly.

In the story above, the borrower who lied on his income stood out as unusual. Here, the posers blend in with the achievers.

Today's featured property was purchased on 5/9/2006 for $4,288,500. The owner used a $3,000,000 first mortgage, a $200,000 second mortgage, and a $1,088,500 down payment. It is listed as a short sale for $3,500,000.

Ponder that for a moment. There is no NOD filed on this property, yet the owner cannot pay off the two mortgages at a $3,499,999 selling price? The only way the mortgage balance could be that large is if this borrower hasn't made any payments in quite a while. That makes this true shadow inventory. It doesn't appear on any reports, but it's clearly a distressed property working to push prices lower.

Irvine House Address … 31 RESERVE Irvine, CA 92603

Resale House Price …… $3,499,999

House Purchase Price … $4,288,500

House Purchase Date …. 5/9/2007

Net Gain (Loss) ………. ($998,501)

Percent Change ………. -23.3%

Annual Appreciation … -5.2%

Cost of House Ownership

————————————————-

$3,499,999 ………. Asking Price

$700,000 ………. 20% Down Conventional

4.79% …………… Mortgage Interest Rate

$2,799,999 ………. 30-Year Mortgage

$707,482 ………. Income Requirement

$14,674 ………. Monthly Mortgage Payment

$3033 ………. Property Tax (@1.04%)

$600 ………. Special Taxes and Levies (Mello Roos)

$729 ………. Homeowners Insurance (@ 0.25%)

$430 ………. Homeowners Association Fees

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

$19,466 ………. Monthly Cash Outlays

-$1967 ………. Tax Savings (% of Interest and Property Tax)

-$3497 ………. Equity Hidden in Payment (Amortization)

$1279 ………. Lost Income to Down Payment (net of taxes)

$437 ………. Maintenance and Replacement Reserves

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

$15,719 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$35,000 ………. Furnishing and Move In @1%

$35,000 ………. Closing Costs @1%

$28,000 ………… Interest Points @1% of Loan

$700,000 ………. Down Payment

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

$798,000 ………. Total Cash Costs

$240,900 ………… Emergency Cash Reserves

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

$1,038,900 ………. Total Savings Needed

Property Details for 31 RESERVE Irvine, CA 92603

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Beds: 5

Baths: 6

Sq. Ft.: 6000

$583/SF

Property Type: Residential, Single Family

Style: Two Level, Mediterranean

View: Canyon, Catalina, Coastline, Ocean, Panoramic, Trees/Woods

Year Built: 2006

Community: Turtle Ridge

County: Orange

MLS#: S632477

Source: SoCalMLS

Status: Active

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SHORT SALE AT END OF CUL-DE-SAC WITH PANORAMIC OCEAN AND CITY LIGHTS VIEW ON ONE LARGEST LOTS IN TURTLE RIDGE WITH ALMOST 20,000 SQUARE FEET * * * LAST TWO SALES WERE $4.05M AND $3.6M FOR LESSER VIEWS AND SMALLER LOTS. HOME FEATURES TWO KITCHENS WITH EXQUISITE FULL BUTLERS PANTRY AND KITCHEN. UPGARDES ARE TOO NUMEROUS TO MENTION BUT INCLUDE HARDWOOD FLOORS, IMPORTED ITALIAN GRANITE, STANLESS STEEL APPLIANCES, INCERDIBLE BBQ PAVILION. GUARD GATED WITH AMAZING AMENITIES THAT INCLUDE FAMILY AND ADULT SWIMMING FACILITIES, GYMNASIUM, HOA BUSINESS CENTER, ENTERTAINMENT THEATRE, HIKING TRAILS AND ACCESS TO AWARD WINNING YEAR AROUND VISTA VERDE SCHOOL AND UNIVERSITY HIGH SCHOOL.

STANLESS? INCERDIBLE?

The future of IHB news and real estate analysis

We are preparing for some exciting upgrades here at the IHB. Today, I'll talk about some of these changes and why we are making them.

Irvine Home Address … 51 STOWE Irvine, CA 92620

Resale Home Price …… $949,900

Here I am, on the road again

There I am, on the stage

Here I go, playing star again

There I go, turn the page

Bob Seger — Turn The Page

Life is always moving forward. It's time for us to turn the page and embark on a new era at the IHB. But first, a look at one of the reasons we are looking to enhance the IHB experience.

Flawed housing data might mask depth of woes

Critics say Realtors' monthly report overly optimistic

By John W. Schoen Senior producer — March 25, 2011

Two high-profile reports on home sales this week confirmed that the housing market is still mired in a deep slump with prices still falling and sales activity sluggish at best. In fact, the market may be in much worse shape than even those numbers suggest.

Figures from the National Association of Realtors that are among the most closely watched indicators on the housing market have been called into question by economists who say they may overstate existing-home sales activity by up to 20 percent.

The issue is more than just an academic dispute among economists. Without a working barometer, it's hard to see the next storm coming.

It's time to take this task away from the NAr and create some bloated and inefficient government bureaucracy to collect and disseminate this data instead. I would rather deal with the problems of government waste than realtor duplicity.

“It's very important for the industry but also for policy makers,” said Mike Fratantoni, head of research at the Mortgage Bankers Association, one of the groups that is challenging the Realtors' data.

“Folks at the Fed and at the Treasury and anyone involved in economic policy throughout government are very concerned about the health of the housing market. So if your primary indicator is giving you an overly optimistic reading, that's cause for concern,” he said.

It's only a concern for those interested in the truth. Accuracy is not as important to realtors as creating a false sense of urgency.

The Realtors, a trade group of licensed real estate agents and brokers, concede that there has probably been some “upward drift” in its numbers since the unprecedented collapse of the housing market in 2006. But Realtors spokesman Walter Molony says the group's data still accurately track the monthly ups and downs of home sales, providing valuable insight into sales trends.

“In terms of broad market characterizations, it's really not that big of a deal,” said Molony.

Not that big a deal? They grossly overstate housing sales numbers to manipulate buyers for purely self-serving reasons, and this is not big deal? I'm sure it's not… to them.

But if the data is as badly flawed as critics fear, it could be a big deal for home buyers and sellers because it could mean prices are more likely to head even lower. That's because an unrealistically optimistic assessment of the pace of home sales could be artificially buoying home prices.

The possible breakdown of the barometer couldn't come at a worse time for the housing industry. After signs of life last year — helped by generous government tax breaks—there are ominous signs that those incentives simply pulled future sales forward.

According to the Realtors, sales of existing homes fell nearly 10 percent last month, snapping three months of gains. Sales of new homes, which are tracked by the government, plunged in February for a third straight month to the lowest level in records dating back nearly 50 years.

Analysts have theorized that new-home sales have been hurt because prices of existing homes have fallen more quickly, making them relative bargains. But analysts have been unsettled by data suggesting that the housing market is headed into another leg down for sales and prices.

“This is really unknown territory for us,” said Evan Barrington, head of economic analysis at The Stephenson Company, a market research firm. “We haven’t been through this before.”

'Upward drift'

One reason for concern about the Realtors' data is that when assessing the outlook for future sales, forecasters rely heavily on the inventory of homes on the market, which is generally expressed in number of “months' supply.”

That number is derived by comparing the number of unsold homes and the current pace of sales. Prices tend to be fairly stable when the market has about six to eight months' worth of unsold homes. Tighter supplies tend to push prices higher, bigger supplies tend to depress prices.

According to the NAR's latest monthly data, the number of unsold homes in February represents an 8.6-month supply at the current sales pace, based on an annual sales rate of 4.88 million.

But other measures — including mortgage data tracked by the mortgage bankers, show a much lower sales pace. Private research firm CoreLogic, which counts closings filed in more than 2,000 counties, says the pace of home sales in February was just 3.6 million units on an annual basis. If true, that means the inventory of unsold houses is more like 17 months' supply, or roughly double the level reported by the NAR, according to Mark Fleming, chief economist at CoreLogic.

“(Overstating the pace of homes sales) makes a big difference in terms of that month's supply measure,” said Fleming. “That implies significant downward price pressure — which we're actually observing. Prices are falling month over month — and year over year again — at a pretty significant pace at the moment.

So what could account for such a substantial overcounting of home sales?

The desire to lie. realtors feel the need to puff the market with bogus statistics. The rest is merely the mechanics of the deception.

To begin with, monthly statistics like home sales data are the murky underpinnings of economics – a prime example of why it's called the “dismal science.” Almost all economic statistics — from widely watched employment data to more obscure measures of industrial output – are only estimates based on data samples that are designed to stand in for a more complete reporting that would take months or years.

In the case of NAR's existing home sales report, the association polls about 40 percent of its members and logs sales based on the widely used Multiple Listing Service. Up until 2010, it periodically “benchmarked” its data based on the more complete count conducted by the U.S. Census.

Unfortunately, the Census dropped several key questions about housing in the 2010 Census, which left the NAR without that data set to recalibrate its own data series.

“That kind of threw a monkey wrench in the works for us,” said Molony.

The collapse of the housing industry may also have played a role, according to housing economists who are talking a closer look at the data. One theory is that the consolidation of the housing industry also brought a consolidation among real estate agencies that the NAR's model hasn't kept up with. An agency used in the NARs sample, for example, may have increased sales because it acquired smaller agencies, not because sales in that market rose.

Offering excuses only hides the reality that the NAr knew their methods would inflate the numbers, and they chose to deceive the American people because the numbers were not what they wanted them to be.

Moloney said the NAR is working with the Federal Reserve, Fannie Mae, the Federal Housing Finance Agency, the MBA, Corelogic and academic economists to get its monthly sales data back on track.

“It's a normal process, but now we have to obtain a consensus with a lot of parties,” he said.

That could be a big challenge, given the number of businesses that keep an close eye on the NAR data.

The housing industry's outsized role in the U.S. economy touches thousands of businesses whose sales rely heavily on the level of home sales. From appliance makers to home improvement centers, businesses have to decide month-to-month how many workers to hire and how much inventory to stock. The NAR's monthly number is one of the most critical pieces of data they rely on to make the right decision.

“These data really do have a real world impact,” said Franatoni.

Data is important, isn't it?

It's a shame the NAr has gone down the path it has. Few reliable sources of real estate analysis and information exist, and few signs the NAr is going to become one of them. That leaves a void. Uncharted waters buyers must navigate without a reliable guide. It's a void we seek to fill here at the IHB.

We are in the process of assembling our own private database of housing and related economic statistics. Over the next several weeks as I have time to digest the new information, I plan on a number of new analysis posts to truly illuminate the activity in our local housing market.

I have no agenda to spin the data. Let's see what is really going on. I want to be accurate. People can make their own decisions and draw their own conclusions from accurate data. If approached without the built-in bias of a realtor, data analysis can be revealing rather than deceiving.

I will still have a dog in this hunt. I do run a business that makes money from real estate transactions. I am subject to the same biases as any other human being. I sell real estate, but I am not a realtor. The truth needs no salesman. I will present data as accurately as I can. If reality motivates you to buy or rent, the IHB can help you. I have no desire to manipulate data in order to make a quick buck. This is a part-time hobby for me, not my livelihood.

What about the OC Register?

I recently gave the OC Register grief because The OC Register Says California had no real estate bubble. It's a legitimate beef when a supposedly impartial newspaper starts permitting realtors to revise history with self-serving bullshit.

I probably would have overlooked that silly article in the past. I was once on the cover of the OC Register. I think much of their reporting is very good, particularly Marilyn Kalfus who I think does outstanding work.

Did you see their recent blogger anniversary series?

I wasn't noteworthy enough to make their list. ~~ sniffle, sniffle ~~ Perhaps they forgot about me? Their readers haven't. Note September 2010 when IHB stood atop the list.

I don't know how compete.com does their traffic counts, so I can't comment on the accuracy of their data.

How is the IHB unique?

When I started writing for the IHB in February of 2007, I had a simple message: don't buy, prices are going to crash. It was an important news story to a population gripped with the insanity of a financial mania. The message stood out, and the blog readership quickly grew.

I put a great deal of time and effort into writing a series of analysis posts which became the basis for my book, The Great Housing Bubble. It was my the equivalent of a doctoral thesis in real estate economics. My credibility on real estate is evidenced by the book, the daily writing here, and the fact that I predicted a market decline, and explained why it was going to happen. I could have been lucky.

in order to stay relevant and change with the times, I need to provide you a compelling reason to come back. I hope you enjoy my writing and my cartoons, but coming back for a good laugh isn't all I have to contribute. With this new data, I can provide a unique view into the workings of our local housing market.

Data analysis is core strength

I have some skill in data analysis, and with the collective wisdom of the blog that shines through the astute observations, we will come up with some compelling ways to look at data. Many of the silly arguments that dust up in the comments can be put to rest with data.

For instance, are heavy-cash buyers supporting house prices in Irvine? With data, we can answer this question. I am getting the median home price and the median loan amount history back to 1988. We will be able to trace exactly how down payments have fluctuated over time. We can correlate changes in the down payment with changes in price. If down payments go up when prices go down, then heavy cash buyers are indeed keeping prices up.

I have no idea what the truth is. I haven't looked at the data. This tempest in a teapot has been whirling in the comments for months. Wouldn't it be great to know the truth?

How many homes did the Irvine Company really sell?

Do you remember the recent news article where the Irvine Company claimed they sold 1,200 homes? Well, they didn't actually sell that many homes, they “signed 1,234 buyers” whatever that means. According to DataQuick, there were 643 new homes sold in Irvine in 2010.

The blue line above is the raw data, and the red line is the trailing twelve months as a moving average. The smoothing effect of the moving average reveals the underlying trends in new home sales.

I didn't realize they sold so few new homes after the 2001 recession. The bubble rally years of 2002-2004 were not as lucrative for new home sales as I would have thought. It looks like late 2004 through 2005 was a very profitable period for them. They sold a lot of houses at peak prices. From July 2004 to December 2006, they sold 2,455 homes.

The utter collapse of sales in 2008 is apparent. After recording two sales in January of 2009, there were zero sales in February and March of that year. In all of 2009, there were 90 new homes sold in Irvine. The average since 1988 is 52.5 homes per month.

The good news is that the trend is decidedly up. It's hard to go below zero.

What data is coming?

That is probably a follow-up post all to itself. I am getting data down to the zip code level for most items. For the MLS data, we are grouping builder codes into neighborhoods to overcome the clumsy village codes in the local MLS. Knowing the median price in Northwood is not as useful as seeing the difference between Northwood Pointe, Northwood I and Northwood II. Granularity of data is important for it to be meaningful.

I have closed sales, asking prices, rents, sizes, ages, and a number of other data points all broken down by zip code, village, and neighborhood. We will be able to identify high-equity neighborhoods and high-debt neighborhoods. We will be able to rank villages and neighborhoods desirability as measured by median and $/SF for both resales and rentals. Which do you think is more desirable, Turtle Rock or Turtle Ridge? The numbers will tell us.

Where is the data coming from?

I am getting data from three sources:

  1. MLS listings and transactions raw data
  2. Dataquick
  3. Various public sources

No NAr nonsense data or projections. I am using raw MLS data which is subject to its own errors. The information I am getting from Dataquick is one level removed from the raw data, but Dataquick's reputation for accuracy is good, certainly better than the NAr.

I also discovered a great source of public data at the St Louis Fed. They call the system FRED for Federal Reserve Economic Data. They go to the various government agencies, compile their data, and put it in a consistent format so data analysts like me can use it. If you are in to data, this site is a treasure.

How will Shevy get involved?

I didn't handle the announcement of the brokerage well. I thought the shock value would be interesting and positive. I was wrong. Unfortunately, that put Shevy in a difficult circumstance to share is perspective on the market. We are going to change that.

Shevy has been working daily with IHB clients since 2009. Our sidebar has testimonials from IHB clients on the quality of his work, and his sales volumes have been fantastic. In other words, he has satisfied a lot of IHB clients.

We have asked Shevy to start writing posts we will air on Sundays. He may not write every Sunday, but he will share his experiences working with clients. It's a perspective on the market I don't have.

Do you like the Shevy graphic? I was inspired by the common interpretation of Raphael's The School of Athens: “It is popularly thought that their gestures indicate central aspects of their philosophies, Plato's his Theory of Forms, Aristotle's his empiricist views, with an emphasis on concrete particulars.”

i believe Shevy will contribute much to the IHB conversation.

That Mille Fleurs you're waiting for has a squatter in it

The myth of Irvine's high end immunity continues to prove wrong. The reality of squatting to boost prices is inescapable.

Today's featured property isn't supposed to exist. All the heavy-cash buyers with stable finances are allegedly holding all of Irvine's prime properties. Apparently, there are still a few posers out there.

This property was purchased on 5/3/2005 for $1,247,000. The owners used a $935,200 first mortgage, a $186,750 second mortgage, and a $125,050 down payment. I thought this would be a tale of woe from a peak buyer. Nope. These owners got some HELOC booty.

On 2/6/2007 they refinanced with a $1,218,750 first mortgage and a $225,000 HELOC. The total property debt is $1,473,750, and they managed to extract $351,800 — unless you don't believe they maxed out the HELOC. In that case, they only got out $96,800, which recoups most of their down payment.

They quit paying about two years ago.

Foreclosure Record

Recording Date: 02/11/2011

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 12/18/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/17/2009

Document Type: Notice of Default

Foreclosure Record

Recording Date: 09/17/2009

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 07/07/2009

Document Type: Notice of Default

During the next recession, if I fall on hard times, I hope I am allowed to squat in a Mille Fleurs. As for the buyer waiting to pay for the house, too bad.

Irvine House Address … 51 STOWE Irvine, CA 92620

Resale House Price …… $949,900

House Purchase Price … $1,247,000

House Purchase Date …. 5/3/2005

Net Gain (Loss) ………. ($354,094)

Percent Change ………. -28.4%

Annual Appreciation … -4.5%

Cost of House Ownership

————————————————-

$949,900 ………. Asking Price

$189,980 ………. 20% Down Conventional

4.79% …………… Mortgage Interest Rate

$759,920 ………. 30-Year Mortgage

$192,011 ………. Income Requirement

$3,982 ………. Monthly Mortgage Payment

$823 ………. Property Tax

$450 ………. Special Taxes and Levies (Mello Roos)

$237 ………. Homeowners Insurance

$105 ………. Homeowners Association Fees

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

$5,598 ………. Monthly Cash Outlays

-$964 ………. Tax Savings (% of Interest and Property Tax)

-$949 ………. Equity Hidden in Payment

$347 ………. Lost Income to Down Payment (net of taxes)

$119 ………. Maintenance and Replacement Reserves

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

$4,151 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,499 ………. Furnishing and Move In @1%

$9,499 ………. Closing Costs @1%

$7,599 ………… Interest Points @1% of Loan

$189,980 ………. Down Payment

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

$216,577 ………. Total Cash Costs

$63,600 ………… Emergency Cash Reserves

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

$280,177 ………. Total Savings Needed

Property Details for 51 STOWE Irvine, CA 92620

——————————————————————————

Beds: 5

Baths: 3

Sq. Ft.: 3650

$260/SF

Lot Size: 5,339 Sq. Ft.

Property Type: Residential, Single Family

Style: Two Level, Contemporary

Year Built: 2005

Community: Woodbury

County: Orange

MLS#: P775061

Source: SoCalMLS

Status: Active

On Redfin: 1 day

——————————————————————————

New Listing (24 hours)

This elegant Mediterranean style 5bd 4bth home is located in the prestigious Woodbury Community in Irvine near 405 & 5 fwys. Mille Fleurs Plan 1 (Giverny) built by Standard Pacific homes offers plenty of upgrades that include ADT alarm system, corian countertops, built-in BBQ & fireplace, Koi pond, and many more ammenities. Truly resort style living. Hurry, wont last!!!

Breaking News!!!

Do you remember my Wii Golf hobby? I just broke the course record on the back nine.

That's going to be tough to beat….