Republicans in the House of Representatives are introducing legislation to tighten lending standards on government-backed loans to limit the exposure of taxpayers to ongoing price declines.

Irvine Home Address … 2418 SCHOLARSHIP Irvine, CA 92612

Resale Home Price …… $325,000

Hey yo I once was a kid all I had was a dream

mo money mo problems when I get it I'm a pile it up

Now I'm dope, wonderbread we can toast

Chiddy Bang — Opposite of Adults

In our two-party political system, the function of the minority party is to oppose policies of the party in power, particularly when the party in power is overreaching or enacting legislation that is not in the best interest of the country. Sometimes, members of Congress act the opposite of adults, and the rhetoric gets heated and sometimes pretty ridiculous. But for the most part, the two-party system is successful in debating ideas and allowing only the most supported to become law.

One of the advantages of the minority party is that they can force uncomfortable public votes on major issues. When the majority party begins pandering to its constituencies with handouts and political seniorage, the minority party can garner attention by introducing good competing legislation and force the majority party to cast an unpopular vote.

The Republicans in the House of Representatives in Washington now hold a majority, and thereby they control the introduction of most new legislation into our grand political theater. They are taking advantage of their majority in the House to force the Democrats which control the Senate and the Presidency to vote down common-sense legislation designed to protect the interests of US taxpayers.

Republicans Aim to Raise FHA Down Payment Requirement

by Adam Quinones — May 25, 2011

The Republican led House Financial Services Committee has drafted legislation that would, among other things, (1) raise the FHA down-payment requirement to 5 percent and (2) prohibit borrowers from financing their closing costs.

The draft legislation, ‘‘FHA-Rural Regulatory Improvement Act of 2011’’, was discussed today in a House Subcommittee hearing entitled “Legislative Proposals to Determine the Future Role of FHA, RHS and GNMA in the Single-and Multi-Family Mortgage Markets”.

If both provisions above were enacted, the already depleted buyer pool would be made much smaller because it would require much more savings for buyers to close the deal. Raising the down payment requirement from 3.5% to 5% will get the most attention, but the other provision prohibiting buyers from financing their closing costs that will really add to the savings requirement and decimate the buyer pool.

I have sold several houses in Las Vegas to FHA borrowers. On properties selling for less than the $118,000 median, FHA dominates the market. In a typical FHA deal, the buyer submits a full asking price offer but asks for the seller to pay all buyer closing costs which generally run between 3% and 5% of the purchase price. If borrowers are prohibited from financing these costs into the loan, the effective down payment doubles to 7% or more.

By far the most damaging provision to the quantity of buyers in the buyer pool is the prohibition against financing their closing costs.

However, the long-term effect of this will be to have buyers with more of their own money into the deal which makes most borrowers much less likely to strategically default, partly because they are less likely to fall underwater, and partly because they don't want to lose their money in a sale. Despite the horrendous impact this policy would have the in the short term — and it would inflict a great deal of pain in the most beaten down markets — the long term impact is nothing but positive.

In a formal release, the House Financial Services Committee's Republican Chairman Spencer Bachus touted the bill as a coming at an important time in history, “This hearing and legislative proposal come at a pivotal moment, as the Committee debates the future of the mortgage finance system, and in particular, government guarantee programs that could expose taxpayers to significant losses.”

Senator Bachus is right. The various government guarantees have been used to shift much of the private sector garbage onto the balance sheets of Uncle Sam and the federal reserve. It was a short-term policy designed to keep our banks solvent, but since the various players in the real estate industry gain advantage from the government assignment of risk, they are lobbying to keep their advantage in place.

Industry advocates were quick to respond to the proposal as a move in the wrong direction. Michael Berman, Chairman of the Mortgage Bankers Association, explained that down-payments are not the best indicator of payment default. Berman said, “Recently, policymakers have focused on required minimum down-payments as a measure of what factors are necessary to create sound lending practices. While down-payment certainly impacts default risk, other compensating factors, particularly full documentation of conservative loan products, are more influential mitigating factors.”

This is a straw-man argument. This legislation does not argue that down payments are the best indicator of default. It isn't. However, based on the government database of loans in both the GSEs and FHA, the data shows that default rates are inversely related to down payment. As down payments go down, default rates go up. Some of this may be due to the borrower being underwater and hopeless, but much of this documented behavior is because borrowers aren't losing their money.

Berman went on to share the MBA's opinion on the matter, saying, “The current minimum down-payment of 3.5 percent for borrowers with credit scores of 580 or above and 10 percent for borrowers with credit scores of 579 and below permits borrowers to have appropriate “skin in the game” while providing credit-worthy homebuyers with an option for entering the purchase market. Maintaining the existing minimum down-payment requirements, while requiring strong underwriting standards, such as full documentation and income verification, allows borrowers to responsibly become, and stay, homeowners.”

The MBA isn't the only industry group to oppose the down-payment hike. Ron Phillips, President of the National Association of Realtors, shared similar sentiments in his prepared remarks. “NAR strongly opposes increasing the down-payment for FHA. The correlation between down-payment and loan performance is significantly less important than the linkage to strong underwriting, which FHA continues to have. FHA’s foreclosure rate remains less than conventional mortgages, so we don’t believe changes to the down-payment would do anything but disenfranchise many creditworthy homebuyers”.

Does the government really want to disenfranchise creditworthy borrowers? Increased home ownership has been the goal of Congressional public policy and every presidential administration since the 1920s. A declining home ownership rate is not politically popular. The only way a policy that negatively impacts the home ownership rate would be proposed is because the alternative is even less appealing — endless government bailouts.

Not all feelings were mutual though. The Cato Institute, a D.C. think tank devoted to limiting government participation in free markets, believes a combination of poor credit history and low down-payment requirements have resulted in “tremendous losses” for private mortgage investors and the FHA. In its prepared testimony Cato said, “Given the relatively “safe” features of an FHA loan, we do not have to guess about loan characteristics driving the borrower into default. We know it is equity and credit history that drives losses.”

To complete their list of causes, they should add unemployment due to the economic collapse that was a direct result of the anti-regulation policies endorsed by groups like the Cato Institute, but I don't want to quibble with their well-reasoned argument….

Cato outlined a variety of FHA program reforms it believes must be implemented immediately to ensure taxpayers are exposed to minimal risk. These reforms include:

• Immediately require a 5 percent cash down-payment on the part of the borrower.
• Require FHA to allow only reasonable debt-to-income ratios.
• Restrict borrower eligibility to a credit history that is equivalent to no worse than a 600 FICO score.
• Require pre-purchase counseling for borrowers with a credit history that is equivalent to a FICO score between 600 and 680.
• Require a 10 percent down-payment, immediately, for borrowers with a credit history equivalent to below a 680 FICO score.
• Borrower eligibility should also be limited to borrowers whose incomes do not exceed 115 percent of median area income, so as to mirror the requirements of section 502(h)(2), as amended, of the Housing Act of 1949.

That's the best policy proposal I have seen come out of Washington. Each one of those provisions would serve to limit the borrower pool to those most likely to repay the debt which in turn limits the exposure of taxpayers to further Ponzi scheme losses.

Besides raising the down-payment requirement, the proposed legislation would also cement the reduction of current “high-cost” loan limits. The maximum loan limits for Fannie Mae, Freddie Mac, and FHA are currently $417,000 with a temporary limit of up to $729,750 for one-unit properties in high-cost areas. The temporary high-cost area limit was first set in the Economic Stimulus Act of 2008, and was extended in subsequent legislation. It expires on September 30, 2011. Without the extension, the high-cost loan limit ceiling would revert back to the limits established under the Housing and Economic Reform Act (HERA), a maximum of $625,500 in high-cost areas.

The change from $729,750 to $625,000 will be effective October 1, 2011. There is no political will to save markets like Irvine where GSE financing between $625,000 and $729,750 is common.

The Obama administration already stated in its white paper that it will not support another extension of the higher loan limits, but the MBA believes the higher limits should be maintained until the housing market stabilizes and the private market shows more signs that demand has returned.

Why should government policy be used to prop up house prices for the upper-middle class? What societal benefit is obtained? Money is fungible, and any assistance the government is providing to upper income households is merely supporting their entitlements.

MBA urged such legislation to be enacted well before October 1, 2011, in order to avoid certain market disruptions that will, because of rate locks, occur within 90 days of the current limits expiring. The National Association of Home Builders echoed that perspective.

NAHB First Vice Chairman Barry Rutenberg, a home builder from Gainesville, Fla., told the House Financial Services Subcommittee, “Counties across the country would see their loan limit reduced by tens of thousands of dollars, placing further downward pressure on home prices and impairing the ability of borrowers to use FHA-insured mortgages to purchase new homes,”

To keep FHA, Fannie Mae and Freddie Mac loan limits at their current levels, NAHB called on Congress to support H.R. 1754, the Preserving Equal Access to Mortgage Finance Programs Act, a bipartisan measure sponsored by Reps. Gary Miller (R-Calif.) and Brad Sherman (D-Calif.).

The draft legislative proposal will require a full Committee vote before it is formally introduced to be voted on by the entire house. Such measures would not be expected to pass the Senate.

Is anyone surprised that two California legislators signed on to a bill designed to support the California real estate Ponzi scheme? I'm not.

A stable home ownership rate requires the limiting of access to home loans to those who cannot make the payments. It doesn't serve anyone for lenders to let borrowers move into properties they cannot afford, develop a sense of entitlement to property they cannot afford, and then foreclose on them because the borrower cannot afford it. The cycle merely upsets everyone involved and makes the taxpayer lose money through losses on the insured loan.

It has been a long and painful process as the bubble deflates back to levels of affordability. Housing deflation is not over yet, particularly in markets like ours where price deflation has been slowed by the government meddling. Kool aid intoxication must die, and buyers must give up on the idea of their California house being a substitute wage earner. Until that happens, a few people will overpay, the the slow grind of lower prices will go on.

Welcome to our new normal.

A 50% loss in an Irvine high rise

One of the most obvious signs of the housing bubble was the rise of buildings on the Jamboree corridor about 25 years ahead of when the economics may support it. These properties should never have been built. The units within them are worth less than half of what they were at the peak, and if today's pricing would have been the order of the day back when these were proposed, they wouldn't have been financed.

The owner of today's featured property paid $635,000 back on 1/27/2006. He used a $507,650 first mortgage and a $127,350 down payment. However, on 10/6/2006 he obtained a $150,000 HELOC from Wells Fargo which gave him access to his down payment plus $22,650 in HELOC booty.

Do you think he took the HELOC money, or did he lose his down payment?

And, if he didn't take the HELOC money, do you imagine he wishes he did?

Irvine House Address … 2418 SCHOLARSHIP Irvine, CA 92612

Resale House Price …… $325,000

House Purchase Price … $635,000

House Purchase Date …. 1/27/2006

Net Gain (Loss) ………. ($329,500)

Percent Change ………. -51.9%

Annual Appreciation … -12.0%

Cost of House Ownership

————————————————-

$325,000 ………. Asking Price

$11,375 ………. 3.5% Down FHA Financing

4.54% …………… Mortgage Interest Rate

$313,625 ………. 30-Year Mortgage

$68,424 ………. Income Requirement

$1,597 ………. Monthly Mortgage Payment

$282 ………. Property Tax (@1.04%)

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

$68 ………. Homeowners Insurance (@ 0.25%)

$361 ………. Private Mortgage Insurance

$460 ………. Homeowners Association Fees

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

$2,767 ………. Monthly Cash Outlays

-$257 ………. Tax Savings (% of Interest and Property Tax)

-$410 ………. Equity Hidden in Payment (Amortization)

$19 ………. Lost Income to Down Payment (net of taxes)

$61 ………. Maintenance and Replacement Reserves

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

$2,179 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,250 ………. Furnishing and Move In @1%

$3,250 ………. Closing Costs @1%

$3,136 ………… Interest Points @1% of Loan

$11,375 ………. Down Payment

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

$21,011 ………. Total Cash Costs

$33,400 ………… Emergency Cash Reserves

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

$54,411 ………. Total Savings Needed

Property Details for 2418 SCHOLARSHIP Irvine, CA 92612

——————————————————————————

Beds: 2

Baths: 2

Sq. Ft.: 1260

$258/SF

Property Type: Residential, Condominium

Style: Two Level, French

Year Built: 2007

Community: 0

County: Orange

MLS#: P782365

Source: SoCalMLS

Status: Active

——————————————————————————

THIS CONDO HAS OVER 100K IN UPGRADES. .. INTERIOR IS IMMACULATE. .. TURN KEY READY. ..

Off Topic: Las Vegas auction property in today's offerings

Anyone want that house? They ripped out the copper plumbing in the walls.

Government efforts to prop up house prices are in effect mandating unaffordable housing and forcing the next generation to transfer wealth to the current one.

Irvine Home Address … 103 ORANGE BLOSSOM #97 Irvine, CA 92618

Resale Home Price …… $199,900

Just another lesson learned

Wear a scar, a bore repeating

Take a simple fateful turn

Opened up to stop the bleeding

Feeling like you never could

Been the disconnected frying

Hit the vein and struck a nerve

Seeing through a self that's blinding

Nowhere to buy in

Most of us hiding

Alice in Chains — Lessons Learned

The agents of denial seem bent on failing to learn the lessons of the housing bubble, or worse yet, they want to learn the wrong lessons. We are setting up a system where actions have no consequences, money is for the taking, and the bills get passed on to the prudent and law-abiding. All under the watchful eye of our bought-off politicians who will tell us the plundering of our nation's wealth was for our own good.

In my opinion, government has no place in setting market prices. We need regulations to ensure markets are transparent, contracts are enforceable, and our notions of justice are maintained. Even that level of regulation seemed burdensome to many prior to the meltdown of 2008.

Now the same people who wanted free markets and deregulation are looking for government policy to set prices in the housing market through any and all policies necessary. They can't have it both ways.

Affordability is at the heart of the problem. Lower house prices benefit new buyers who will be putting less of their income toward housing or obtaining better housing for their money. Affordable housing benefits the local economy because people have more disposable income they can spend on goods and services. Expensive housing is a drag on the economy that can only be temporarily masked by mortgage equity withdrawal. Contrary to popular belief, appreciation is not income.

Why Does The New York Times Want Government to Make Housing Unaffordable?

May 26, 2011 — Dean Baker

The lead New York Times (NYT) editorial tells readers that it is surprised and upset by the deflating of the housing bubble. It tells us:

“At times, it has looked as if things were improving, like last year’s jump in sales because of a temporary homebuyer’s tax credit or the recent rise in new-home sales from near-record lows. But, over all, sales and construction have been flat for two years, while prices, driven down by foreclosures, are plumbing new depths.”

Actually no; it never looked like “things were improving” to people who follow the housing market. It looked like the tax credits were temporarily delaying the deflation of the housing bubble. This delay allowed banks and investors to have hundreds of billions of dollars in mortgages, which would be underwater today, taken off their books and replaced by Fannie and Freddie guaranteed loans, through sales or refinancing.

That is exactly what happened. With the previous profits properly privatized and the losses put on the backs of taxpayers and ordinary citizens, banks may have averted the need for nationalization. This policy undoubtedly preserved the bonuses of the idiots who lead us into this disaster. Are you still convinced this was necessary to save the economy? I'm not.

Prices are still close to 10 percent above their trend level, based on either the 100-year long-term trend in house prices or the current price to rent ratio. Neither the NYT, nor anyone else, has provided an explanation as to why we should expect prices to settle above trend.

Dean Baker will have to be forgiven for not reading the astute observations on the IHB. He would find plenty of reasons offered for prices to remain elevated above any measurable historic norm. Some of those reasons are more plausible than others, but as the ongoing decline in prices will attest to, they are all wrong.

It is not clear why the NYT would view any delay in the bubble's deflation as a positive development. People who buy houses at prices that are still inflated by the bubble can anticipate losing money on their house. Does the NYT have some reason for thinking it is good policy to get new homeowners into homes where they can anticipate capital losses.

realtors maneuver buyers into homes where capital losses are likely in order to generate commissions for themselves. They endorse the same failed policies designed to keep prices inflated, partly out of their perceived function as the voice of buyer manipulation, and partly out of a desire to feel less guilty about their previous deceit when they told people to buy during the bubble. To realtors, every problem is solved by more buying at ever-higher prices, affordability be damned.

More generally, high house prices amount to a transfer of societal wealth from people who don't own homes to those who do. Since the latter group is much wealthier on average than the former group, why should it be public policy to promote this sort of upward redistribution of wealth?

Each house that sells for a bubble price represents a current buyer paying off the debts of a previous one. When a new buyer is compelled to overpay by artificially restricted supply, the excess is a direct transfer from the new buyer to the former owner. Since banks are now owners of large amounts of REO, they are happy to join forces with other owners and lobby for policies that promote higher prices and greater indebtedness being passed on to the next generation.

The NYT's failure to seriously think about the housing market demonstrates an extraordinary laziness that prevents it from clearly understanding the policy implications. The economy will have adjust to a situation where prices return to trend levels. This will mean lower consumption. (Isn't this what everyone wants — higher savings?) The lost consumption must be replaced in the short-term by government spending, in the longer term by more net exports. The latter will require a lower dollar. This is all Econ 101.

Lower consumption! The horror of it. What would happen to Orange County if people had to consume less and live within their means? i guess they would have to cancel the Real Housewives of Orange County and bring back Kung Fu.

As far as the housing market, a little clearer thought would get policy to distinguish between markets where the bubble is still deflating (e.g. Seattle, Los Angeles, Boston)

and markets where prices are likely overshooting on the low side (e.g. Los Vegas and Phoenix).

It might make sense to have policies to boost prices in the latter set of cities. It makes no sense to have policies to boost prices in the former.

Sacrilege! Everything possible must be done to preserve Irvine's home prices! If something isn't done to keep coastal California real estate prices inflated, the bank losses are going to be astronomical. Who cares about Las Vegas? They're a lost cause, right?

The common sense nature of Mr. Baker's commentary will not be popular in the inflated housing markets that remain.

Finally, the simplest and cheapest way to help homeowners facing the loss of their home is to give them the right to stay in their house as renters paying the market rent. This requires no taxpayer dollars and no new bureaucracy and would immediately help all the homeowners affected. For these reasons, it is a non-starter in Washington.

The real reason his right-to-rent idea is a non-starter is because it would flatten coastal California, and it would strongly encourage strategic default which would wipe out the banks.

The real answer is to let the process go forward unimpeded. Borrowers who cannot afford their homes will vacate them either through short sale or foreclosure. Many of those people will need to declare bankruptcy and start over. Once all the excess debt has been purged from the system, house prices will be lower, less income will be diverted to debt service, and the economy would improve as people saved money and had more disposable income.

The only problem with the best solution is the pain. Ponzis and loan owners aren't big on austerity, and they seek out bogus government solutions that amount to handouts and support politicians who endorse these bad policies. Ultimately, cooler heads will prevail, and despite the unnecessary diversion of resources to hold back the floodwaters, the market will flow and find it's own course. That's why prices are falling again now.

Left or Right?

I am a left-leaning libertarian who finds myself being pulled in both directions by what I observed in the housing bubble. I have become far more conservative about issues of personal responsibility, yet I have become far more liberal about getting out from under debt through strategic default. Some decry my hypocrisy. So be it. I believe personal responsibility to one's family outweighs one's responsibility to a lender.

I have become far more liberal about economics and regulatory issues. I have lost faith in the workings of unfettered capital markets to avoid Ponzi schemes and cycles of booms and busts, yet I have become far more conservative in what I perceive as sensible solutions for market regulation that take a minimalist approach.

The New York Times article mentioned above is one of the finest examples of empty-headed liberalism I have read in a while. After the author makes his bogus contentions that falling house prices are bad, he follows with this jaw dropper:

Since the problems in housing are not self-curing, a government fix is in order.

What? No. a government fix is not in order. Enforcement of government regulations and an improvement in those regulations is in order, but some makeshift bailout program designed to prop up house prices at the expense of the next generation is a rip off. it's government facilitated theft.

It's the ideal issue for a politician to pander to the middle class. Of course, such a position is giving the bird to renters and future buyers who would benefit from lower prices, but perhaps bailing out the middle class and baby boomers at the expense of their children will help someone get elected.

I hope not. People need to learn their lessons eventually.

Another long term owner that went Ponzi

My records don't go back far enough to say exactly when these owners bought, what they paid, and what they borrowed. However, it looks as if they purchased at the peak of the previous bubble in 1990. If that is accurate, they lost their home to foreclosure from excessive borrowing after 20 years of ownership. Very sad.

My records pick up with a $163,500 first mortgage on 4/1/2003. The bounced back and forth between Washington Mutual and World Savings Bank with various HELOCs until on 5/9/2005 they obtained a new first mortgage for $250,000.

The pinnacle of stupidity was Bank of America that gave them a $20,000 HELOC three months after the final refinance.

Apparently Wells Fargo got the servicing on this loan from World Savings Bank, and since they weren't on the second mortgage, they proceeded with foreclosure.

Foreclosure Record

Recording Date: 08/12/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/13/2010

Document Type: Notice of Default

Irvine House Address … 103 ORANGE BLOSSOM #97 Irvine, CA 92618

Resale House Price …… $199,900

House Purchase Price … $186,454

House Purchase Date …. 10/12/2010

Net Gain (Loss) ………. $1,452

Percent Change ………. 0.8%

Annual Appreciation … 10.5%

Cost of House Ownership

————————————————-

$199,900 ………. Asking Price

$6,997 ………. 3.5% Down FHA Financing

4.56% …………… Mortgage Interest Rate

$192,904 ………. 30-Year Mortgage

$42,184 ………. Income Requirement

$0,984 ………. Monthly Mortgage Payment

$173 ………. Property Tax (@1.04%)

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

$42 ………. Homeowners Insurance (@ 0.25%)

$222 ………. Private Mortgage Insurance

$275 ………. Homeowners Association Fees

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

$1,696 ………. Monthly Cash Outlays

$0 ………. Tax Savings (% of Interest and Property Tax)

-$251 ………. Equity Hidden in Payment (Amortization)

$12 ………. Lost Income to Down Payment (net of taxes)

$45 ………. Maintenance and Replacement Reserves

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

$1,502 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$1,999 ………. Furnishing and Move In @1%

$1,999 ………. Closing Costs @1%

$1,929 ………… Interest Points @1% of Loan

$6,997 ………. Down Payment

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

$12,924 ………. Total Cash Costs

$23,000 ………… Emergency Cash Reserves

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

$35,924 ………. Total Savings Needed

Property Details for 103 ORANGE BLOSSOM #97 Irvine, CA 92618

——————————————————————————

Beds: 1

Baths: 1

Sq. Ft.: 819

$244/SF

Property Type: Residential, Condominium

Style: Two Level, Contemporary

View: Creek/Stream

Year Built: 1976

Community: Orangetree

County: Orange

MLS#: P781272

Source: SoCalMLS

Status: Active

——————————————————————————

Amazing price for this Orangetree condo with creek/stream views. Upper level end unit with 1 bedroom + Loft, 1 bath, approx. 819 sq. ft. that has: NEW interior two tone paint. NEW exterior paint. NEW carpet. NEW kitchen counters/sink/faucet. Eating area/living room/kitchen all overlook each other. Neutral colors throughout. Central heat and a/c. Laundry area in kitchen. Vaulted ceilings. No one above you. THIS IS NOT A SHORT SALE. Seller will assist owner occupied buyer with closing cost assistance-Call for details. Come on by and take a look today!

Have a great weekend,

Irvine Renter

The liquidation of bank REO is pushing prices lower. Prices are extraordinarily affordable in Las Vegas as the market there overshoots to the downside. How does that compare to Irvine?

Irvine Home Address … 556 ALBACATE St Henderson, NV 89015

Resale Home Price …… $65,000

To anyone drinking the morning away

The afternoon will prove a mistake

They never will get it right

Now they've got it so low

Ocean Colour Scene — So Low

How low will prices go in Las Vegas? Affordability is no longer a problem, so now it comes down to supply and demand. On the supply side, the behavior of lenders is not helping their own cause. As they continue to release properties to the market for much less than recent comps, the perpetuate the decline that is wiping them out.

Today's featured property is a recent closing of an REO resale in Las Vegas. I discovered this neighborhood while looking at another auction property nearby. The property of interest is in a cluster product neighborhood in a nice part of Henderson, Nevada. All the properties were built in 2005 and sold new in the mid 200s.

We all know prices are falling throughout Las Vegas, but when I saw the comps for this property, I couldn't believe my eyes.

The list of comparables below are all in the cluster neighborhood, and they are arranged in decending order of closing dates. Take a careful look at the sales price in the column second from the right.

If I had looked at these comps last November, I would have estimated the resale value at between $105,000 and $110,000. Further, I would have likely set an initial asking prices of about $114,000 without much fear of a low appraisal forcing me to lower my price to an FHA buyer.

What would possess an asset manager at a bank to let properties go in the mid 60s? There are limited possibilities:

Capitulation may be motivating asset managers to take any deal presented to them. If they have a caseload of thousands, they care less about maximizing recovery and more about processing files. The asset manager could also be incompetent.

Fannie Mae has the Homepath program where they allow owner occupants to bid on properties and sell them at a reduced price. I understand their desire to put owner-occupants back into homes, but when they let them go for 40% under comps, they merely take down the values throughout the neighborhood and dramatically increase the pain for other owners and sellers in the area.

Another possibility is fraud. The listing agent could have submitted comps from properties in another neighborhood to the lender to justify a $65,000 selling price. The lender may have approved this sale without realizing there were model-match properties in the same neighborhood selling for much, much more.

This property was quickly listed on the MLS, but the seller probably realized they were not going to be able to sell the property as it had already been sold twice in the last year. Neither the GSEs or FHA will insure a loan on a property sold three times in a year. Further, if it was purchased through an owner-occupant deal with Homepath, the owner also faced resale restrictions because the GSEs don't want to sell to flippers.

$40,000 in value gone in three months

How would you like to be the next-door neighbor at 555 Albacate St. who paid $105,000 three months before the model-match at 556 Albacate St was sold for $65,000?

House Address … 555 ALBACATE St Henderson, NV 89015

Resale House Price …… $105,000

House Purchase Price … $253,900

House Purchase Date …. 2/28/2005

Net Gain (Loss) ………. ($155,200)

Percent Change ………. -61.1%

Annual Appreciation … -13.9%

Cost of House Ownership

————————————————-

$105,000 ………. Asking Price

$3,675 ………. 3.5% Down FHA Financing

4.56% …………… Mortgage Interest Rate

$101,325 ………. 30-Year Mortgage

$22,158 ………. Income Requirement

$517 ………. Monthly Mortgage Payment

$91 ………. Property Tax (@1.04%)

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

$22 ………. Homeowners Insurance (@ 0.25%)

$117 ………. Private Mortgage Insurance

$41 ………. Homeowners Association Fees

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

$787 ………. Monthly Cash Outlays

$0 ………. Tax Savings (% of Interest and Property Tax)

-$132 ………. Equity Hidden in Payment (Amortization)

$6 ………. Lost Income to Down Payment (net of taxes)

$33 ………. Maintenance and Replacement Reserves

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

$695 ………. Monthly Cost of Ownership

——————————————————————————

GREAT 3 BEDROOM AND 2 AND HALF BATH; WITH CORIAN COUNTERTOP AND UPGRADED MAPLE CABINETS

Based on the cost of ownership and comps to date, the buyer of the above property must have felt they got a good deal last October. It was. At least until the identical property below sold for $40,000 less.

House Address … 556 ALBACATE St Henderson, NV 89015

Resale House Price …… $65,000

House Purchase Price … $268,656

House Purchase Date …. 1/4/2005

Net Gain (Loss) ………. ($207,556)

Percent Change ………. -77.3%

Annual Appreciation … -21.2%

Cost of House Ownership

————————————————-

$65,000 ………. Sale Price

$2,275 ………. 3.5% Down FHA Financing

4.56% …………… Mortgage Interest Rate

$62,725 ………. 30-Year Mortgage

$13,717 ………. Income Requirement

$320 ………. Monthly Mortgage Payment

$56 ………. Property Tax (@1.04%)

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

$14 ………. Homeowners Insurance (@ 0.25%)

$72 ………. Private Mortgage Insurance

$41 ………. Homeowners Association Fees

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

$503 ………. Monthly Cash Outlays

$0 ………. Tax Savings (% of Interest and Property Tax)

-$82 ………. Equity Hidden in Payment (Amortization)

$4 ………. Lost Income to Down Payment (net of taxes)

$28 ………. Maintenance and Replacement Reserves

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

$453 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$0,650 ………. Furnishing and Move In @1%

$0,650 ………. Closing Costs @1%

$0,627 ………… Interest Points @1% of Loan

$2,275 ………. Down Payment

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

$4,202 ………. Total Cash Costs

$11,100 ………… Emergency Cash Reserves

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

$15,302 ………. Total Savings Needed

Property Details for 556 ALBACATE St Henderson, NV 89015

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Beds: 3

Baths: 2

Sq. Ft.: 1354

$048/SF

Property Type: Single Family Residential, Detached

Year Built: 2005

County: Clark

MLS#: 1071785

Source: GLVAR

Status: Closed

——————————————————————————

Great 3 Bedroom 2 1/2 Bath home with a 2 Car Garage and a nice back yard.

Affordability is the best ever in Las Vegas

Take a look at the cost of ownership and the income requirement for this house. The monthly cash outlays and total cost of ownership are lower than the cheapest rental in all of Las Vegas. Even 1 bedroom apartments in most complexes rent for more than this property costs to own.

Prices are trading at their 1995 levels in Las Vegas, and interest rates are south of 5%. Even back in 1995 when prices were at the same level, interest rates were north of 8%. The cost of home ownership has never been less expensive in Las Vegas than it is today — ever.

Lenders wonder why buyers are sitting on the sidelines, but with liquidation behavior like this and the future REO inventory ballooning, buyers should be worried. This could happen anywhere at any time — including Irvine.

Irvine Comparables

People in Irvine, California, make about 50% more than as workers in Henderson, Nevada. Therefore, it is logical to assume house prices in Irvine for comparable properties should be roughly 50% higher than what people are paying in Henderson. The historic relationship between Orange County and Clark County where Irvine and Henderson are respectively located is shown below.

So what are Irvine comps asking?

$439,900 — 32 Alevera St., 2/2 1,050 SF

$449,000 — 33 Alevera St. 2/2 1,200 SF

$519,900 — 40 Alevera St. 3/2.5 1,500 SF

$525,000 — 8 Sonata St. 3/2.5 1,300 SF

The four properties above are all located in a cluster community in Oak Creek. The properties in Irvine are older, most are smaller than the Las Vegas properties, and two of them have one less bedroom.

The least expensive of these properties if 4 times as expensive as the $105,000 property, and the most expensive comparable is nearly 9 times more expensive than the $65,000 comparable.

Does that seem right to you?

Which is a better investment?

Which is a better place to invest, Irvine or Las Vegas? I am putting my money where my mouth is and investing in Las Vegas. I believe the historic relationship between house prices in the two cities will be restored over time, probably through continued erosion of pricing in Irvine and a rebound in pricing in Las Vegas. Plus, while waiting for prices to revert to the mean, the cashflow in Las Vegas is outstanding while the cashflow in Irvine is breakeven at best.

There is no reason to believe the premium in Irvine doubled in 2009 for any reason other than the housing bubble has not deflated here and it has overshot to the downside in Las Vegas. Despite problems with unemployment, the relationship between wages in the two cities has not changed, and although most readers of this blog find Irvine a more desireable place to live (me included), nothing has made Irvine twice as desirable as it was for the prior 20 years.

Take where you would want to live out of the equation, and ask yourself where you think your investment — combined cashflow and appreciation — has greater upside potential over the next 10 years, Las Vegas or Irvine?

The punishment lenders inflict on strategic defaulters are lighter than most realize, and likely to lessen as lenders need customers in the future.

Irvine Home Address … 65 ESSEX Irvine, CA 92620

Resale Home Price …… $729,000

Trust me,

Believe me,

It's all in the art of stopping

Wire — In the Art of Stopping

There is an art to strategic default. There are many options, and some have stronger consequences than others. Does the borrower want to maintain some lines of credit? Will selectively defaulting on certain debts hurt their credit score more than others? Will strategic defaulters need to declare bankruptcy?

Now that millions have defaulted on their mortgage, we have anecdotal data and research studies on what really happens to those who quit paying. The results will surprise some and inspire many.

Eroding the Fear of Foreclosure: New Research Shows Strategic Defaulters Experience With Post-Foreclosure Credit

Posted on May 12th, 2011

One of the most cited deterrents of deciding whether or not to foreclose or strategically default is the fear of a catastrophic and irreversible hit to one’s credit score, leading to an inability to rent, purchase a new car or home, or open a new credit card. After polling some of our 5,000 clients nationwide, YouWalkAway.com has discovered it’s a fear that may be blown way out of proportion.

Susan Edwards is a client of YouWalkAway.com, a company that walks defaulting homeowners through the foreclosure process. Edwards recently walked away from a property in Southern California. “Prior to missing our first payment, my credit score was 805,” Edwards stated “I checked it again in June after we missed the 5th payment and it was 680. At the time, it was commonly reported that the average foreclosure would lower your credit score about 150 points. I had assumed it would stay in that range for up to 7 years. I was wrong.”

So, what is Edwards credit score now? According to Edwards, after only 3 months following the foreclosure auction of her property, her credit is back up to 734 and climbing. Fortunately, the hit taken to her credit was not nearly as bad as most people, including those who claim to be experts, might have depicted.

If this woman's credit score gets back above 740, there will be no real ramifications for her default. Most lenders don't have a super-duper category for those with FICO scores over 740, so the borrower with a 745 is getting the same rate and the same treatment as someone with an 805.

Edwards is not the only YouWalkAway.com client to see her credit rebound so quickly. New York resident and YouWalkAway.com client Jodi Romanello has walked away from two investment properties in Florida. While she has never closely monitored her credit score, Romanello has yet to see any negative repercussions of a credit drop. “When I first skipped payments on my first foreclosure, CitiBank Diners Club abruptly canceled my card due to ‘undesirable changes in my credit rating,’” Romanello explained. “I got very upset because I hadn’t thought this would happen, but to my enormous relief none of my other cards did this. I have a high limit with American Express Gold, Visa, MasterCard and a lot of store cards, and Amex just renewed my card with an invitation to go Platinum.” Romanello continued to explain how she staved off the negative credit effects of two foreclosures, “I am careful to pay all other bills instantly when I receive them, I run no balances on any cards month over month.”

The key to keeping a high credit score is to selectively default. Some people who strategically default stop paying on all their debts, often as a precursor to bankruptcy. Anyone hopelessly overloaded with debt is probably wise to follow that path. However, for those who can afford to maintain other credit lines, and feel the need to do so, can simply stop paying their mortgage and keep paying everything else.

When I first reported that borrowers were defaulting on their first mortgage and keeping their second mortgages current, I was shocked. I conjectured most borrowers would default on their second mortgage and keep the first mortgage current to prevent a foreclosure because it's unlikely an underwater second would foreclose. That isn't what people are doing.

Most borrowers are defaulting on their first mortgage and keeping other debts current which is helping their credit scores.

According to the study, credit cards, car payments and student loans are the most common forms of additional debt, with personal loans and medical loans rounding out the bottom. Surprisingly, only 23% of those surveyed have ever defaulted on any other debts. Many YouWalkAway.com clients have never even had a late payment on their record prior to strategically defaulting from a property. Although, 91% of underwater homeowners surveyed are facing other debts in addition to their mortgage, YouWalkAway.com has seen these recurring trends amongst many clients. Those who have handled the foreclosure strategically by closely monitoring their credit and other debt are fairing much better financially after the foreclosure.

Lenders should be thrilled that borrowers can't seem to kick the habit. People want signatory debt, and they would rather walk away from their underwater house than default on their other debts. Personally, I think people should get rid of all their debts and live on the positive side of the financial ledger, but that isn't what most borrowers are doing.

Even borrowers who opt for a short sale have seen quick restoration of their credit. San Diego Real Estate Broker, Jeff Grant can attest to his credit recovering after a short sale of his investment home which was upside down by more than $200K. “After my own short sale, missing a total of 8 mortgage payments, my credit went from 729 to 679. But it quickly recovered to 728 a year and four months later!”

Less than 18 months after a short sale, and his credit score is basically unchanged. Why would anyone fear the credit implications of a short sale?

Following in suite, Wynn Bloch’s house in Palm Springs, CA sold at foreclosure auction in March 2010. As a result of the foreclosure, her credit score fell just 45 points – from 780 to 735. “It didn’t hurt me really at all,” Bloch stated, “In fact, I was foreclosed upon last March and just bought a new house in December!” While it may be unlikely for all defaulting homeowners to purchase a home so quickly, 51% of YouWalkAway.com clients polled do wish to purchase a new home within 5 years.

From foreclosure to homeowner in less than a year. Perhaps lenders should be tougher on these people, but the need for warm bodies to sign a loan document is prompting lenders to forgive and forget.

In reality, many YouWalkAway.com clients are more than happy to shed the excess baggage of their underwater homes and downsize to a rental. Nearly, 100% of clients report saving money by renting, and 52% chose to rent a house smaller than their previous one. Jon Maddux, CEO of YouWalkAway.com explains, “Eighty-one percent of our clients have experienced no issues renting after a foreclosure or short sale. Only, 18% were asked to provide a slightly larger deposit.”

As Susan Edwards shares, “I love being at our new house. I can imagine my dogs in the yard and our family sitting at the table for Thanksgiving. Funny,” she continues, “but I’m more excited for [my new rental] than I was when we bought this house. It really is a new beginning for us.”

Renting is a huge relief to people escaping a huge mortgage payment. Home is where the heart is, it doesn't require a big loan.

Edwards, Romanello and Bloch are not exceptions to the rule or lucky strategic defaulters who have fallen through the credit reporting cracks. They are living proof that if homeowners continue to keep on top of other debts and their credit scores, they can rebound much faster than initially predicted.

Maddux continues, “There has been a lot of misinformation regarding the effects foreclosure has on one’s credit. More often than not, it is those who have an agenda to deter homeowners from walking away who use scare tactic phrases such as, ‘Foreclosure will destroy or decimate your credit.’

That is exactly why lenders try to foster the perception that default will be harmful. It's only harmful to those who want to use credit, and apparently it isn't very harmful to those who want to get another home loan.

Due to the nature of how credit scoring works, I prefer to describe the effects of foreclosure as wounding one’s credit. Blemishes will heal on their own as long as one continues to keep other lines of credit current. Seeing it first hand with our own YouWalkAway.com clients, a homeowner’s credit will improve over time as the delinquent payments move further into the past.” …

Lenders want to keep the millions who would benefit from strategic default in a state of fear and confusion to compel the borrowers to keep paying. They would prefer to publicly endorse borrowers most macabre fantasies of strategic default while quietly soliciting new customers behind the scenes. Prior to the blog era, they might have been successful.

Study: Mortgage-only defaulters may be safe credit risks

By Julie Schmit, USA TODAY

People who default on their mortgages — but no other debts — are not as risky as expected, according to a new study from credit monitor TransUnion.

TransUnion's research shows that those who only default on mortgages are less likely to then default later on new car loans or credit cards than are people who default on mortgages and at least one other debt at the same time.

The study results, to be released Tuesday, also show that mortgage-only defaulters saw credit scores rebound faster than people who defaulted on multiple loans, which could include people who went bankrupt.

The mortgage-only defaulters “are less risky than they appear,” says Steve Chaouki, TransUnion vice president. “Lenders will want to lend to these people in the future.”

There you have it. The already light punishments for strategic default will be lessened even more in the future, provided the strategic defaulter is calculated and selective in their default.

TransUnion, like other credit-management firms, is seeking insight into mortgage-only defaulters, who could prove to be a big market for lenders. In the past five years, almost 4 million U.S. homes have been lost to foreclosure, says market researcher RealtyTrac. A chunk of those were “strategic defaults,” in which homeowners who could afford to pay their mortgages walked because home values had tanked so much.

FICO, keeper of the widely used FICO credit score, last month released one of the first credit studies on strategic defaulters and found them to be savvy about credit, with better credit histories than other mortgage defaulters.

As with FICO, TransUnion did its study — “Life After Foreclosure” — after enough people had defaulted and results could be considered valid.

TransUnion's research should diminish expectations that mortgage-only defaulters will join the ranks of habitual defaulters, Chaouki says.

Fear of being lumped in with the riff-raff is largely what prevents many with good credit for defaulting. Information like this will likely push many off the fence and into a new rental.

For instance, 5.8% of mortgage-only defaulters examined in the study were at least 60 days delinquent on new car loans which were opened after they defaulted on their mortgages. But 13.1% of the multiple defaulters were at least 60 days delinquent. The mortgage-only defaulters also had lower 60-day delinquency rates for credit cards, 11.4% vs. 27.1%. Both measures were taken at least 120 days after mortgage defaults.

Credit scores for mortgage-only defaulters bounced back quicker, TransUnion also found. For instance, consumers with Vantage credit scores — a competitor to FICO scores — in the 631 to 650 range saw their scores rise a median 8 points 12 to 17 months after defaulting on mortgages. People in the same credit score range with multiple defaults saw their credit score drop by 2 points. Vantage scores range from 501 to 990. …

People considering strategic default who wish to maintain their credit use should default only on their primary mortgage. The punishments aren't that bad, and they are likely to be lessened as time goes on.

Although, there are some consequences….

What did they need $650,000 for?

The owner's of today's featured property were solid borrowers who paid down their mortgage through the entire housing bubble when all their neighbors were borrowing money and spending like drunken sailors. But then in the summer of 2007, they obtained a $650,000 stand-alone second from a private party.

The owners who show a pattern of HELOC abuse simply spent the money as if they had earned it, but these rare cases where borrowers have large private loans, something unusual happened. Based on what the property records show, they used this HELOC to leverage themselves into a much larger home.

Before the property crash, people used to sell their properties before moving up. Perhaps they wanted to keep this one as a rental, or perhaps they didn't want to sell it for less than its peak value. In either case, they now have a massive debt on this property to go along with the $1,104,614 debt they have on their new property. With over $800,000 in debt on this property, it isn't cashflow positive.

Basically, they leveraged their modest down payment on today's featured property into two properties with nearly $1.9M in debt between them. For their sakes, I hope they either make a great deal of money or Irvine real estate starts going up.

Irvine House Address … 65 ESSEX Irvine, CA 92620

Resale House Price …… $729,000

House Purchase Price … $322,000

House Purchase Date …. 7/24/1998

Net Gain (Loss) ………. $363,260

Percent Change ………. 112.8%

Annual Appreciation … 6.3%

Cost of House Ownership

————————————————-

$729,000 ………. Asking Price

$145,800 ………. 20% Down Conventional

4.56% …………… Mortgage Interest Rate

$583,200 ………. 30-Year Mortgage

$127,535 ………. Income Requirement

$2,976 ………. Monthly Mortgage Payment

$632 ………. Property Tax (@1.04%)

$150 ………. Special Taxes and Levies (Mello Roos)

$152 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$165 ………. Homeowners Association Fees

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

$4,074 ………. Monthly Cash Outlays

-$498 ………. Tax Savings (% of Interest and Property Tax)

-$760 ………. Equity Hidden in Payment (Amortization)

$248 ………. Lost Income to Down Payment (net of taxes)

$111 ………. Maintenance and Replacement Reserves

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

$3,175 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,290 ………. Furnishing and Move In @1%

$7,290 ………. Closing Costs @1%

$5,832 ………… Interest Points @1% of Loan

$145,800 ………. Down Payment

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

$166,212 ………. Total Cash Costs

$48,600 ………… Emergency Cash Reserves

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

$214,812 ………. Total Savings Needed

Property Details for 65 ESSEX Irvine, CA 92620

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Beds: 4

Baths: 4

Sq. Ft.: 2500

$292/SF

Property Type: Residential, Single Family

Style: Two Level, Craftsman

View: Trees/Woods

Year Built: 1998

Community: Northwood

County: Orange

MLS#: S658156

Source: SoCalMLS

Status: Active

——————————————————————————

* * * FANTASTIC LOCATION IN AWARD WINNING NORTHWOOD POINTE * * * 4 bedrooms plus an office in almost 2,500 square feet, 3.5 bathrooms, 2 car attached direct access garage, large and private yard, upgrades include wood floors, custom paint, newer carpet, custom built-ins, ceiling fans. Located less than 100 yards to award winning schools, meadowood Swimking Cnter, Citrusglen Tennis Center, Hicks canyon Hiking Trail and easy access to freeways, shopping and recreation.