Banks holding onto foreclosed homes to force buyers to overpay
The cartel of banks holding prices up are openly stating their contempt for the families of today's buyers and forcing them to pay inflated prices to obtain their American Dream.
Irvine Home Address ... 26 LEWIS Irvine, CA 92620
Resale Home Price ...... $584,900
Time for the final bow,
Rows of deserted houses,
All our stable mates highway bound.
Give us our measly sum,
Getting the air inside my lungs is heavenly,
Starting out, with nothing but crippling debt.
We'll rest easy justified.
Death Cab for Cutie -- Stable Song
When you read trade publications you get a point of view on issues that is often unbiased by the political correctness of the mainstream media. I found the article today in www.bigbuilderonline.com written to interested parties in the homebuilding industry. The article in bold in its statements that the banking cartel is colluding to hold up prices. There is a matter-of-factness about the articles tone that says this activity is just and desirable. I think the bank's behavior sucks.
Source: San Bernardino County Sun
Publication date: December 2, 2010
By Toni Momberger, San Bernardino County Sun, Calif.
Dec. 02--Inventory is low all over the area, and there are frustrated buyers among us.
They have saved a 3.5-percent down payment. They have an income and good credit. They want to take advantage of today's low prices and low interest rates. They tried to get the $8,000 tax credit.
They've made dozens of offers in the past year.
How can there be so little available when so many have lost their homes to foreclosure?
The properties are not all being released.
Banks are intent on screwing buyers. They are knowingly and intentionally withholding inventory in a futile attempt to sustain bubble prices -- prices that were never supported by incomes.
Ultimately, the banks will fail to keep prices high. Competition among cartel members to liquidate their shadow inventory will put pressure on prices, and if the process drags on long enough affordable housing advocates may finally apply some political pressure to force government action.
"My understanding is there's between 1.2 (million) and 1.6 million in California alone," said Robert Laguna, an agent with ReMax Masters in Covina.
"Inventory has been diminished considerably, so they have to release some of these properties."
Shadow inventory, also called ghost inventory, is the population of houses that banks already own through foreclosure, but have not released to the market.
No, shadow inventory is both bank-owned properties not on the market and future foreclosures from currently delinquent borrowers. It is the latter group that is by far the largest segment of shadow inventory.
A small portion of the shadow inventory is a result of banks' being overwhelmed. The homes may just not have gotten processed yet.
But everyone seems to concur that most properties are being held to prevent another market crash.
And only a few vocal opponents are pointing out the problems with this approach. Lenders and loan owners fall on one side of this issue, and renters and buyers stand on the other.
"Fannie Mae and Freddie Mac own most," said Laguna. "The government said it doesn't want to flood the market with properties, because if it did, the properties will depreciate. Values will go down."
Adam Quinones of Mortgage News Daily added on MND site's NewsWire, "To reduce the cost of maintaining the condition of foreclosed properties, banks have delayed the liquidation process
and allowed delinquent borrowers to remain in their homes."
People who are not paying their mortgage or rent are living in property they don't own without paying for it. That is squatting by another name.
"In addition to that, by delaying the liquidation of foreclosed properties, banks have avoided large asset value write-downs."
Failing to recognize losses by avoiding the write down is amend-extend-pretend. This farce will ultimately shake confidence in our accounting and financial reporting systems here in the US. If not for the implied protection of our major banks as too-big-to-fail, investors would be avoiding our banks for lack of transparency and likelihood of bankruptcy.
Laguna said the key is to release some, then let the market stabilize, and repeat the cycle until all of the shadow inventory is bought.
"They have to release them in waves, not in tsunamis. They have to be very careful how they release them. They can't release them too slowly, because they'll drag it on for years and years."
Part of the frustration is that 3.5 percent means the buyers are planning on a Federal Housing Administration loan.
Because of the high default rate, the FHA has become pickier about the condition of homes it'll take as collateral.
"What banks are releasing in the marketplace are REOs that need work. FHA offers will be rejected in favor of conventional loans, so banks don't have to fix the house."
Banks are required to get three job bids per improvement.
They don't have the resources to deal with it. As a result, "very rarely does an FHA offer get chosen," Laguna said.
FHA loans always end up on the bottom of the list of seller's preference. There are so many costs and fees, and the hurdles to overcome that can kill escrows. FHA buyers are riskier candidates to fall out of escrow after wasting months of time in the process.
It can be argued that the cumbersome FHA process should be cumbersome so competitors can provide money under better terms and make a profit. The FHA is the lender of last resort, and right now it is three times the market share (25%) than normal (8%-10%).
If they're not immediately liveable -- for instance, if the wiring has been yanked, or the toilet's gone -- no bank will fund the purchase. Those houses must be bought with cash, and are often going to investors.
With foreclosures composing most of the transactions today, obviously, not all of the shadow inventory is being held.
Laguna said most of the houses not owned by Fannie Mae and Freddie Mac are getting released, and some government- owned properties are going on the market.
"How (Fannie and Freddie) decide what to release, I don't know," he said.
If you watched a family moving out of your dream home, and have been waiting for the sign to go up, you may just have to wait. Shadow inventory is not easy to buy.
Shadow inventory is impossible to buy. That is part of the problem.
Shadow inventory is composed of many delinquent borrowers many of whom are attempting short sales. When the short sale gets held up for months as owners and lien holders negotiate, the property is not effectively for sale. It is that rare gem under glass you can look at but can't touch. You know it's there, and it's ostensibly for sale, but it can't transact without approvals from lien holders that are not forthcoming.
None of the delinquent borrowers in this part of shadow inventory have gone through foreclosure. The bank does own them. The delinquent and most often underwater borrower has nothing and is paying nothing while this drama plays out.
Shadow inventory also consists of properties banks have foreclosed on and they now own. These properties may be renovated to sell, some are rented out, but many simply sit empty gaining no rental income and serving no family as a home. This inventory is considered shadow because it is not for sale on the MLS, but it will be someday soon because it isn't generating banking revenues sitting empty.
When I think of shadow inventory, I am not concerned about the stuff the banks already own. The inventory banks own but are not actively selling is not that large. It is the upcoming inventory from the delinquent borrowers that is the big, scary number. Millions of borrowers are not making their payments, and loan modification programs are not succeeding in resolving the the problem. Short sales are not working either. Foreclosure is the option everyone is trying to avoid, but it is exactly what is needed to get past this problem.
Laguna suggests starting by contacting a Realtor. Realtors have access to profiles and who owns the notes to houses.
"Sometimes the bank doesn't even know who would make the decision. You have to research that," he said.
"It's difficult to make an offer. The bank may say its Realtor has to be in charge. Then the Realtor says he hasn't got the listing yet."
After a foreclosure, there's a trustee sale, so all of the shadow inventory was for sale for at least a moment during the process. One of the consequences of shadow inventory is a high number of vacancies, which are targets for squatters and vandals.
"I don't know if vacancies are depreciating the market, because comparables use sold properties, but vandalized homes may make a neighboring conventional homes harder to sell," Laguna said. "Cities are being tougher and tougher on those properties, but there's just so many of them."
Whether property has been released for sale, the title holder of any property is responsible for basic maintenance. For example, pool water may not be green; lawns may not be brown.
Laguna said the city will impose a deadline for signs of neglect to be remedied.
After the deadline, there may be $1,000-a-day fine until the home is in compliance. If that fine is unpaid, the city may put a lien on the title. That property then cannot be sold until the lien is cleared.
"Every city is different.
Some (lien blemishes) follow the house; some follow the previous owners."
Laguna says buyers should not let the possibility of shadow inventory's release cause reluctance.
"Is it a good time to buy, with all this property about to come on the market? I think so. If I could afford it, I would buy. Who's to say how they're going to release it? The deals you can get on some of those properties now is incredible, and the interest rate!"
It's a good time to buy if you believe a cartel of lending interests that control the sale of millions of properties can hold price levels above what people can realistically afford and divest themselves of all their inventory. If you believe the banking cartel can do this, then we are near enough to the bottom that buying now doesn't hurt. On a nominal basis, it may not, but on an inflation-adjusted basis, it is not great planning to tie up money in an asset that treads water for 10 years while inflation ravages the buying power of the currency.
For the banking cartel to maintain the balance they are looking for between liquidation rates and asset prices, price volatility will be very low during the purging process. The inventory will prevent prices from going up. The real challenge for the asset managers is to dispose of their properties without pushing prices lower. This may be possible in some markets where inventory problems are smaller, but in over-debted California, the inventory and associated debt purge may take much longer.
If bank asset managers are successful, prices will probably drift slightly lower over a multi-year period while the debt winds down. Long periods of low volatility takes many appreciation traders out of the game. Why buy when prices are expensive and when prices are not going up? it takes a lot of faith.
A subprime casualty in Irvine
Many people who took out subprime loans did so because it was an easier process with less paperwork and less need for accuracy on the paperwork you had to fill out. We had less subprime in Irvine, mostly because the borrowers had higher FICO scores and became classified alt-a.
- This property was purchased on 12/22/2004 for $610,000. The owner used a $488,000 first mortgage, a $122,000 second mortgage, and a $0 down payment courtesy of New Century Mortgage Corporation.
- On 8/2/2005, only eight months after putting zero down on the property, the owners were given a $125,000 HELOC. There is a chance this simply replaced the second mortgage, and they didn't spend the extra $125,000 they were given for nothing. However...
- On 2/13/2007 they refinanced with a $588,000 first mortgage and obtained a $73,500 HELOC.
- Total property debt was $661,500.
- Total mortgage equity withdrawal was $51,500. Not a huge take, but considering they put nothing into the property, $51,500 in free money is not too bad.
She quit paying the mortgage in 2009.
Recording Date: 02/03/2010
Document Type: Notice of Sale
The sale notice was in February, but the house did not sell until 11/12/2010 when the bank took the property back for $642,500.
Irvine Home Address ... 26 LEWIS Irvine, CA 92620
Resale Home Price ... $584,900
Home Purchase Price … $610,000
Home Purchase Date .... 12/22/2004
Net Gain (Loss) .......... $(60,194)
Percent Change .......... -9.9%
Annual Appreciation … -0.7%
Cost of Ownership
$584,900 .......... Asking Price
$116,980 .......... 20% Down Conventional
4.87% ............... Mortgage Interest Rate
$467,920 .......... 30-Year Mortgage
$119,323 .......... Income Requirement
$2,475 .......... Monthly Mortgage Payment
$507 .......... Property Tax
$0 .......... Special Taxes and Levies (Mello Roos)
$97 .......... Homeowners Insurance
$0 .......... Homeowners Association Fees
$3,079 .......... Monthly Cash Outlays
-$421 .......... Tax Savings (% of Interest and Property Tax)
-$576 .......... Equity Hidden in Payment
$219 .......... Lost Income to Down Payment (net of taxes)
$73 .......... Maintenance and Replacement Reserves
$2,374 .......... Monthly Cost of Ownership
Cash Acquisition Demands
$5,849 .......... Furnishing and Move In @1%
$5,849 .......... Closing Costs @1%
$4,679 ............ Interest Points @1% of Loan
$116,980 .......... Down Payment
$133,357 .......... Total Cash Costs
$36,300 ............ Emergency Cash Reserves
$169,657 .......... Total Savings Needed
Property Details for 26 LEWIS Irvine, CA 92620
Beds : 3
Baths : 3 baths
Home size : 1,856 sq ft
Lot Size : 5,642 sq ft
Year Built : 1979
Days on Market : 15
Listing Updated : 40515
MLS Number : P761430
Property Type : Single Family, Residential
Community : Northwood
Tract : Cust
According to the listing agent, this listing is a bank owned (foreclosed) property.
And that's all we know about this property because the realtor didn't bother with a description.