Foolish Bankers Surprised: Borrowers Never Intended to Repay Their Loans

Aug 16th, 2010  
by IrvineRenter  in Library News

Borrowers no longer view debt as something to be paid off. We have entered the Ponzi era where borrowers inflate asset prices with perpetually serviced debt. 

 

Irvine Home Address ... 19 HAZELNUT Irvine, CA 92614
Resale Home Price ...... $695,500

Some people ain't no damn good
You can't trust 'em you can't love 'em
No good deed goes unpunished
And I don't mind bein' their whippin' boy
I've had that pleasure for years and years
No no I never was a sinner--tell me what else can I do
Second best is what you get 'til you learn to bend the rules
And time respects no person--what you lift up must fall
They're waiting outside to claim my tumblin' walls

John Mellencamp -- Crumblin' Down

Some people ain't no damn good. You're going to meet some of them in today's post. For those of us who didn't participate in the housing bubble, no good deed goes unpunished. I have been the whippin' boy for kool aid intoxicated fools who can't deal with the inconvenient truths I display on a daily basis. I've had that pleasure for years and years. Second best is all we seem to get by playing by the rules. Irresponsible homedebtors get loan modifications, no-interest loans, and principal forgiveness, and we have to pay for it! And the irresponsible get to walk away from their debts with no repercussions, and many don't think they did anything wrong. They're victims of circumstance so they say. Everyone else did it, so it must be okay.

I say screw them. Get the lazy squatters the hell out of our houses! What the lenders lifted up must fall. We are all waiting outside to claim their tumblin' walls.

Debts Rise, and Go Unpaid, as Bust Erodes Home Equity

By DAVID STREITFELD
Published: August 11, 2010 

PHOENIX — During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back.

There is a pathology at work here that lenders don't recognize: borrowers never intended to pay that money back.

Once people accepted that house prices would always go up, they didn't need to worry about increasing their mortgage. As long as house prices go up, if the payments become too much to handle, they could just sell the house and let someone else pay off the debt -- either that, or they could just borrow more money to make the payments. In either case, the borrowers were running a Ponzi Scheme. Every serial refinancer was a mini Bernie Madoff.

The road to hell is paved with good intentions, and strictly speaking, the borrowers intended to repay. When they sold the house, borrowers accepted the idea that the lender would take a portion of their appreciation to satisfy the debt. Borrowers were okay with sharing the profits, but if prices depreciated and if the borrower might have to come out-of-pocket to pay back the loan, well... that was never part of the deal. Besides, they couldn't pay back such a large sum even if they tried. Banks should have known this.

People who borrow money they have no intention to repay or no ability to repay are stealing. Unfortunately, the morality of this isn't quite so black and white. We have had many discussions about the morality of strategic accelerated default and the relative culpability of lenders and borrowers. Whatever the moral and ethical implications, lenders must deal with borrowers who will not pay back loans if prices go down. This is a new fact of life for lenders they must adjust to. Perhaps it will make them pause before inflating the next housing bubble, but as long as the US taxpayer is liable for their loses, lenders really don't care.

The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association.

Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcy and because the value of the homes, the collateral backing the loans, has often disappeared.

The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up.

This is not a paradox. This is the obvious and predictable result of the deflation of the housing bubble. When lenders provide borrowers with money they can't or won't pay back, the more lenders loan, the less likely they are to get paid back. The only apparent contradiction here is that lenders didn't realize that the people they were loaning money to would behave this way. And that merely emphasizes how incredibly stupid lenders are.

“When houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats,” said Christopher A. Combs, a real estate lawyer here, where the problem is especially pronounced. “Their chances are pretty good of walking away and not having the bank collect.”

Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.

Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. “People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”

To some extent? LOL!

If banks give out free money, everyone will want it. This entire fiasco has made sure moral hazard is deeply embedded into the belief systems of every borrower in America. How many people buying real estate in California are doing so because they believe prices have bottomed and that lenders are going to be giving out free-money HELOCs soon? Realistically, it is more than half. Kool aid intoxication has not gone away, it has gotten worse.

Utah Loan Servicing is a debt collector that buys home equity loans from lenders. Clark Terry, the chief executive, says he does not pay more than $500 for a loan, regardless of how big it is.

“Anything over $15,000 to $20,000 is not collectible,” Mr. Terry said. “Americans seem to believe that anything they can get away with is O.K.”

It is zombie debt collectors like Mr. Terry that will make life hell for those attempting to walk away from HELOCs. Go get 'em Clark!

But the borrowers argue that they are simply rebuilding their ravaged lives. Many also say that the banks were predatory, or at least indiscriminate, in making loans, and nevertheless were bailed out by the federal government.

Let's stop for a moment and shed a tear for the victims... You know, those HELOC abusers who pulled half a million bucks out of the wall and bought new cars and took fancy vacations while the prudent went to work and paid taxes to eventually bail them out.

Finally, they point to their trump card: they say will declare bankruptcy if a settlement is not on favorable terms.

They should declare bankruptcy. There is nothing wrong with that. The system was designed to provide a mechanism for those who need to wipe the slate clean and start over. Anyone who defaulted on their loans should declare bankruptcy and be done with it. Hoping the problem will go away on its own will hurt them more in the end.

“I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. His lender obtained a court order garnishing his wages, but that was 18 months ago. Mr. Schlegel, 38, has not heard from the lender since. “The case is sitting stagnant,” he said. “Maybe it will just go away.”

Mr. Schlegel’s tale is similar to many others who got caught up in the boom: He came to Arizona in 2003 and quickly accumulated three houses and some land. Each deal financed the next. “I was taught in real estate that you use your leverage to grow. I never dreamed the properties would go from $265,000 to $65,000.”

I guess my real estate education must have been a bit better than his. When I studied real estate economics, the professors always emphasized the prudent use of debt to maintain positive cashflow. Borrowing past the breakeven point is guaranteed to destroy your investment. At some point during the bubble, borrowers unlearned this simple truth about debt, and they sought to maximize their borrowing to acquire as many homes as possible even if the cashflow was negative. At that point, the entire market became a Ponzi Scheme waiting to implode.

Apparently neither did one of his lenders, the Desert Schools Federal Credit Union, which gave him a home equity loan secured by, the contract states, the “security interest in your dwelling or other real property.”

Look at this guys attitude. He clearly feels no responsibility whatsoever for the losses, and he really believes he is going to escape with no further damage. If he had any brains at all, he would declare bankruptcy now and start over. If he doesn't, the lender -- or the zombie debt collector who buys his loans -- is going to come take whatever he has. All these people who are walking away from recourse debt will be contacted by debt collectors once they start acquiring assets again.

Desert Schools, the largest credit union in Arizona, increased its allowance for loan losses of all types by 926 percent in the last two years. It declined to comment.

The amount of bad home equity loan business during the boom is incalculable and in retrospect inexplicable, housing experts say. Most of the debt is still on the books of the lenders, which include Bank of America, Citigroup and JPMorgan Chase.

The second mortgage debt and HELOCs are the root of all our housing woes.

The main reason lenders will fail to execute more short sales is due to these seconds and HELOCs. The holders of those worthless loans have the power to hold everyone hostage and try to extort whatever they can out of both buyers and sellers. In the end, the buyer and seller are better off in a foreclosure that wipes out the seconds, HELOCs and back HOA dues.

With the huge amount of second mortgage and HELOC debt still on the books of major banks, they are still insolvent. Despite the Federal Reserve stealing from savers and giving the money to banks -- which is the net effect of zero percent interest rates -- it will take many more years before banks have made enough money to fully write down the losses on this part of their portfolios. It also suggests that the Federal Reserve may maintain zero percent interest rates for a very long time. Welcome to Japan.

“No one had ever seen a national real estate bubble,” said Keith Leggett, a senior economist with the American Bankers Association. “We would love to change history so more conservative underwriting practices were put in place.”

OMG! I don't believe he said that. The reason we had never seen a national real estate bubble is precisely because we have never had such stupid underwriting practices in place. What did these idiots expect? If you give unlimited money to anyone who asks, you are going to have problems. The ignorance is truly remarkable.

The delinquency rate on home equity loans was 4.12 percent in the first quarter, down slightly from the fourth quarter of 2009, when it was the highest in 26 years of such record keeping. Borrowers who default can expect damage to their creditworthiness and in some cases tax consequences.

Nevertheless, Mr. Leggett said, “more than a sliver” of the debt will never be repaid.

You think? Not that the banks have written down the bad debt. Thanks to amend-extend-pretend, only a sliver has been written off so far.

Eric Hairston plans to be among this group. During the boom, he bought as an investment a three-apartment property in Hoboken, N.J. At the peak, when the building was worth as much as $1.5 million, he took out a $190,000 home equity loan.

Mr. Hairston, who worked in the technology department of the investment bank Lehman Brothers, invested in a Northern California pizza catering company. When real estate cratered, Mr. Hairston went into default.

The building was sold this spring for $750,000. Only a small slice went to the home equity lender, which reserved the right to come after Mr. Hairston for the rest of what it was owed.

Mr. Hairston, who now works for the pizza company, has not heard again from his lender.

Since the lender made a bad loan, Mr. Hairston argues, a 10 percent settlement would be reasonable. “It’s not the homeowner’s fault that the value of the collateral drops,” he said.

Isn't it funny that homedebtors have no problem keeping all the profits when prices go up, but when prices go down, it isn't their fault and the bank should absorb that loss. If the guy wanted an equity partner to take that risk, he should have sought one out. What he did was take out a loan, and lenders do not assume downside risk -- well, at least they aren't supposed to.

I sincerely hope lenders are learning the lessons of this bubble collapse. Lenders and borrowers do not view the world the same way. Borrowers expect all the downside benefits of equity participation and all the upside benefits of debt in fixed amounts. This is the new world order.

Marc McCain, a Phoenix lawyer, has been retained by about 300 new clients in the last year, many of whom were planning to walk away from properties they could afford but wanted to be rid of — strategic defaulters. On top of their unpaid mortgage obligations, they had home equity loans of $50,000 to $150,000.

Fewer than 5 percent of these clients said they would continue paying their home equity loan no matter what. Ten percent intend to negotiate a short sale on their house, where the holders of the primary mortgage and the home equity loan agree to accept less than what they are owed. In such deals primary mortgage holders get paid first.

The other 85 percent said they would default and worry about the debt only if and when they were forced to, Mr. McCain said.

“People want to have some green pastures in front of them,” said Mr. McCain, who recently negotiated a couple’s $75,000 home equity debt into a $3,500 settlement. “It’s come to the point where morality is no longer an issue.”

Earlier this year, I wrote that by the end of 2010 the idea of a moral obligation to repay mortgage debt will carry no weight. It is August, and we are already there.

Darin Bolton, a software engineer, defaulted on the loans for his house in a Chicago suburb last year because “we felt we were just tossing our money into a hole.” This spring, he moved into a rental a few blocks away.

The only positive lenders have obtained by allowing widespread squatting is that they have convinced a few people prices might come back soon. This false and misguided hope is stopping them from lapsing into the malaise demonstrated by Mr. Bolton in the comment above. As prices roll over again in the inevitable double dip, more and more borrowers are going to embrace Mr. Boltons attitude and realize that continuing to pay an oversized mortgage on an underwater property is tossing their money into a hole.

“I’m kind of banking on there being too many of us for the lenders to pursue,” he said. “There is strength in numbers.”

Borrowers who took out enormous loans during the housing bubble never intended to repay these loans from their wage income, they always intended to pass this debt to some else. Somewhere along the way this subtle paradigm shift took place. It seems very reasonable that one could merely service debt for a while and resell the property to someone else and pay off the debt then. Like any Ponzi Scheme, it works until there is no greater fool to come along and assume the debt. Then the entire system comes crashing down and a spiral of debt deflation we are witnessing today. The worst part is that this thinking is still alive and well today.

The reason this problem won't simply go away is because incomes do not support the debt created. Even at 4.5% interest rates, as a society we cannot support the debt lenders made. Deflation will continue until prices are back in line with incomes. In markets like Las Vegas, we are already well below the price point needed, but in Orange County, our prices have not fallen enough to be supported by the local population. More pain lies ahead. 

 

They shook down the walls 

Did any of you have a piggy bank growing up. I had one that didn't have a hole to empty it. In theory, you were supposed to fill it, then break it with a hammer. It was a secure as home equity used to be before HELOCs. Of course, being an enterprising child, I knew that if I shook the piggy bank, I could get coins to fall out of the little slot. It took more effort, but you could raid the piggy bank, and with a little patience, you could get every last coin out of it.

Homeowners during the housing bubble were no different. A home was like a piggy bank that was difficult to make a withdrawal from, but with HELOCs prying open every home safe, lenders were helping homeowners shake down their own houses. Some homeowners, like the ones I am featuring today, shook their house often and made sure every available penny was stripped from the walls. 

  • My records don't show when this house was purchased, but there was a $230,500 loan on 8/25/1997. From that we can surmise they bought the house in 1997 and paid $288,125 using an 80% loan.
  • On 1/22/2001 they refinanced with a $254,800 and began down the road leading to rampant HELOC abuse.
  • On 7/17/2002 they obtained a stand-alone second for $45,000.
  • On 3/3/2003 they refinanced the first mortgage for $350,000.
  • On 5/6/2004 they obtained a $126,000 stand-alone second.
  • On 3/27/2006 they borrowed $602,509 in a new first mortgage.
  • On 8/4/2006 they got a $27,000 HELOC.
  • On 1/16/2007 they refinanced with a $692,254 first mortgage. Note the odd amount. They left nothing in the walls.
  • Total mortgage equity withdrawal is $461,754.
  • Total squatting time was only 10 months. Beneficial California Inc moved quickly on this one.

Foreclosure Record
Recording Date: 03/26/2010
Document Type: Notice of Sale

Foreclosure Record
Recording Date: 11/09/2009
Document Type: Notice of Default

When you see HELOC abuse this bad, it is almost incomprehensible how a middle-class family could have pissed away nearly half a million dollars. If we weren't so numb to the large numbers, we would be outraged by $46,175 worth of HELOC abuse. When the number ballons to $461,754, its like trying to imagine infinity; the mind just can't grasp it.

The flipper bought this property at auction for $571,800. They will make a nice margin assuming it sells for near its asking price.

If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.    

 

Irvine Home Address ... 19 HAZELNUT Irvine, CA 92614

Resale Home Price ... $695,500

Home Purchase Price … $571,800
Home Purchase Date .... 6/16/2010

Net Gain (Loss) .......... $81,970
Percent Change .......... 14.3%
Annual Appreciation … 123.5%

Cost of Ownership
-------------------------------------------------
$695,500 .......... Asking Price
$139,100 .......... 20% Down Conventional
4.51% ............... Mortgage Interest Rate
$556,400 .......... 30-Year Mortgage
$136,085 .......... Income Requirement

$2,823 .......... Monthly Mortgage Payment

$603 .......... Property Tax
$0 .......... Special Taxes and Levies (Mello Roos)
$58 .......... Homeowners Insurance
$80 .......... Homeowners Association Fees
============================================
$3,563 .......... Monthly Cash Outlays

-$471 .......... Tax Savings (% of Interest and Property Tax)
-$731 .......... Equity Hidden in Payment
$233 .......... Lost Income to Down Payment (net of taxes)
$87 .......... Maintenance and Replacement Reserves
============================================
$2,680 .......... Monthly Cost of Ownership

Cash Acquisition Demands
------------------------------------------------------------------------------
$6,955 .......... Furnishing and Move In @1%
$6,955 .......... Closing Costs @1%
$5,564 ............ Interest Points @1% of Loan
$139,100 .......... Down Payment
============================================
$158,574 .......... Total Cash Costs
$41,000 ............ Emergency Cash Reserves
============================================
$199,574 .......... Total Savings Needed

Property Details for 19 HAZELNUT Irvine, CA 92614
------------------------------------------------------------------------------
Beds: 3
Baths: 1 full 2 part baths
Home size: 1,786 sq ft
($389 / sq ft)
Lot Size: 3,400 sq ft
Year Built: 1985
Days on Market: 7
Listing Updated: 40400
MLS Number: S628132
Property Type: Single Family, Residential
Community: Woodbridge
Tract: Bg
------------------------------------------------------------------------------
This turnkey, single family detached home is located in Woodbridge's terrific Briarglen Tract, which is inside of the Loop, and offers three spacious bedrooms,a dining room, new lighting fixtures, new a/c and many other upgrades for you to enjoy. Take advantage of all that Woodbridge has to offer. HOA's only $80/mo. Enjoy access to two lagoons, 20 pools and rec center. This charmer is move-in ready with freshly painted interior, new granite countertops and gorgeous travertine floors in the kitchen, family room and dining rooms! Master bath has large bathtub, dual sinks, natural lighting. New landscaping and spacious backyard with fruit trees is perfect for entertaining! A must see! No need to preview!

A must see! No need to preview! Please explain to me how that works. Is this a must see, or is there no need to see it?


Astute Observations

Astute Observation by winstongator
2010-08-16 04:14 AM

This is the key element of the housing bubble: “Once people accepted that house prices would always go up, they didn’t need to worry about increasing their mortgage (or what they would spend on a home)”  Most of these borrowers did NOT intend to pay back the loans…out of their income.  The belief of ever increasing prices was not prevalent everywhere, or at least many areas only expected very low single digit growth.  I believe this, in part, created the geographic dependence of the bubble.

The HELOC money also got plowed into ‘investment’ properties.  I definitely saw this in FL, and Schlegel admits to it.  An irony is that we might have been better off if people had just been using heloc money for cars & boats because it wouldn’t have provided more fuel to the appreciation fire.

Education - I don’t think that word means what Mr. Schlegel means.  Tips from other realtors or a $100 mail-order system is not an education.

Astute Observation by AZDavidPhx
2010-08-16 10:21 AM

Yes, “education” in this context is a euphimism for “tribal knowledge”.  He was brainwashed into believing that leverage leads to growth.  An educated person would have questioned it and steered clear.  Heis just another ignorant fool who bought into a get-rich-quick scheme and made others rich while failing himself.

Astute Observation by winstongator
2010-08-16 10:33 AM

Many educated people drank the kool-aid.  Even some with formal economics training bought the assumption that home prices only go up.  Check this:
http://www.fpafunds.com/news_070703_absense_of_fear.asp
and pay attention to the discussion with the ratings agency guy.

“What if HPA was flat for an extended period of time?” They responded that their model would start to break down. He then asked, “What if HPA were to decline 1% to 2% for an extended period of time?” They responded that their models would break down completely.

They weren’t even looking at a Gaussian function of price change, they had a solid assumption built in.  Lots of people in the modeling business would have scoffed at that, so maybe some parts of the ‘education’ were left out.

Astute Observation by SanJoseRenter
2010-08-16 04:45 AM

Love the Mini Madoff cartoon!

You should always mention that he was former Chairman of NASDAQ though. It spells out how completely corrupt our financial system is.

http://en.wikipedia.org/wiki/Bernard_Madoff

Astute Observation by mike23w
2010-08-16 05:19 AM

IR,

this graph is nonsense. i’m surprised you posted it.

Astute Observation by mike23w
2010-08-16 05:20 AM

turned off links to images?

http://www.irvinehousingblog.com/images/uploads/01 Post Images 2010-8/4-trille-xcess-.png

it’s the “$4 trillion dollars in excess mortgage” graph

Astute Observation by mike23w
2010-08-16 06:07 AM

i take it back.

apparently “housing stock” used in the chart, is the dollar value of housing stock instead of the number of residential units (which i thought was the correct usage of housing stock).

http://www.ritholtz.com/blog/2010/07/the-4-trillion-dollar-question-2/

http://www.bloomberg.com/news/2010-07-16/housing-bubble-leaves-4-trillion-hangover-chart-of-the-day.html

Astute Observation by IrvineRenter
2010-08-16 06:36 AM

Calculated Risk recently did a post estimating the overhang of residential mortgages. He estimates it is only about $800 billion rather than $4 trillion. His estimate is probably better, but the basic point is the same: there is much more than needs to be written off.

Astute Observation by winstongator
2010-08-16 07:16 AM

I didn’t get the times 0.4 part.  What helps is the homes without mortgages.  This data is available from the fed in their flow-of-funds data :
http://www.federalreserve.gov/releases/z1/Current/z1.pdf
p111 of the pdf, labeled 104.  Value of household RE assets, $16.5T, mortgage debt outstanding, $10.2T.  I believe CR limits the asset side to homes with mortgages.  Household RE assets peaked at $23T in 2006.  Mortgage debt has been relatively flat since 2007.

Astute Observation by Alan
2010-08-16 01:13 PM

Damn, we’re at the point where we can say “only $800 billion”. What a relief it’s not an important amount after all. Let me just check what I’ve got in my wallet ...

Astute Observation by Anonymous
2010-08-16 08:56 AM

As you are fond of satire featuring the picture old farmer and his wife in front of their house - did you notice
That in the latest Merle Hazard video he
does it too? Maybe he reads IHB.

http://www.calculatedriskblog.com/2010/08/merle-hazard-double-dippin.html

Astute Observation by Walter
2010-08-16 09:15 AM

“A must see! No need to preview!”

I think they are saying there is no need to take a look before bringing your buyer by.

Astute Observation by Kelja
2010-08-16 09:23 AM

You say the flipper on the property will do well if the house sells at the advertised price. I get a sense that flipping houses aren’t (isn’t?) what it used to be. A house near me (Carlsbad, CA) was a flip but had no real interest and they converted it into a rental. Don’t know the particulars, but if this market continues trending down, they’ll come a day when flippers get burned.

True?

Astute Observation by IrvineRenter
2010-08-16 09:57 AM

Yes, over the last few months, many trustee sale purchases were made on the assumption prices would continue to rise, so many of them overpaid. If we get a nice leg down this fall and winter, many will get burned. I profiled one last week where the flipper lowered the asking price to breakeven just to get out.

Astute Observation by awgee
2010-08-16 12:01 PM

I tend to think that the flipper who broke even was an amateur.  In my observations, the pros always buy well.  They make their money on the buy, not the sell, and they know it.

Astute Observation by DarthFerret
2010-08-16 06:08 PM

In my observations, the pros always buy well.  They make their money on the buy, not the sell, and they know it.

I don’t understand statements like that. How can you make your money on the buy? Do they have the next buyer’s money in an escrow account with not contingencies prior to their winning bid at the trustee sale? Unless they do, then there’s still some uncertainty in the amount and timing of the sale.

Yes, I have also heard this investor truism many times (usually by investors trying to puff up their perceived level of sophistication), but it’s illogical. If prices fall after you buy but before you sell, then your margin is reduced or possibly even negative. If you buy low enough, you may THINK that you made your money on the buy, but it’s just a paper profit until you close the deal.

This truism about buying starts to conflict with another truism about selling: no one ever lost money by taking profits.

-Darth

Astute Observation by DarthFerret
2010-08-16 06:10 PM

My spelling and grammar are just atrocious today. Should have been “...with no contingencies…”.

-Darth

Astute Observation by Anonymous
2010-08-16 08:57 PM

I dunno that makes sense to me.  You could find a property that is undervalued, or offer way to low and if refused, that’s fine, just walk and try again until someone says yes.  Or you could find a property with super ugly cosmetic stuff that is simple to fix (ex. hideous paint or something like that), get it for a good price, then fix and flip.  Or whatever.

Astute Observation by tlc8386
2010-08-16 11:31 AM

It always comes down to valuation most of the homes have doubled or more they have to come down to reflect earnings/income and IR has said this a hundred times over.

Lenders did not care how much money they gave out because the GSE’s and the MBS were buying the loans so they did not hold them—they sold them off making money from the packaged debt.

The bond market will continue to go down because the debt load is much to large to pay higher interest while the fed absorbs the losses from RE loans.

Trying to inflate RE is failing because of real valuation just like a stock becomes over priced due to it’s high PE ratio housing will correct down to market conditions of supply vs. demand.

Along with valuations.

Astute Observation by Pwned
2010-08-16 12:39 PM

It seems so obvious now that the main thing driving recent price “gains” was the federal housing tax credit, and that without it debtors are screwed. With elections coming up in Nov, what are the chances that this insane program will get yet another reboot?

Astute Observation by AZDavidPhx
2010-08-16 02:42 PM

I suspect the tax credit is done for a little while. A reboot would almost certainly result in diminished returns.  Also, the house “buying season” is coming to a close anyway.  “r"ealtors are most likely on their own for the rest of the year.  The buyers who bought are happy (for now…) the sellers who escaped are happy, the banks are profiteering, Wall Street is handing out bonuses - all is good.

My bet is that the politicians are now going to start “talkin jawbs”.  Be looking for makework jobs programs next and further extensions of unemployment and welfare giveaways.

The GOP is going to come in waving the flag promoting protectionism, war mongering to protect us from “terrorists” / illegal aliens, and promote “fiscal responsibility”.

Either way, we are in trouble.  Nobody is going to go after the banking interests that are strangling to economy so we are going to continue on with the fake recovery.

Astute Observation by Misstrial
2010-08-16 05:13 PM

imo, will get a reboot since a voting base needs to get paid off.

Astute Observation by tlc8386
2010-08-16 02:29 PM

The recent gains in housing is on the lower end because the tax credit was used as an incentive to buy. Along with the mortgage rates dropping houses that were out of the reach for some folks started to become accessible. 

The lower end has corrected for the most part. In some areas you see 75% such as Sacramento, Ca. Giving folks an incentive to buy was right to do in order to ignite RE.

Dropping rates have everything to do with our high debt ratios.

Attaching this to elections is more insane if you ask me. It’s all about economics and trying to clean up RE.

The higher end will keep falling because supply is higher than demand and that is do to the amount of people who can qualify to buy a million plus home with real cash.

Regardless who wins in Nov. the economy has no choice but to continue to absorb the RE losses from these horrible excessive loans given out the last ten years.

Astute Observation by AZDavidPhx
2010-08-16 02:52 PM

Yup.  It does not matter who wins as far as the economy goes.  Nobody will touch the banks - the politicians are 100% bipartisan on that issue.  So what they are going to do is distract us instead so we do not interfere with the interests of their banking friends.  Democrats are going to promise lots of giveaways and engage in fear mongering about how the GOP will take away the foodstamps.  The GOP is going to tap into anti illegal alien hysteria and promise to protect us from terrorists and free up jobs for citizens.  They will also pretend to put an end to the Democrat spending spree.

In reality, the government spending is one big shell game anyway.

Since Americans don’t vote for independents we will continue the status quo.

Astute Observation by DarthFerret
2010-08-16 02:44 PM

As we are seeing Deerfield SFR’s slip below $500K (http://www.redfin.com/CA/Irvine/5-Fern-Cyn-92604/home/4682603), we are also seeing more of the condo’s-posing-as-mansions lining Yale Loop slip below $600K and/or drop below $300/sf: http://www.redfin.com/CA/Irvine/182-W-Yale-Loop-92604/unit-14/home/5462884 & http://www.redfin.com/CA/Irvine/364-E-Yale-Loop-92614/unit-13/home/5669458.

Price declines continue to spread throughout Irvine. If you think that we’re at the bottom, go ahead and grab that knife. Personally, I think that interest rates (aka, payment affordability) will remain low and prices will continue to fall as our deflationary recession drags on through 2013 or longer. Waiting to buy means you get a better house down the road for the same price as a lesser house today.

We will see a high level of Alt-A resets through at least 2013 (5-year reset windows, and they were still being issued in 2008), so the employment picture is unlikely to start to heal before then. No need to wait to time the exact bottom, but also no need to rush into buying, as we’re nowhere near the bottom.

-Darth

Astute Observation by EMc
2010-08-16 03:26 PM

Excellent Observation

The last housing boom caused by the Savings and Loan folly peaked in 1988 and bottomed in 2007; 9 years top to bottom.  This credit bubble was magnitudes greater and the governments actions to moderate the fallout far more extreme. 

To think we are anywhere near bottom after 4 years is just silly.

Astute Observation by DarthFerret
2010-08-16 04:09 PM

Exactly. And that bust was really only driven by restricted access to credit and slumping economy. None of it was directly related to housing. As opposed to our current slump, where housing is the epicenter of the whole mess. The idea that things are turning around already is ludicrous!

IMO, the deflationary nature of this recession even makes it too early to call a bottom on payment affordability. If rates stay low and prices fall, then we are NOT at the bottom on payment affordability. All indications are that both will continue for at least the next year; if we follow Japan’s model, then it could be the next few decades!

Once higher rates eventually do set in, then we have anywhere from 5-30 years of declining prices. The Aught’s were an asset/RE bubble like Japan’s, and our response has mirrored theirs, so shouldn’t we assume the higher end of that 5-30 year range? Arguably, our economy is more resilient and our demographics less severe, but I see no reason to assume a mere 5 years or less of price declines.

-Darth

Astute Observation by winstongator
2010-08-16 02:59 PM

Mortgage cram-down for principal residences in bankruptcy would be a better system than the one we have.  It takes principal reduction to make a mod work, but banks are loath to do that because it would produce a mad rush of people who can and are paying on underwater loans.  But if you require a bk to get the reduction, many will not go for it.  You should also have judges doing a real analysis of whether the person could have afforded the home originally, or could after the mod, or if they needed to sell it.  It might have stressed the court systems, but maybe some stimulus money could have gone to judge, court reporter, other legal staffs overtimes.

Astute Observation by DarthFerret
2010-08-16 05:09 PM

winston: Mortgage cram-down for principal residences in bankruptcy would be a better system than the one we have.

As you pointed out in your post, the moral hazard of principal reduction is beyond measure. Cram-downs are the last thing we need. An acceptable system is already in place: foreclosure. So long as we keep trying to delay the inevitable, this problem will linger on.

-Darth

Astute Observation by HydroCabron
2010-08-16 05:16 PM

I agree - this has long been one of my pet causes - and I can’t imagine significant disagreement on this issue among those who have thought it through. Yet, due to the political influence of the mortgage lenders, mortgage debt is one of a tiny number of types of debt not reducible in bankruptcy.

The banks, but not their management, might be in better financial shape today were this true: an official path to cramdown makes it harder to lie to oneself, one’s accountants, and buyers of MBSs as to the risk. Even in the absence of bankruptcy “reform” it would have made it harder for debtors to walk away without documenting true financial hardship.

There is no good reason for exempting mortgage debt from cramdown during bankruptcy.

Astute Observation by DarthFerret
2010-08-16 08:42 PM

I think I’m not understanding the problem here. Provided one lives in a non-recourse state, mortgage debt CAN be reduced to zero (through foreclosure) with or without bankruptcy.

Are you arguing that mortgage debt should be reduced through bankruptcy and the person declaring bankruptcy should be allowed to KEEP the house? That would be quite extraordinary, and I can’t imagine a good reason to allow that.

-Darth

Astute Observation by about bankruptcy
2010-08-16 11:23 PM

The purpose of bankruptcy is to dispose of assets to pay creditors and not the other way around. The gain to a bankrupt person is in keeping creditors off their back because they have proven in court that they don’t have the means to pay anymore. It’s counter-intuitive to declare bankruptcy and get to keep the biggest asset, the unpaid for house. Also, there’ more to it than just moral hazard. There would be a huge cost to borrowers because the banks will have to factor in the cost of cram downs. See, in a normal (non-bubble) market, banks don’t need to lose much money on a foreclosure. Who would lend their money if they could lose it in court?

Astute Observation by winstongator
2010-08-17 06:14 AM

Um, OK.  Aren’t banks having to factor in the cost of foreclosures?  The issue is when a bank can do better through a modification than through foreclosure.  You don’t want that being used haphazardly, so you do it through the bankruptcy courts.  Also, second homes can have cram-downs, and banks continued to lend on them.  Actually during the bubble, many of the worst loans were to non-owner-occupied homes.

Astute Observation by BD
2010-08-16 07:15 PM

Hello All -

... can you imagine a decade of more of first deflated prices and recession and then more time in a hyperinflation environment?  This is the scenario materializing.  First de-leveraging by consumers mostly around housing and then a hyperinflation environment caused by all of the printing of money… housing could be flat 20 years from now in today’s dollars.  Think about it… What do you think?  What is the urgency to buy?  Answer:  NONE. 

My .o2

BD

Astute Observation by DarthFerret
2010-08-16 08:19 PM

BD: “a decade of more of first deflated prices and recession and then more time in a hyperinflation environment

Hyperinflation is a very loaded term, and its use as hyperbole only robs our arguments of legitimacy. Despite its misuse as a sensationalist tool in the media, the technical definition of hyperinflation is “a monthly inflation rate of at least 50%”. (http://en.wikipedia.org/wiki/Hyperinflation#Characteristics) I highly doubt that we will see inflation at those levels. What we are likely to experience after this deflationary recession is a rate of inflation that is much higher than normal (not to be confused with “hyperinflation”). This is probably something on the order of 5-25% annual inflation. Hyperinflation, per the technical definition of 50%/month, would result in annual inflation of nearly 8,650%! I will assume that you are not predicting that.

In the past 200 years, hyperinflation has nearly always been associated with a war, a military dictatorship, or some other extreme social upheaval. That may be in the cards, but no one knows for sure.

Definitions and misuse of terminology aside, an inflationary environment is a time that you DO want to own assets such as real estate. Owning RE is a way to hedge against inflation, whether it be your primary residence or an investment rental. For example, suppose we had average annual inflation of 10% over the next 10 years. If all other factors rose equally (wages, etc.), inflation should cause a house priced at $500K today to increase to $1.43M in those 10 years, an increase of 285%. If wages and prices rose the same amount, then the increase in relative wealth would not change. On the other hand, $500K in dollar bills kept in a suitcase would suffer a SEVERE drop in purchasing power!

So, if we DO get high inflation, RE might be merely flat in today’s dollars (I doubt it will stay flat), but that’s definitely a reason to own RE (or other hard assets or commodities) and NOT dollars.

-Darth

Astute Observation by theyenguy
2010-08-17 08:13 AM

You write: “The only positive lenders have obtained by allowing widespread squatting is that they have convinced a few people prices might come back soon.”

My comment is that yes there is widespread squatting as Sue McAllister and Eve Mitchell in Oklahoman/McClatchy Tribune article Millions Stay Put, Await Foreclosure Or Help report from San Jose, CA that millions of homeowners are trapped in a bizarre real estate limbo, living in houses but no longer paying for them, waiting and wondering if someone will help them — or throw them out. Some 3.5 Million squatters are now living payment free.

And I comment that the major positive that lenders have obtained by allowing widespread squatting comes from exercising their FASB 157 entitlement and mark the property to managers best estimate rather than mark the property to market. 

FASB 157 is the foundation that enabled the Federal Reserve to proceed with its QE program that traded out 1.2 Trillion and accepted in every kind of toxic debt, like those in Fidelity Capitol and Income mutual fund FAGIX. And in so doing the banks, KBE, and the too large to fail financial institutions, RWW, were capitalized at taxpayer expense, and the overall stock market, VT, was kept from collapsing, or perhaps better said postponed from collapsing. There was a major benefit to the bank in that they were nationalized and integrated with the US Federal reserve, effectively creating a new form of government, that being state corporatism.

On April 26, 2010, the currency traders went short the major currencies and the emerging market currencies, while sustaining the Yen, causing stocks to fall world-wide. There was a European Financials Stress test rally from June 10, 2010 to August 11, 2010, but now stocks have fallen off and are on the brink of falling lower as currency traders once again sold out of currency carry trades such as the EUR/JPY.

Once there is a liquidity evaporation stemming from a fast sell off the current sizzling hot US Ten Year Notes, IEF, and the 20-30 US Government Bonds, TLT, due to rising interest rates, ^TYX, and ^TNX, or once the Euro, FXE, falls below 127, then the European Financials, EUFN, and banks, KBE, and financials, XLF, will fall significantly, causing European stocks, FEZ, world stocks, VT, and the Russell 2000, IWM,  to fall significantly as well.

Once this happens, banks will become ever more stock market decapitalized and will turn to foreclosing and leasing properties as their FASB 157 entitlement and lifeline of support fails to sustain their ability to stay in business: yes a new business model is coming to banking, that being property management on behalf of government.

Astute Observation by MsMarvel
2010-08-17 07:44 PM

I know that the family that lost 19 Hazelnut were original owners - probably paid about $160k in 1985.  The condition of the home on the day they moved out was indescribably dirty.  The flipper had to replace nearly everything inside.

Commenting is not available in this channel entry.

<< Back to main