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You could also argue this owner’s ‘mistake’ was not taking a 100% LTV Liar Option Arm back in 2007. Taking as given that he will sell this place near the asking price, he could probably have borrowed at least $850k for a 100% LTV liar Option Arm back in early 2007. So instead of pocketing $350k from selling today he’d have pocketed closer to $500k (or more) in 2007 & then got to live payment free for at least a year (probably longer, given the lags by banks for foreclosing).
You are learning the lessons of the housing bubble well. Next time they start offering 100% financing during a house price rally, I assume everyone will be refinancing every 6 to 12 months to make sure they extract maximum profit from the lender. Most borrowers will see no reason to leave any money trapped in the walls when the lender will pay peak pricing as the house goes up in value.
Why does modification make sense in this case? This guy clearly ran into tough economic times. He could pay his mortgae for 7 years, and then suddenly he needed a huge influx of cash to stay afloat, and apparently the new mortgage was too large for him to afford. This is a clear case of someone who should and is selling. He can sell, take out all that appreciation equity, and use it towards his rent for many years if his income doesn’t recover.
Modification is only needed so that this guy is given the time to collect things such that he’s ready and able to sell. It makes sense because it avoids an unnecessary foreclosure with probably a deeper loss to the lender. But it’s not a “permanent” mod.
I am making the assumption that this owner could afford the previous loan and payments and only temporarily is experiencing a decline in income. If this income loss is permanent, then the loan modification will not work, and he should sell. The permanent loss of income is probably why he is selling.
The report citing the 59.8% back end DTI has been updated. Here’s the report published May 17:
http://www.financialstability.gov/docs/April MHA Public 051710 FINAL.pdf
59.8 has become 64.3
Don’t stop there, let’s slap a 3.5% five year ARM on that DTI. That oughtta let the banks borrow at 0% and buy even more treasury bills.
Let’s give The European debt crisis some props. Now that European banks are in full force borrowing at 0% and buying treasury bill who knows how low rates can go.
While today a 5 year ARM is at 3.5%, by next year it could be 2.5%.
The saddest thing is that he can still make 3x the purchase price. Anyone notice your salary go up 300% in the last 10 years?
Yea, neither did I. However, it has been noted that CEO pay has risen by an average of 654% while the lowly worker peasants only went up 1%.
Long live Reagan’s policies of destruction, he not only “beat” the U.S.S.R. during the cold war, but started the demise of the U.S. as well….never seen a president doing that before, he should be honored like the liar/cheat/impeached Nixon with a fancy place for people to bemoan his greatness.
Remember, wrong is right, and right is wrong. Vote accordingly. LOOK…a squirrel!
“Long live Reagan’s policies of destruction..”
Ok…
“Remember, wrong is right, and right is wrong. Vote accordingly.”
So you don’t like Reagan’s policies. Then you should be partying for the past 1 1/2 years then.
Last I checked, CEO pay didn’t exactly fall back to Earth during the past 1 1/2 years.
I don’t like ANY of the presidents policies since JFK, who was the only one with any brass and ordered the U.S. Treasury to make REAL money, backed by silver….he was killed a few months later.
I’m not backing any side…left or right, I’m just calling out what has happened to the middle class of america. As with anything….moderation and balance are key. America went from loving democracy, to loving capitalism. This most assuredly is *not* what our founders created the country on.
Reagan was just the big win for Wall St. and corporate greed. The rest of the sock puppets merely fall in line with the wealthy, whose ultimate goal is globalization. Why just control america, when you can control the entire world?
America needs a revolution, either in the pools, or in the streets, but if nothing happens, america will be reduced to a third world nation of the have’s, and the have nots.
Welcome to Cali-Brazil…and welcome to Irvine, you don’t even have to gaze upon the corrugated tin roofs of our neighbors in Santa Ana. “Those people” are different. Thankfully, we don’t have to question our existence at the expense of others, we just consume.
Why are you insulting Brazil?
Both parties have a war on the middle class. The middle class is one of the legs of society to knock off for radical change. The other legs have been severely weaken and judicially legislated out of public life.
If Mortgage rates fall to 3.5 - 4 % as treasury bills creep lower and spreads on US mortgages lower that will be a major fly in the ointment.
I know this is the exact opposite of what you predicted, but you were already wrong about rates.
The interest rate cycle is long, and I have not been wrong about interest rates. Your contention that rates could fall to 3.5% to 4.0% is laughable. The Federal Funds rate is already zero, and it took massive intervention by the Federal Reserve to get rates to drop slightly below 5%.
If mortgage interest rates were to drop below 4%, it would mean there is no better investment alternative available providing a higher yield. That would not be a good sign for the economy; in fact, that would take a catastrophe worse than we already experienced.
What is laughable is that you could not even fathom that rates could be 4.75% in 2010.
You need to accept real possibilities. You have your blinders on and I don’t. Take a 5 minute study on Japan and then explain to me why 3.5 - 4 % rates are laughable.
Do you not see that the longer the fed rate is held at 0% the lower mortgage rates can go? Are you that blind that you call this laughable?
Is a 10 year t-bill rate of 2.5 - 2.8 % plausible?
Is a mortgage spread of 100 bps over the 10 year t-bill rate plausible?
Not only are they plausible, both have occured in real life.
The longer the fed rate is held at 0% the more likely this scenario becomes.
Where do I get in on investing in treasury bills at a 0% rate?
IrvineRenter-
I’m surprised to hear you defend your record of forecasting interest rates. In the comments section of your May 14, 2007 post “The Anatomy of a Credit Bubble” you said:
“Personally, I don’t think the FED will be able to impact mortgage interest rates much by lowering the FED funds rate…Plus, I don’t think the FED has much room to lower rates.”
Three years later the FED funds rate is at zero and mortgage rates are more than a full point lower than they were back then. Clearly, many of your predictions over the last several years have come to pass but the direction of interest rates isn’t one of them.
I admit, I did not foresee the FED lowing interest rates to zero. It had never happened before. Do you think they can go lower? I suppose I can’t rule out negative interest rates. Perhaps the Federal Reserve will pay banks to borrow money.
If you and others believe you can make money by betting that interest rates go lower, go ahead. I will pass on that trade.
I have been wrong about interest rates staying low as long as they have. Dead wrong.
And I would like to see how much money any of these folks have made on their predictions/forecasts. How many of them are buying treasuries or MBS right now? John Paulson is buying MBS, but he does put his money where his mouth is.
Why does the fed rate have to go lower for lower mortgage rates? It doesn’t.
Only the spread between the 10 year t-bill and the fed rate and/or the spread between mortgage rates and the 10 year t-bill need to go lower.
Why do you need to trade on this possibility. You don’t, but it’s wise to consider the possibility. You seem to be way to arrogant to make money.
Since the quote was from early 2007, let’s consider what happened in order to lower interest rates and lower spreads.
1. The Federal Funds rate was lowered to zero, something they have never done. They are giving away free money.
2. The GSEs were nationalized by the Federal Government, something they said they would not do for decades.
3. The GSEs and the FHA now control 96% of housing market finance, an unprecedented number.
4. The Federal Reserve directly purchased mortgage debt insured by the GSEs, also something that has never been done before.
5. The Federal Reserve directly purchased 10-year treasury notes to flatten the yield curve and lower spreads. Quantitative easing has not been attempted for decades.
While we are keeping score, I did not anticipate any of those extraordinary events either. Perhaps if I had, I might have speculated that interest rates could go down.
I never said the fed rate has to go lower for lower mortgage rates.
I never said that I had to trade on that possibility or that I did trade on it.
Are you as good of a judge of character as you are at making money on your predictions?
You are a known quantity, quit the BS.
Awgee, both of my responses were to IR who first claims he has been right about interest rates and then back tracks. I could see how you may think both were responding to you. There is 3 years of blog history on interest rates and shadow inventory, none of which has come true for Irvine.
Sorry, my bad.
Planet Reality,
You are right, and I am wrong. Interest rates will likely go down, and you will be able to sell your very wise 2009 home purchase for a huge profit. You are a genius who perfectly timed the bottom of the market through superior market information and careful analysis. You saw through the illusion of shadow inventory and recognized that lenders could easily manage distressed properties in a way that held up prices. Kudos to you.
I didn’t buy a house in 2009, I put my money back in the stock market. I’m willing to admit perfect timing takes some luck.
Interest rates (including mortgage rates) will likely fall further from current level only in the event of deflation taking a firm grip of US economy. If that happens the nominal rates will keep falling but REAL interest rates will actually rise when you fact in the deflator. That’s why during late 90’s - early 2000’s – when mortgage rate in Japan dropped to 2%, Japanese home owners still opted to pay off their loan as quickly as they could because the “real” interest rate they were paying was much higher.
With the sovereign debt blowup in Eurozone the probability of a wide spread deflation on a global scale has risen considerably. Collapse of EU economies killed any last hope for a recovery in Global demand.
Think China is going to revalue RMB (Yuan) when their largest export market is imploding?
Think Obama’s pledge to double US export in 5 years has any tie to the reality other than political rhetoric?
Think we can magically inflate our way out of the debt burden (by debasing US$) when everybody and his sister are doing the same thing in the so called “developed world”?
Think the structural high unemployment rate will go away in the next 10 years just because some politicians and economastrologists said so?
Do you honestly believe that ultra low interest rates will accompany deflation in house prices in prime US locations? Low interest rates would likely have little to no impact on areas like Riverside, that I can agree with. Areas like SF? Good luck with that theory.
” If we had nationalized the banks back in 2008, we would have eliminated the zombie banking problems.”
There was a Republican in the White House back in 2008, so that proposal was a complete non-starter. It wasn’t even on the table.
Assuming nationalizing the banks wasn’t an option, what would have been the second best choice? I personally believe what they did (more or less) was the second best choice (or should I say the least worst choice).
The Japanese faced this same dilemma in the early 90s, and they elected to have 15 years of steady deflation and a massive government debt. We are traveling the same road, but we somehow expect a different result.
Because our government officials know the only way to avoid a ‘Greece’ is to inflate our way out of this debt mess.
Actually Japanese did not elect to take the “deflationary” path. Truth be told they just did not know that the crackpot Keynesian and Monetarist snake oil prescribed by Western theorists would not work. Had Japanese gov’t known they were facing 2 decades (I am sure it will become lost 3 decades by 2019) of stag-deflation, they would have bitten the bullet and let the whole thing crash and burn and started anew. If you are familiar with Japanese culture you may notice this air of stoicism about their national character – the endurance and perseverance for pain and austerity of an entire population when facing harsh reality and crisis. If there is one country that is capable of quietly carrying out real austerity program without all the whining, it has to be Japan. The real tragedy of Japan is that Japanese had too much faith in the Western economic doctrines and tenaciously experimented with “deficit spending/zero interest rates/QE” cocktails for the last 20 years with disastrous results. Only in hindsight did they realize (I hope they finally did) these so called medicines only temporarily masked the symptoms but did nothing to cure their credit bubble disease.
The real tragedy of America is that we KNOW these policy tools would NOT work but still elect to apply them anyway. The whole debacle of Japan was such a recent precedence that we can’t just tell ourselves that we don’t’ know.
Japan revalued their currency and cause a train wreck in trade, housing, employment and a lost generation who were unable to find employment for 20 years. The US wanted PRC to repeat history, but the PRC leaders don’t want the instant retirement packages for causing an avoidable economic train wreck and for their relatives to receive a bill for the bullet.
A new garage door can instantly change the look of your home. Call now and pay no blah, blah ,blah.
You relate: (The banks) “are choosing squatting over foreclosure because when they foreclose, declining neighborhood values encourage too much strategic default. Of course, the squatting causes its own issues including moral hazard, but the banks are so desperate they are choosing moral hazard to stay alive—a zombie existence.”
The zombie existence comes by the FASB 157 entitlement, where banks value assets at manager’s estimate rather than at market.
Banks such as SunTrust Banks, Inc
http://finance.yahoo.com/q/bc?t=3m&s=STI&l=off&z=m&q=l&c=rww,kbe,iat,eufn
were capitalized with TARP funds; and as you relate they should have been nationalized.
So the question comes up, why were the banks not nationalized? The reason being, is that there was forward thinking on the part of Ben Bernanke and other central bankers, finance ministers and heads of state to effect a political and economic coup de etat by trading out Government Treasuries for toxic debt of all types under a global program of quantatative easing. And these leaders congratulated themselves at a May 5, 2009 Bilderberger Meeting as recorded by Elaine Meinel Supkis in article Bilderberger Secret Name List Leaked In Germany.
Astute investors would have gone long March through May 2009 in the financial sector with the ETF, RWW, which is the Ben Bernanke Portfolio, that is the financial institutions chosen to be the very foundation of the new and prevailing state corporate rule.
You relate: “I don’t see rates rising very high very fast either.” I see a black swan event, perhaps a failed Treaury auction, or war between Israel and Syria, where there will be a sudden evaporation of liquidity, and no money at the US Treasury for weeks. Then there will be an interest vacume, and real estate prices will collapse, and the zombie banks will be faced with a predicament because most of their assets, the US Treasuries received via TARP are on reserve at the FED receiving 0.2% interest, and these will plummet in value; and the market value of the banks will plummet resulting in the banks forcing the squatters out and commencing a leasing program. The new era of leasing will begin and the prior era of mortgage lending will cease.
“The taxpayers are absorbing bad bank debt through the TARP loan modification program. It is a direct transfer of wealth from Main Street to Wall Street.”
The question is how do the people stop this theft?
Same old fear mongering: If you don’t support __ it will lead to a) Great Depression II, b) crime in the streets, rapist in your homes, c) deaths due to fires d) no schools and JD’s…. Not very original, but seems to work almost every time.
Are you saying that what is happening in America is nothing more than fear mongering?
Yea, I guess the 20% unemployment, the absolute control of the country by monopolies and the direct transfer or wealth that IS happening, is nothing more than propaganda.
Those 600k mortgages…no worries, they are propaganda too, just ignore the prices, they aren’t real. Keep watching TV and using CREDIT!!!
Calpers just went to the CA state legislature with their hand out for $600 mil because Calpers does not have enough to make good on it’s pension obligations. It’s just fear mongering though.
CalPERS doesn’t have legislative oversight, so they don’t need to ask Ahnold or lawmakers for the 600mil. They just snap their fingers, and the money is theirs. Welcome to socialist Kalifornia.
That’s right, because thank God CalPers isn’t a state entity. The only reason CalPers goes to the state for money, is because the STATE voted to give those benefits RETROACTIVELY to your beloved Police State and Fireman. Don’t blame CalPers for what the state government CHOSE to do.
Everyone whining about pensions…..you didn’t hear that 20 years ago when the majority of corporations willingly provided pensions for their employees. That changed when good ol’boy Reagan got into office. Now you don’t get squat, and now the public is just demanding equal treatment to their public employees. WE don’t get squat, YOU don’t get squat. Most people don’t want to try and see that through de-regulation, the average americans quality of life plummeted.
Ask yourself if America was a economically better place 30 years ago. If corporations ruled the country in the 1800’s like they do now, black people would still be picking cotton. After all, a slave is a slave, but it works out MUCH better when you can have the entire workforce of america “pickin’ cotton”.
The fear mongering is if your don’t give the bailout will will have ____ or if your don’t vote for the tax increase will have ___. Now if you prevent wealth transfer, we will have ____ (fill in the fear triggers).
Same old, same old. WITH the bailout and WITH wealth transfer, we have 20% unemployment in the inland empire region. A jobless recovery elsewhere. If half that cash were giving to non-banking, non-corporate companies, there would be a bigger boost to the economy.
As I wrote, a return to feudalism. Only the names have changed. The wealth transfer fixes are like trying to cure food related diarrhea by giving lots of money to plumb the toilets to the vegetable gardens.
Alternative scenario…
Husband.. we have to sell the house, I can’t afford the payments..
Wife.. over my dead body
Instead of selling, husband stops making payments so the bank forecloses…
I know of at least three people in this situation, two of whom are in multimillion dollar properties
Why did they refinance to take money out?... who knows, medical bills, kids in college, business needs the capital, the usual speculation
How interesting, I know somebody in that exact situation, but it is not a mil $ property.
“Instead of selling, husband stops making payments so the bank forecloses…”
Im curious how the wife reacted to THAT?
Divorce?
Sometimes its best to cut your losses (dump the house, the wife/gf..etc), and RUN!
Looks like the futures market is in agreement with my original forecast that I have had since 2005 that the bottom would be in 2012.
http://www.doctorhousingbubble.com/futures-market-home-prices-real-estate-cme-case-shiller-may-2012/
Too bad they don’t mention Riverside/Inland Empire which will fall another 40%.
Predicting nominal prices? Why bother, what’s the point?
Predicting the weather is easier and more meaningful than predicting nominal prices.
I do not find it easy.
But, since you do, I imagine you make a lot of money with your insight.
Awgee, that blog post would be more meaningful to me if it said something like:
“Today it takes 10,000 bags of rice to buy a house in Los Angeles, in 2012 it will only take 9000 bags of rice.”
The nominal price losses predicted are a complete joke.
awgee.
Remember when Jim Cramer said that the only way to fix the Inland Empire housing situation was to plow the houses under ? The land is going to be worth more as farmland before all is said and done with the housing market out there.
Yeah… I remember that video. Cramer was pretty articulated (for him even!).
Oddly, he was right on the money. The land in Moreno Valley is likely worth more as a desert than a sea of McMansions.
“before all is said and done” is the key here. This thing is far from over.
I used to think that. But then I saw flippers making bank on what appeared to be completely hopeless properties. Let me give you an example of a house I thought would never be legally occupied again:
http://www.redfin.com/CA/Riverside/3680-Franklin-Ave-92507/home/4934263
This is a small (876 sq ft) old (built in 1910) house in a horrible part of town (Eastside, right across the street from Longfellow elementary for those of you familar with the area).
Sale history:
Oct 31, 2002 Sold (Public Records) $125,000
Jul 15, 2005 Sold (Public Records) $285,000 (what an idiot)
Then it was foreclosed and initally listed as an REO for $104,900 on Sept 17, 2008.
After TWELVE price reductions, it finally sold on April 30th, 2009 for $40,000 to a flipper, who fixed it up (mostly-still doesn’t have air conditioning)-and sold it for $100k six months later. Considering how small it is, the flipper’s total costs were probably on twenty grand or so. So, they made $40k on a $60k investment in six months. Beats the hell out of the stock market.
This is not an isolated example. Inexpensive houses that sell in poor condition for X will frequently sell for 2X in good condition.
I seriously doubt that Riverside will fall another 40%. Heck, prices here are up 10% from the absolute bottom already. We will see shortly, as inventory is rising slowly-today was the first day that the non-short sale non-under contract houses under $175k inventory on Redfin (the stat I track) was above 100 in months. Obviously, the end of the tax credits are the cause there, as well as the rise in prices. Of course, a year ago, that figure was well over 300, so we have a long way to go.
Gotta give credit where credit is due. Cramer was right about something.
I tried to respond, but got a spam message. Here goes again.
Gotta give credit where credit is due. Cramer was right about something.