Irvine Housing Blog

“Or worse yet, perhaps underwater homeowners should keep paying their oversized mortgages and ‘take one for the team?”

I don’t understand this comment.  It sounds like continuing to pay a mortgage even if the home is underwater is a bad thing.  Why would this be bad?  Assuming the homeowner has the means to continue paying, doesn’t the homeowner have a contractual obligation to continue paying?

Am open to reasons as to why the homeowner shouldn’t pay but can think of any at the moment.

If there’s something obvious I’m missing, please excuse my ignorance.  New reader of IHB and the coffee hasn’t quite kicked in yet.

This subject has been beat to death here. Read the comments here for a starter:

http://www.irvinehousingblog.com/blog/comments/strategic-default-is-merely-collecting-on-home-price-protection-insura/

My HO and understanding of CA loan contract essential has out causes for the borrower and conquences for non-payment and for payment.  It states either paying or not paying, not the motive, reason, etc.

Non-payment, either deed of trust sale or judical foreclosure.  CA law has one action rule.  So the lender also has a menu of actions.  No arm breaking, kidnapping, etc.  It’s a contact and laws, not the law of the jungle.

I have no signed contract to support squatter, bailouts, etc.  I didn’t sign any document to that effect, but I’m forced to pay.
Free-rent for years, 2 trillion dollars for banksters’ bailout and bonus.

Was this all banksters incompetence or where the scenaris run through a risk-benefit, payoff analyses?  Or is this so old hat that it was SOP?

I don’t think the banksters are stupid.

The house is impressive.  It masterfully combines the feelings of sterile and filthy.

It’s a shame that the multiple families who make offers on this house don’t see the light and buy their Hole 16 gaudy Riverside McMansion.

Absence of Fear From June 2007.  Excerpt:
Our worst fears were recently confirmed in a study by First American Financial entitled, “First American Real Estate Solutions Report, Alt-A Credit—The Other Shoe Drops?” This report shows the following changes in underwriting standards between 1998 and 2006, with the major changes occurring in the last two or three years:

  * ARM % of originations rose from 0.7% to 69.5%
  * Negative Amortization rose from 0% to 42.2%
  * Interest Only rose from 0.1% to 35.6%
  * Silent Seconds rose from 0.1% to 38.7%
  * Low Documentation rose from 57% to 79.8%
  * FICO scores were essentially unchanged at an average of 706.

What is interesting is that the origination volumes for the last two years, when the most egregious deterioration in underwriting standards occurred, total more than the previous seven years of originations combined.

We were on the March 22 call with Fitch regarding the sub-prime securitization market’s difficulties. In their talk, they were highly confident regarding their models and their ratings. My associate asked several questions. “What are the key drivers of your rating model?” They responded, FICO scores and home price appreciation (HPA) of low single digit (LSD) or mid single digit (MSD), as HPA has been for the past 50 years. My associate then asked, “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. He then asked, “With 2% depreciation, how far up the rating’s scale would it harm?” They responded that it might go as high as the AA or AAA tranches.

Source:
CFA SOCIETY OF CHICAGO SPEECH – June 28, 2007

Absence of Fear, by Robert L. Rodriguez, CFA

Underwriting standards and the assumption of home price appreciation were rampant and few, this guy being one,  were considering their implications.

IR, don’t forget the recent Fannie Mae quarterly bailout of $8.4B. And don’t forget Timmah’s Treasury has given the GSEs a blank check now. The people will be on the hook for unlimited amounts now. This is wholesale theft of taxpayer money to fill the pockets of banks and wallstreet. When will America wake up and smell the BS?

http://www.examiner.com/a-2621863~Fannie_Mae_seeks__8_4B_in_aid_after_1Q_loss.html

Have you ever wondered about the peculiar nature of these “quasi-gov’t entities” (GSE’s)? When the time is good and market’s booming, GSE’s move to the “private” side and behave like typical profit-making financial institutions and facilitate the market expansion and gains for financial firms. As soon as the market turns south with mounting losses, these same GSE’s all of a sudden switch the side and morph into public entities to help socialize the losses. Only the most perverse form of capitalism (or socialism) could come up with such an insane design - while under the disguise of “helping” home buyers and expanding RE market, really aims at screwing prudent middle class American families. And I have to say that so far they have been right on target.

Can anybody give me the name of ONE industry or sector in Irvine (or OC in general) that will be bullet-proof for the next 10-15 years, that is, immune from the increasing pressure of competition, industry self-implosion, and employment degradation as a result of outsourcing and gov’t budget cut? IT? Telecom? Financial Services? RE? Retail? Defense Industry? Education? Health Care? Health Care might be a toss up. Education – even UCI is facing funding cut from the state.

If most of the existing economic drivers for higher wages and employment are either stagnant or in decline, what might be the new industries that will provide the boon necessary for future growth in the area? And what does Irvine (or OC or California) has to offer that will be conducive to attract large employers to the area? High taxes? High cost of living? Prohibitive housing price? Good weather?

We all know the temporary forces that have supported Irvine and better parts of the OC RE market – gov’t subsidy, idiotic policies to fight foreclosures, FCB’s, low rates, supply restriction … But these are temporary props that will go away sooner or later. No serious buyers or investors would base their long term decision on these unsustainable factors.

I have seen increasing number of bullish comments on this blog and elsewhere about the invincible future of Irvine/OC RE market. I am scratching my head trying to figure out what I might be missing here. Is this wide spread optimism based on some secrete knowledge that I am not privy to or just blind faith that Irvine market will do well in 5 or 10 years just because it is doing well now?

I think the Fannie/Freddie (F&F) losses will get recouped by the taxpayers, but over a pretty long time horizon. Spread lenders, almost no matter how bad off they are, can always fill a hole, the only issue being how long it takes. And it’s going to take F&F a long time. To use an example, lets say that F&F charge off 10% of their portfolio (which would be a big number). Further, let’s say the average yield on the remaining 90% of their book is 5.5% and their funding costs (now borrowing at govt rates) are 2.5%. Add in 100 bps of operating expenses and you have a 200 bp spread. Here, it takes F&F 5.5 years to fill its hole (from losses) with spread income from the performing portfolio. If you assume that F&F’s losses are going to be 20% of its book, it takes them 11 years to fill the hole, and so on. So, while we’re hearing about the big “losses” coming out of F&F - which are real losses - we will get that money back… eventually… but it could be many years. We the taxpayers will lose in real (that is, inflation-adjusted) terms for sure, but we’ll get back the nominal dollars.

One can use the link to access the John Clapp report in the February 3, 2010, MortgageOrb.com article FHFA Acting Director Provides GSE Update where the financial facts about the Fannie Mae and Freddie Mac operations under US Treasury conservatorship are provided. Mr Clapp relates that the Obama administration surprised the mortgage industry with its 2011 federal budget, which included only a single sentence pertaining to the GSEs. Beginning last year, administration officials repeatedly stated that the timing of the budget’s release would coincide with a proposed framework for Fannie Mae and Freddie Mac going forward. The budget’s lone mention of the GSEs, however, stated that the administration would continue to monitor the situation closely and provide updates on considerations for longer-term reform. Separately, Department of Housing and Urban Development Secretary Shaun Donovan told reporters Monday that a plan will be unveiled “shortly.”

When the GSEs were taken under US Government control, mortgage finance was formally nationalized, a bloodless coup d’etat was effected; and state-corporate rule commenced; this is otherwise known as state corporatism. Profits were privatized to the banks and investors; losses and risks socialized to the public.

I “hope” that Freddie Mac and Fannie Mae do not have toxic assets that they keep off balance sheet in special investment vehicles, SIVs.

Yes, it is as you relate my potential losses are unlimited.

Furthermore, it makes an inquiring mind wonder just how far and how agressively, the Treasury and the owners of the debt, will pursue their rights for satisfaction of payment of the debt.

“In such circumstances, strategic default is what is best for the borrower’s family ...”

Good tactics can not fix bad strategy.

I have seen a lot of strategic defaulters in the past. The default was temporary relief. Most of defaulters were doomed to fail again and agian.

Bad strategy is ticking bomb set to explode. Just give it some time. Another day will bring another miscalculation.

The best for the borrower’s family is to learn from thier mistakes, but they want immediate money instead of knowledge.

I think people who can continue to pay their mortgage should continue to do so. No one really knows how real estate WILL play out in the long term. If someone allows foreclosure now, he/she/she might not be able to buy a property for at least few years. I went throught the downturn of the 1990’s and considered turning the key to my condo over to the bank but decided against it because I could still afford the payment even though I was about 25% upside down. A friend of mine let his condo go to the bank but he missed the appreciation and recoup of losses of the late 90’s and early 2000’s; this is not to mention the housing bubble that later ensued.

Gretchen Morgensen of the New York Times writes an insightful article Ignoring The Elephant In The Bailout with helpful facts on Fannie Mae and Freddie Mac.