Category Archives: Special Essays

To Catch a Falling Knife

January 1, 2008

The race to the bottom had begun, and house prices were dropping in thousands every week, even in Irvine. On one side, there was Irvine Renter writing blogs with titles like “Speculation or Investment”, profiling the properties with an asking price totally out of tune with the market, and graphs that showed the shadow inventory as well as the current REOs with no sign of bottoming till 2012. It was doom’s day. Great Housing Bubble was bursting. On the other side, there were Realtors, convincing you that this was the bottom, and Irvine will never see these prices again. Opportunity was knocking, according to them, and you would be a fool not to pick up the keys to open that door.

Amidst all this certainty, an impending recession and growing unemployment, there were a lot of houses on the market, and there were buyers and sellers, including us. We decided to catch the falling knife, and buy a house.

All we wanted was a small three bedroom/ two bathroom house with an attached garage in an excellent school district. We saw a lot of houses, and wrote a lot of offers. Most of them were rejected. Some got better offers than what we quoted, and some just waited for the right price. Some were short sales that took forever to materialize. Today I will profile a few houses that we had put offers on, with the price that we had offered.

1. 256 Monroe #50

Irvine CA 92602

Listing Price: $599,000

Our offer: $474,000

Community: Northwood

Area: 1411 SF

This house fit our criteria, and it was the first one that we saw. When our Realtor sensed that we had liked the house, she told us to put in an offer fast, because the house already had multiple offers. We ran a few calculations using Irvine Renter’s blogs, and decided to offer $474,000. She was miffed at us, and told us that she could not submit any offer below $500,000 since the house already had two offers above $500,000.

Public records show that the house was foreclosed at $417,600 by the Bank in July 2008, and resold at $448,000. Two days after our Realtor told us about the outstanding offers above $500,000, the listing price dropped to $480,000 proving that there weren’t any other offers.

Currently, 72 Monroe from the same neighborhood is on the market for $349,000.

446 Monroe was sold at $401,000 in September 2011.

Verdict: Falling knife.

2. 59 Bellevue

Irvine CA 92602

Listing Price: $564,900

Our offer: $525,000

Community: West Irvine

Area: 1600 SF

Our offer was rejected and public records show that the house was taken off the market.

Currently, 17 Bradford from the same neighborhood is on the market for $479,000.

9 Bellevue was sold at $465,000 in September 2011.

In the same neighborhood, 1 Bradford was in the market at $589,900 in 2008. We offered $525,000 and we were counter offered at $585,000. Eventually the house was sold at $570,000 in May 2008. The house was listed at $540,000 in June 2011 and sold at $495,000 in August 2011.

Verdict: Falling knife wrapped in silk

3. 10 Wedgewood

Irvine, CA 92620

Listing Price: $525,000

Our offer: $525,000

Community: Northwood

Area: 1561 SF

This was a lovely single family home with a “teaser price” of $525,000 to lure the buyers. It was everything that we looking in a house, but we were outbid as expected. It was a single family home. There was another house on Grape Arbor with a teaser price of $525,000 and people were faxing in their offers even before the house was opened for showing.

Public records show that the house was sold for $660,000 in June 2010.

Currently, the same house is listed in the market for $698,000.

Verdict: Would have, should have!

4. 11 Sagamore

Irvine CA 92602

Listing Price: ??

Our offer: $525,000

Community: West Irvine

Area: 1500 SF

I lost the MLS listing sheet for this one, and couldn’t trace the listing price online either. But I did find an email stating that we were counter offered at $545,000. I am assuming this was on the market for $550,000. I had also written a letter to the seller, asking him to reduce the price to $525,000 quoting Irvine Renter’s speculations about Irvine market. Looking back, I am thinking that the whole house hunting process must have been so frustrating that I wanted a house to move into, rather than this house. It can happen to any buyer- after you look for a few months, and find nothing worth your attention and money, frustration sets in and you start making mistakes.

Public records show that the house was sold for $491,104 in April 2009.

Currently, the 97 Sapphire with the same floor plan in the same neighborhood listed at $385,000.

Verdict: Phew! That was close. It was probably the sharpest knife that we were going to catch.

5. 801 Yorkshire

Irvine, CA 92620

Listing Price: $505,000

Our offer: $475,000

Community: Northwood

Area: 1481 SF

Public records show that the house was sold for $515,000 in December 2008.

Currently, the 135 Islington with the same floor plan in the same neighborhood sold at $489,000.

We had offered $475,000 for a similar condominium in the same neighborhood. Our offer wasn’t accepted then. The house was foreclosed at $495,000 in October 2009, and it was again relisted in 2011. The last sale was for $485,000 in August 2011.

Verdict: Blunt knife

6. 171 Lockford

Irvine CA 92602

Listing Price: (Feb 2008) $558,800

Our offer: $525,000

Community: Northpark

Area: 1752 SF

This house was a perfect size, and a perfect location- we were taken by the guard gated community. Every room was well laid out, and except for the fact that the entrance was through a flight of stairs, there was nothing to really point out to. But around the same time we found out about the lies our Realtor was feeding us, and decided to stop working with her. By the time we found a new Realtor and re-entered the market, this house was sold at $540,000 in August 2008.

117 Talmadge in the same neighborhood was sold at $450,000. It was a short sale.

3 bedroom/ 2.5 bath detached condos are on the market in the same community for around $535,000 now.

Verdict: Kool-aid happens, even from those who read IHB.

7. 9 Hollyhock

Irvine CA 92602

Listing Price: I lost the MLS sheet, but this was listed around $600,000.

Community: West Irvine

Area: 1700 SF

This was a short sale, and we offered $545,000 to the bank. The offer was rejected, and the house was foreclosed at $600,555 in July 2008. It was sold again in November 2008 at $569,000.

Verdict: Knife in a box.

After spending so much time touring at least a hundred houses in Irvine, we finally bought in November 2008. It was a short sale that took four months to get the bank approval. When it materialized, we had almost forgotten about the offer and moved on. It is not the perfect house, but so far, our house is the “bottom” for our neighborhood. In the little improvement that the market saw in 2010, one of our neighbors sold their house (same plan) for $65,000 more than the sold price of our house, and another short sale in 2011 dragged the appreciation by $30,000.

So do you maintain a list of homes that you put an offer on?

Did you buy or sell a house during 2008/2009?

Did you speculate, or did you invest?

Discuss below or at Talk Irvine.

American Ponzi: Redefining a cultural icon

A review of American Gothic themed cartoons by Irvine Renter.

Irvine Home Address … 27 OROVILLE Irvine, CA 92602

Resale Home Price …… $839,000

Bye, bye Miss American Pie

Drove my Chevy to the levee but the levee was dry

And them good old boys were drinking whiskey and rye

Singing this'll be the day that I die

This'll be the day that I die

Oh, and there we were all in one place

A generation lost in space

With no time left to start again

Don McLean — American Pie

My interest with American Gothic, a classic of American art, began when it was first proposed as the cover to The Great Housing Bubble. I liked the use of American Gothic because it has become a symbol of Mr. and Mrs. America. The work was painted in the Great Depression, which is part of the reference of the book title, but with some modernization we see how today's American family is deeply underwater on their mortgage — a mortgage that was their reservior of unlimited spending money. Parody's of American Gothic are fairly common, and I have assembled many pieces of parody art and added my own words to bring out the American Ponzi.

There are early housing bubble cartoons with Mr. and Mrs. America. And my own attempts to capture Mr. and Mrs. Ponzi.

Mr. and Mrs. America got caught up in an easy money lifestyle fueled by cheap debt.

Mr. and Mrs. America are facing low property values and mortgage payments much higher than staying in a rental.

Once they quit paying, they got to stay rent-free in their houses for a very long time.

Our society was changed forever.

What were we to do about the low house prices.

People want houses because they want to get rich owning them.

Nobody wanted to be left out.

Free money brings entitlement. People get because they deserve, not because they earn.

Many people found their poor decisions landed them in a difficult predicament.

And now I leave you with American Ponzi: Redefining a cultural icon.

If you bought a property in early 2008, do you have any reason to believe your house is worth more today?

Irvine Home Address … 27 OROVILLE Irvine, CA 92602

Resale Home Price … $839,000

Home Purchase Price … $807,000

Home Purchase Date …. 5/29/2008

Net Gain (Loss) ………. $(18,340)

Percent Change ………. -2.3%

Annual Appreciation … 1.5%

Cost of Ownership

————————————————-

$839,000 ………. Asking Price

$167,800 ………. 20% Down Conventional

5.07% …………… Mortgage Interest Rate

$671,200 ………. 30-Year Mortgage

$175,110 ………. Income Requirement

$3,632 ………. Monthly Mortgage Payment

$727 ………. Property Tax

$267 ………. Special Taxes and Levies (Mello Roos)

$140 ………. Homeowners Insurance

$145 ………. Homeowners Association Fees

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

$4,911 ………. Monthly Cash Outlays

-$891 ………. Tax Savings (% of Interest and Property Tax)

-$796 ………. Equity Hidden in Payment

$333 ………. Lost Income to Down Payment (net of taxes)

$105 ………. Maintenance and Replacement Reserves

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

$3,661 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$8,390 ………. Furnishing and Move In @1%

$8,390 ………. Closing Costs @1%

$6,712 ………… Interest Points @1% of Loan

$167,800 ………. Down Payment

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

$191,292 ………. Total Cash Costs

$56,100 ………… Emergency Cash Reserves

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

$247,392 ………. Total Savings Needed

Property Details for 27 OROVILLE Irvine, CA 92602

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 2,333 sq ft

($360 / sq ft)

Lot Size: 5,131 sq ft

Year Built: 2002

Days on Market: 98

Listing Updated: 40476

MLS Number: S632323

Property Type: Single Family, Residential

Community: Northpark

Tract: Mnd2

——————————————————————————

Exceptional 3 Bedrooms, 2.5 Baths home plus tech center. Located in the heart of resort-style community of Northpark on a cul-de-sac & interior tract location. Highlighted features: Oversized backyard with custom Outdoor fireplace, BBQ island, and Patio cover. Professionally Landscaped with citrus trees, roses, bougainvillea, cypress trees and Custom Hardscape. Elegant Maple Hardwood floors, Chef's Gourmet Kitchen features double ovens, built-in refrigerator, five burner cooktop, Granite kitchen counters and Large Center island. Maple raised panel Cabinets, Eat-in kitchen, Family room with hearth, Karastan designer carpet, Designer paint colors, Plantation shutters, Crown moulding, Arched doorways and Architectural windows throughout bringing in lots of natural light. 10' Ceilings make a dramatic Formal living and Dining room. Master Suite with walk-in closets, & French doors leading to balcony. Porte Cochere motor court driveway and two-car garage for extra parking. Excellent schools!

Go Ponzi, Young Debtor! How to Manage Your Finances The California Way

Have you ever borrowed money to pay off a creditor? If you have, you have participated in a debt Ponzi scheme. Do you manage your finances that way all the time? If so, you are a Ponzi.

Irvine Home Address … 453 EAST YALE Loop #34 Irvine, CA 92614

Resale Home Price …… $634,900

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Head like a hole.

Black as your soul.

I'd rather die than give you control.

Bow down before the one you serve.

You're going to get what you deserve.

Nine Inch Nails — Head Like A Hole

Borrowers bow down before their lenders. Borrowers give up control of their own lives when they take on debt as their time and effort go toward paying for the past rather than investing for the future. Borrowing is a weakness, a crushing weight, a debilitating pile of paper detailing a life of servitude in exchange for a borrower's entitlements.

Of course, most borrowers don't see it that way. They feel powerful. Borrowers believe they are rich because someone was willing to loan them money. The more money people borrow, the stronger they feel and the weaker they get. Ponzi Schemes of debt are the highest form of borrower sophistication and financial management. These structures take borrowers to the heights of borrower power and the depths of borrower weakness.

What is a Ponzi Scheme?

The first Ponzi Scheme was the brainchild of Charles Ponzi from whom we get the name. From Wikipedia:

A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going.

The term "Ponzi scheme" is a widely known description of any scam that pays early investors returns from the investments of later investors. He promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage. Ponzi was probably inspired by the scheme of William F. Miller, a Brooklyn bookkeeper who in 1899 used the same scheme to take in $1 million.

Ponzi Schemes remind us that greed is not good and that unfettered capitalism leads not to unlimited prosperity but to the creation of dangerous paper tigers.

Ponzi Schemes of debt

A Ponzi Scheme is any investment where the returns come not from the investment but from the capital contributions of new investors. If you change the terms slightly, a Ponzi Scheme is also any debt where the payment of debt comes not from wage income but from borrowed money from new lenders.

The Ponzi Scheme embedded in the housing bubble was relatively easy to spot from a lending perspective if lenders had bothered to look. Serial refinancing is a clear sign a borrower has gone Ponzi. A prudent lender would not extend credit to a borrower who increases their debt every year. That is an implosion waiting to happen. However, during the housing bubble, lenders did not care. They thought the risk was passed to someone else, so they turned a blind eye to the obvious and gave out free money.

Even now lenders seek to enable Ponzi borrowing. Lenders try to bring borrowers to a boiling point where the borrower is churned with fees and drained with interest. Borrowers learn to tread water in this boiling froth partially submerged for their entire working lives. It is hell on earth, in my opinion.

Going Ponzi

Going Ponzi often happens in stages. Ponzi is a slow seducer offering tempting pleasures; the devil in disguise. Each step into the trap of Ponzi offers rewards, but like the La Brea tar pits attracted predators to trapped prey, Ponzi puts a death grip on all who enter.

My revulsion toward debt comes from personal experience. I know the evils of debt first-hand.

I remember my first introduction to Ponzi. A brash young man in my real estate development program in college was a born entrepreneur. He mowed lawns for an entire summer to pay for an option contract on a piece of land for a small deal. He was the one who first suggested to me that I take the cash-advance checks from one credit card to pay another. I was floored. I was in my mid 20s, and it didn't occur to me that I could do that. Since it came from an guy I perceived to be a finance genius, I thought it was a great and sophisticated financial management tool. But I didn't jump in right away.

I remember my first taste of Ponzi. I was finishing my education when I embarked on a doomed entrepreneurial adventure. There was a six-month period where I was working many hours without pay as entrepreneurs do, and I didn't work enough paying hours to cover my costs. When I considered my dilemma, the correct decision was to work more paying hours, but the decision I made was to go Ponzi.

I remember my first comfort of Ponzi. That first month after going Ponzi, my stress level dropped significantly. I suddenly had all the money I needed to focus my efforts on starting a new business. Hell, I quit that stupid job at the computer lab. I had thousands of dollars before I reached my credit limit, and I wasn't falling behind that quickly; besides, I was going to be rich soon. I was very peaceful.

I remember my first feeling of the sophistication of Ponzi. After a few months of juggling credit card bills, I came across the advanced technique of low-interest balance transfers. Since I was now accumulating and storing debt like I used to accumulate and store savings, I needed some new tools. Storing my debt on low-interest credit cards seemed like wise financial management. It was wise. I was a genius. I was as sophisticated as those cool people on TV who pull out their American Dumbass cards.

I remember my first worry about Ponzi. As the pile of debt grew, I began to feel the weight of Ponzi. When I first saw the event horizon of the abyss — the credit limit — a small twinge of regret and worry signaled my upcoming doom. It was a minor worry — easy to ignore. A quick glance at the remaining credit limits on the six other credit cards showed me I had nothing to worry about.

I remember feeling pwned by Ponzi. For many years, I learned to dance with Ponzi. My debt service was a manageable amount of my income, but it was a significant percentage that needed to go out each month. What made matters worse, there wasn't much room in the budget to pay off the debt in a reasonable timeframe — or so I thought. I really didn't want to give up my entitlements. Since paying off Ponzi seemed hopeless and painful, like many others, I chose to dance in the debt meat grinder.

I remember choosing not to live Ponzi. At some level, I knew I was carrying a crushing weight, but denial prevented me from doing anything about it. A small voice inside of me cried out, "enough." I set my intention on purging Ponzi debt from my life. The decisions that followed both big and small were guided by my intention, and they lead me to a life without Ponzi debt.

I remember the freedom releasing Ponzi. I wish I had a great story of personal sacrifice, but I don't. I received outside help, and thanks to the housing bubble, I found good paying work that enabled me to pay off a few remaining debts. Fortunately, I was disciplined enough from my fear of Ponzi to stop using credit at all. It is a healthy fear I carry with me to this day. Once I had purged Ponzi debt from my life, I freed up all of my income. I was losing no energy to the past. It is a wonderful feeling of freedom I enjoy to this day.

The Ponzi limit

Debts are supposed to be paid off. People forget that simple fact and take on debt as if it is something to be endlessly serviced. Those that embrace the debt-service mentality try to surf on the edge of the abyss.

Treading financial water occurs is when the amount a borrower pays toward principal on debt is matched by taking on new debt. When the amount of new debt exceeds the amount debt was paid down, particularly if debt was used to pay debt, the borrower is Ponzi borrowing. There is a point beyond which a borrower cannot pay down debts without continued borrowing, a point where the debt service exceeds the ability to income to support it. This is the dilemma of insolvency, and the brink of insolvency is the Ponzi limit.

Unfortunately, the Ponzi limit is fluid. Many borrowers creep up on the Ponzi limit without knowing it. Lenders often extend credit to borrowers beyond their ability to service it putting the sum of all credit lines beyond the Ponzi limit. Once borrowers cross this unseen threshold, lenders begin to raise the borrower's interest rates and force them to Ponzi borrow in order to make ends meet. At that point, the borrower is insolvent, but ongoing Ponzi borrowing can mask that for a time.

Once borrowers have gone Ponzi, there is no hope — they can't borrow their way out of debt, and they can't afford to earn and pay their way out either. It is only a matter of time before insolvency leads to delinquency and forgiveness of debt usually through a bankruptcy.

The problem with the Great Housing Bubble is insolvency. Lenders underwrote too many loans for too much money. Borrowers everywhere are insolvent, and the main mechanism for curing real estate debt insolvency — foreclosure — is being shunned by our government, lenders and borrowers alike. Thus our government encourages useless loan modifications programs and lenders allow delinquent borrowers to squat. These are not solutions to the problem; these are avoidance mechanisms to prevent dealing with the problem. The debt must be purged.

The fate of Ponzis

The Ponzis have two options once they are insolvent: (1) find another borrower who will loan them money, or (2) experience the The Unceremonious Fall from Entitlement as their lifestyle expenses are reduced to their income level regardless of their needs and wants.

Ponzi borrowing is not sustainable. Once borrowers cross the Ponzi limit, they will financially implode, and any lenders who extend credit to those borrowers will lose their money. Since lenders have so much money tied up in the Ponzis right now, they are working to expand the Ponzi scheme by getting the government involved as the bagholder for the bank's Ponzi loans. The government and the central bank are the lenders and bagholders of last resort. It isn't very likely private lenders will step forward to extend Ponzi loans any time soon. That leaves only one option for the Ponzis….

Unless Ponzis are given more debt, they will all succumb to the weight of their obligations. As each one exhausts their credit lines, bank losses will mount, and pressures on capital reserves will increase. Lenders will remain cautious and zombie-like. Since the spending of the Ponzis has become such a large part of our local and national economy, we may experience a long period of deflation similar to Japan as the Ponzis collapse. As I see it, we will not experience a robust economic recovery as long as the Ponzis keep their debts and banks keep pretending these Ponzis will pay them back.

He got it all

When lenders believe they have no risk, It is astonishing the loans they will make. When a debtor continually refinances and removes any equity the moment it appears, that behavior would ordinarily be a red flag to a lender. Ponzi borrowing is easy to see, and the end result of Ponzi borrowing is always a flame out and default.

Lenders believed they had no risk. In the world of stupid lending, real estate would always go up in value in which case a default costs the lender nothing. Also, since many of these loans were underwritten for Wall Street mortgage-backed security pools sold off to collaterailized debt obligation funds, the originator had no real risk. Once lender no longer cared about risk, they began ignoring the obvious signs of Ponzi borrowing.

  • The owner of today's featured property purchased on 3/8/2000 for $353,000. He used a $282,400 first mortgage and a $70,600 down payment.
  • On 7/5/2001 he refinanced the first mortgage for $291,000.
  • On 3/20/2002 he obtained a $54,000 HELOC.
  • On 8/26/2002 he opened a $68,000 HELOC.
  • On 10/15/2002 re refinanced with a $300,000 first mortgage.
  • On 10/22/2002 he obtained a $28,000 HELOC.
  • On 3/20/2003 he refinanced with a $299,500 first mortgage.
  • On 7/15/2003 he opened a $95,500 HELOC.
  • On 5/12/2004 he obtained a HELOC for $200,000.
  • On 5/25/2005 he refinanced with a $442,000 first mortgage.
  • On 10/28/2005 he obtained a $245,000 HELOC.
  • Total property debt is $687,000.
  • Total mortgage equity withdrawal is $404,600

I am impressed at this borrower's ability to sell and resell his house to the bank for ever increasing values. He didn't leave anything on the table. When the prices crashed, the bank gave him peak value. Nice deal — for the borrower….

Some lender looked at this borrower's loan history and still gave this guy $687,000. After the first seven refinancings and a doubling of the original mortgage, isn't it pretty obvious that this borrower has gone Ponzi? Does it really take fancy studies done by lofty academics to see the obvious? Would you loan this guy money?

Irvine Home Address … 453 EAST YALE Loop #34 Irvine, CA 92614

Resale Home Price … $634,900

Home Purchase Price … $353,000

Home Purchase Date …. 3/8/2000

Net Gain (Loss) ………. $243,806

Percent Change ………. 79.9%

Annual Appreciation … 5.5%

Cost of Ownership

————————————————-

$634,900 ………. Asking Price

$126,980 ………. 20% Down Conventional

5.01% …………… Mortgage Interest Rate

$507,920 ………. 30-Year Mortgage

$131,612 ………. Income Requirement

$2,730 ………. Monthly Mortgage Payment

$550 ………. Property Tax

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

$53 ………. Homeowners Insurance

$429 ………. Homeowners Association Fees

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

$3,762 ………. Monthly Cash Outlays

-$467 ………. Tax Savings (% of Interest and Property Tax)

-$609 ………. Equity Hidden in Payment

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

$79 ………. Maintenance and Replacement Reserves

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

$3,012 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,349 ………. Furnishing and Move In @1%

$6,349 ………. Closing Costs @1%

$5,079 ………… Interest Points @1% of Loan

$126,980 ………. Down Payment

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

$144,757 ………. Total Cash Costs

$46,100 ………… Emergency Cash Reserves

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

$190,857 ………. Total Savings Needed

Property Details for 453 EAST YALE Loop #34 Irvine, CA 92614

——————————————————————————

Beds: 4

Baths: 3 baths

Home size: 2,298 sq ft

($276 / sq ft)

Lot Size: n/a

Year Built: 1984

Days on Market: 9

Listing Updated: 40309

MLS Number: K10050830

Property Type: Condominium, Residential

Tract: 0

——————————————————————————

Beautiful turnkey regular sale condo. Tile and carpet throughout. 2 fireplaces, den off of the kitchen, with a living room plus a formal dining area. Downstairs bedroom is perfect for library, office or media room. Master bedroom has upgraded walk-in closet and bathroom with full bath and shower. Upgraded patio with built in jacuzzi, landscaping and tile. Interior of home was painted throughout in 2008. Great home for entertaining.

How Gaming Interests Could Save the Las Vegas Housing Market, and Why They Should

Today, I am going to show in great detail how gaming interests in Las Vegas can save their local housing market and why they should do it.

Irvine Home Address … 5 LA SERENA #21 Irvine, CA 92612

Resale Home Price …… $439,900

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I'm standing in the middle of the desert

Waiting for my ship to come in

But now no joker, no jack, no king

Can take this loser hand

And make it win

I'm Leaving Las Vegas

Lights so bright

Palm sweat, blackjack

On a Saturday night

Leaving Las Vegas

Leaving for good, for good

I'm leaving for good

I'm leaving for good

Sheryl Crow — Leaving Las Vegas

I love Las Vegas. I have family there. It makes me sad to see what lenders did to the people there. I want to do something about it.

I want to save Las Vegas.

Attention Las Vegas Homeowners,

I will save your home. I have assembled a team of real estate super heroes. We are Superfund.

The market statistics are pretty grim. Your house is probably worth less than half of its peak value, and it will not be going up any time soon. What's worse, you can probably rent the house across the street for half of your mortgage payment. You are going to be underwater forever, and you are paying out hundreds or even thousands of dollars each month and getting little in return.

I suspect like most homeowners, you keep paying the mortgage, even when it is very painful, because you don't want to lose your home. My friends and I with Superfund are coming to town, and we want to save your home and clean up the mess that lenders made of your life.

Take a careful look at the chart above. Notice how stable house prices were in your market prior to the false financial innovations of the housing bubble. House prices did not go up for any fundamental reason, and the crash that has taken prices back down below the long-term support line is a direct result of lender's financial folly.

That $150,000 house you live in was never really worth $400,000. Lenders developed toxic loans like the Option ARM that gave borrowers like you the ability to borrow $400,000 with a payment that services a $150,000 loan. Borrowers took out these loans and temporarily inflated house prices. You and all your neighbors refinanced this equity from the inflated home values, and many of you spent it. Now, nearly everyone in town owes more money on their homes than they are worth, and very few of you can afford the payment on the huge debt.

Lenders created this mess, and now they want you to believe you have some moral obligation to pay back the loan they never should have given you — even if it harms your family in the process. This is wrong! You have a greater moral obligation to your family. The interest you pay each month over and above the cost of a comparable rental is money wasted — money that could have been spent to support your family. Lenders are asking you to pay for their mistakes, and if you say no, they have the audacity to try to make you feel guilty about it. Forget them. We have a better answer.

Cancel your mortgage contract

Did you know that you could cancel your mortgage contract? You can. It is a process called strategic default. You stop paying, and the lender gets to sell your house at auction for the repayment of the debt. There are consequences. Your credit will be harmed, and you may need to declare bankruptcy to fully extinguish the debt. Lenders will be hesitant to loan you money for a while, but if your work with Superfund, we may be able to keep you in your home.

Have any of you cancelled a cell phone contract? When you signed the contract for the service, your carrier sold you a phone for less than its actual cost, and they knew that you might cancel your contract before the two years was up. In the contract, the cell phone service provider spells out the costs and fees associated with paying off the phone and provisions for lost profits if you cancel early. In short, when you break your cell phone contract, you pay a fee, and then its over. You are not immoral if you cancel a cell phone contract, you are merely exercising a contractual right.

Similarly, when your lender gave you a loan, they knew you might not be able to pay them back. They made you sign a mortgage agreement that allows them to force the sale of your home at auction to get their money back. They estimated the costs of recovering the home and reselling it on the open market when they extended you the loan, and they only loaned you the amount they believed they could recover if you chose to cancel your contract. You are not immoral if you strategically default on a mortgage contract, you are merely exercising a contractual right.

Guilt and paying the mortgage

Have you ever wondered why people feel guilty about strategic default? Why do you feel guilty? Is it because you would be breaking your promise? What about the promises you made to your family? What necessities and small indulgences are you denying your family in order to pay that bloated mortgage? What is your duty to yourself and your family? Proverbs 22:7 "The rich rules over the poor, and the borrower is the slave of the lender." Have you sold your family into slavery?

Should you feel guilty about breaking a cell phone contract? If you examine the terms in the promissory note and mortgage arrangement, the lender is making a loan, and as a contingency in the event an borrower does not repay the loan, the lender has the right to force a public auction to resell the property to obtain their money. It's a contract, nothing more. The arrangement differs in no material way from breaking a cell phone contract.

Prior to the housing bubble, borrowers lost their homes if they didn't repay the debt. A borrower who was capable of making the payment but didn't was causing their family to lose their home. Losing the family home is arguably an immoral act, particularly if the borrower could keep the home and afford the payments. However, when the home is worth far less than the mortgage, and when comparable properties are for rent for far less than the mortgage payment, the painful alternative of losing the family home is better than a lifetime of crushing debt.

The morality of paying the mortgage to keep the family home is superceded by the greater moral imperative to provide a financial future for the family — a future free of debt.

The morality of the borrowers is not what should be questioned, it is the morality of the lenders. The Option ARM and other loan products put people into homes under terms they could not sustain. Lenders caused this pain. When lenders made these loans, they were being immoral. Strategic default balances the scales of justice and metes punishment to the lenders who deserve it.

Strategic default also serves an important purpose in the housing market. It is part of the checks and balances that ensure prices remain stable and affordable. if lenders did not fear strategic default, they would loan people very large sums of money, far in excess of their ability to repay. Whenever lenders loan more money than rent from the property could sustain, they greatly reduce affordability for potential homebuyers everywhere and inflate massive housing bubbles.

Without strategic default, lenders will inflate one massive housing bubble after another. They will continue to ruin lives everywhere. Strategic default is both moral and a market imperative.

Walk away from your mortgage now!

Discarding mortgage debt is actually quite easy: stop paying. Once you stop paying, your lender will contact you and try to get you to repay. If you play along, you can extend the process for a long time and stay in your home with no rent and no mortgage payment.

There are services devoted to helping people through the strategic default process. The service I recommend is YouWalkAway.com. They are not a scam like loan modification companies. At YouWalkAway.com when you sign up for their service, they will send you a package that takes you through the strategic default process with all the details of mortgage laws in your state. What you are really signing up for is the personal service of YouWalkAway.com's staff who will be there to explain your options, answer your questions, and find you the specialized help you need.

Wouldn't you like to have your own expert to guide you through the process? YouWalkAway.com is there to help.

Why not get a loan modification?

In the short term, if you go get a loan modification, you may be able to lower the payment enough to be competitive with a rental. However, loan modifications are a temporary fix, and the debt on the property is still double what it should be. The only way you are going to see a principal reduction is through a foreclosure. There is less opportunity for most owners in a loan modification to have equity because their loan balance is simply too high.

Why modify a $400,000 loan when you can wipe it out and buy the house back in a few years with a much smaller mortgage?

Superfund is the answer

If you strategically default it will adversely effect your FICO score which will make borrowing more expensive for a while, and after the foreclosure, you will need to wait two years before getting a new government insured loan to purchase a house. During that two years, you will need to start saving for a down payment as those are now required. These consequences will follow your decision to strategically default, and they cannot be avoided.

However, there is one particular consequence that Superfund may be able to remove: you may be able to stay in your house.

There are no guarantees. Superfund is not going to pay more than fair market value, and no more than what earns Superfund a solid return on investment. If you work with Superfund, we still may not be the high bidder. You may still have to move out. However with the lower cost structure and greater projected rent, Superfund will bid higher than the rational professionals, and most often that will be a successful acquisition. The real worry should not be other foreclosure auction bidders, the real concern is the behavior of your lender.

Lenders may opt for what is known as a vindictive foreclosure bid — lenders often bid above market value simply to punish borrowers. If your lender wants to, they can bid above market up to the face value of the loan in order to throw you out of your house. They don't benefit from this behavior financially as they will need to process your house and sell it in the resale market, but by punishing a random selection of underwater home owners, they hope to thwart Superfund and discourage strategic default.

Isn't taking chances what Las Vegas is about? Guaranteed, you can eliminate your mortgage debt through strategic default, and if you work with a Superfund, you have a good chance at staying in your home. How good are your odds? Next time your in a casino, place a chip on red or black at the roulette wheel. Imagine that if it comes up red, you must move out of your home, but if it comes up black, you get to stay. Superfund may not succeed, but if it does, you are back in the black. If it doesn't, you are still better off in a nearby rental than you are with a huge debt over your roof.

How does the deal work?

A representative of Superfund will collect information on the rental and resale market and prepare a report showing what you will need to pay in rent, and how much you will need to pay to repurchase your home from Superfund on a pre-determined schedule. Once you have agreed to these preliminary terms (they will be updated just prior to auction), the only remaining thing for you to do is stop paying your mortgage and wait for the foreclosure sale. Superfund recommends that you begin saving money for your down payment by putting aside the money you were spending on your mortgage.

You will be paying an above-market rent to stay in your home. Plus, you will agree to a 2% automatic yearly rental increase. The higher rent allows the Superfund to bid higher at auction. Your rent will still be much less expensive than the massive mortgage you are currently paying.

That house you have that is worth $150,000 and has a $400,000 mortgage. How would you like to buy it back in 5 years when your credit is better for $182,500?

Superfund will establish a baseline value from comparable resales on the date of the sale. The price increases 4% per year. There is one very important condition, the price actually paid for the property is the greater of the number in the chart above and appraised value at the time of sale. If there is another housing bubble, this right-to-repurchase can't be exercised like an option to a third party to profit from the difference. If you are unable to qualify for a loan and resale values are higher than the numbers above, the benefit of the irrational market exuberance falls to Superfund. If values never come back, you are certainly no worse off by renting.

The deal being offered to you by Superfund is much better than staying in your house and repaying the loan, and it is much better than a loan modification where you can temporarily afford the loan but can't later. Neither the bank nor the government is offering you the chance to drastically reduce your debt and stay in your home.

Superfund is.

Think about it. You have little to lose except your debt.

Interested in Superfund?

Are you interested in Superfund? So am I. I wish I had the backing of a couple hundred million dollars to make Superfund happen. Unfortunately, I don't.

If you like the idea, forward this post to anyone you know in the finance or gaming industries or anyone in Las Vegas. If the right people see this idea, we can make it happen. We can save your home!

Contact me: IrvineRenter [at] IrvineHousingBlog.com

The Big Las Vegas House Party

Attention casino owners,

This impacts you.

Home prices in Las Vegas doubled between 2003 and 2005. The entire city of Las Vegas, at least every homeowner there, saw hundreds of thousands of dollars flow on to their household balance sheets. Las Vegas is already home to every vice known to man — many of which you casino owners provide — so there was no way the citizens were going to resist a pile of free money even if they saw a reason to resist, which they didn't. You don't need to imagine what a party that must have been. Your casino income during that time is a testament to the power of unlimited borrowing on a home equity line of credit.

I shudder to think the money your casinos must have taken in from the local population. How many houses were spent there? Most of them, I imagine.

Gaming interests can save Las Vegas home debtors

I recently wrote about how hedge funds could keep original buyers in foreclosures. Check it out. You casino owners have access to enough capital to form a hedge fund to buy up properties at foreclosure auction and rent them to the former owners. You need to form your own Superfunds. Saving the Las Vegas housing market requires the concerted efforts of several large operators with access to cheap debt now readily available from Wall Street. Right now, you can earn a 6% to 8% return on money invested in your local housing market through collection of rents. If you can borrow for less — which most of you can — you can save the housing market and make a fortune on the recovery.

The financial returns to the Superfunds will be great. The current cashflow will be tremendous from these properties, and you casino owners will be housing your workers (and thereby capturing more of their income), and you will be freeing up more of their income to spend in the local economy — in your casinos.

Casino Superfunds are not about real estate

The Casino Superfund would certainly get good publicity; after all, your actions would be keeping your staff in their homes. Las Vegas workers would be very grateful and perhaps even more loyal. If my employer saved my home, I would be grateful and loyal. Wouldn't you? The good publicity aside, there is a more practical reason to run a debt-cleansing Superfund: the lenders are killing your business.

Where do you think all the money in Las Vegas is going right now? It is going to the banks through payments on the toxic mortgages that infest your town. These lenders came to your town with their slick suits and sales spiel and sucked the life blood out of everyone living there.

Think about how much money you casinos spend trying to capture customer dollars once they walk in the door. Everything you do is about capturing the customer and getting them to stay in your establishment until their wallet is empty. The lender lampreys have moved in on you. They are sucking the money out of the local economy that previously was spent in your casino.

Take a typical example. Lets say the typical borrower has a $3,000 house payment, and they can rent the same house for $1,500 a month — a common situation in the Las Vegas housing market. Each month that borrower makes that oversized payment, the local economy (read your casino) failed to make any of that $3,000. Now lets say you form a Superfund, buy the borrower's house and rent it back to them for $1,500 a month. Not just will you get the $1,500 they spend on rent, they will spend the other $1,500 in your casino.

So, casino owners, what would you rather have that $3,000 a month go to the lenders, or would you rather have it flow back to you? Multiply that by the number of underwater borrowers in your town, and the answer becomes apparent.

Now is the time for Casino Superfunds

This is not a high-risk venture or some flashy mega-resort, but this will have a much greater impact on life in Las Vegas. Buying properties for cash and holding them for cashflow is relatively safe. In fact, it is funds like Superfund that will come in an buy the distressed assets and form a durable market bottom. Las Vegas's housing market is a mess. But contained within this catastrophe is the conditions for a brighter tomorrow.

More can qualify for homeownership in Las Vegas

Housing affordability for Las Vegas is the best it has been in 30 years, California-based real estate consultant John Burns said Wednesday.

And Las Vegas home prices have never been more affordable in relation to income, correcting back to 2000 levels, said Burns, who has been studying the market since 1981.

Housing cost-to-income is 19 percent in Las Vegas, based on a median home price of $133,800 in April, John Burns Real Estate Consulting reported.

"A lot of cabdrivers and hotel workers below the median income have a chance to become homeowners for the first time in a long time," Burns said from Irvine, Calif. "I think they realize that for $700 a month, they can own a home in Las Vegas."

Housing is truly affordable in Las Vegas, arguably too affordable. Prices have overshot fundamentals.

Housing affordability has returned across the nation with most states in the 20 percent to 30 percent range of housing cost-to-income, according to Burns' report. The cheapest area is Saginaw, Mich., at 12 percent, followed by Pine Bluff, Ark., and Danville, Ill., at 13 percent.

The most expensive is San Francisco at 66 percent. Other California areas above 50 percent include Orange County, San Luis Obispo and Santa Cruz.

The only reason we pay so much for housing here in California is kool aid intoxication. People in Danville, Illinios, go to work, earn money, and take on mortgages to buy houses. It only costs them 13% of their income on average whereas it costs us here in Orange County well over 50%. Why are we putting so much more into housing? Because everyone in Orange County thinks the house has an endless ATM machine built in.

… Few homes under $300,000 could be found in Summerlin two years ago, including condos and townhouses, he said. Now that product is available at prices starting around $185,000, or $100 to $120 a square foot.

The better product was witheld to keep up pricing on the garbage. If Las Vegas is finally going through the desirable properties, they are approaching the bottom.

Last week, I discussed The Cash Value of Real Estate. Since prices are so low, as John Burns noted, cash investors like Superfund are coming in to buy properties. These investors are not speculating on the comeback of prices, they are buying because the great positive cashflow these properties offer. Many of these buyers know that prices will still go lower when the rest of Las Vegas's housing stock goes through foreclosure, but there is no need to time the bottom tick. Acquiring cashflow properties makes sense as long as the returns warrant the investment.

Superfund is hope

Las Vegas will experience a nearly complete turnover of its housing stock over the next several years. Housing prices may rebound from the lows, but they will not reach the peak for decades. Without Superfund, there is no way for borrowers to eliminate their toxic debts and stay in their family homes.

With Superfund, there is new hope. Viva Las Vegas!

Bought at the peak

The owners of today's featured property managed to buy at the peak. However, they did refinance. The first mortgage holder was Wells Fargo, and the second mortgage holder was Chase bank. Since the same bank did not hold both mortgages, the first lien holder — in this case Wells Fargo — had no problem blowing out the second lien holder in a foreclosure. The properties going to foreclosure now are the ones where the bank does not hold both the first and the second mortgage. Anyone who refinanced into two mortgages with the same bank has much more negotiating leverage than borrowers who used different banks. Borrowers with the same lender are also much more likely to be allowed to squat.

Wells Fargo bought this property for $489,000 on 4/26/2010. Despite the dropped bid, they grossly overpaid at auction, and now they have another REO to deal with.

Foreclosure Record

Recording Date: 01/07/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 12/23/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/08/2009

Document Type: Notice of Default

Irvine Home Address … 5 LA SERENA #21 Irvine, CA 92612

Resale Home Price … $439,900

Home Purchase Price … $669,000

Home Purchase Date …. 4/21/2006

Net Gain (Loss) ………. $(255,494)

Percent Change ………. -34.2%

Annual Appreciation … -9.7%

Cost of Ownership

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$439,900 ………. Asking Price

$15,397 ………. 3.5% Down FHA Financing

5.01% …………… Mortgage Interest Rate

$424,504 ………. 30-Year Mortgage

$91,189 ………. Income Requirement

$2,281 ………. Monthly Mortgage Payment

$381 ………. Property Tax

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

$37 ………. Homeowners Insurance

$377 ………. Homeowners Association Fees

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

$3,076 ………. Monthly Cash Outlays

-$377 ………. Tax Savings (% of Interest and Property Tax)

-$509 ………. Equity Hidden in Payment

$30 ………. Lost Income to Down Payment (net of taxes)

$55 ………. Maintenance and Replacement Reserves

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

$2,275 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$4,399 ………. Furnishing and Move In @1%

$4,399 ………. Closing Costs @1%

$4,245 ………… Interest Points @1% of Loan

$15,397 ………. Down Payment

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

$28,440 ………. Total Cash Costs

$34,800 ………… Emergency Cash Reserves

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

$63,240 ………. Total Savings Needed

Property Details for 5 LA SERENA #21 Irvine, CA 92612

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Beds: 3

Baths: 2 baths

Home size: 1,507 sq ft

($292 / sq ft)

Lot Size: n/a

Year Built: 1976

Days on Market: 8

Listing Updated: 40309

MLS Number: S616141

Property Type: Condominium, Residential

Tract: Jh

——————————————————————————

According to the listing agent, this listing is a bank owned (foreclosed) property.

Beautiful lower end unit on Rancho San Joaquin Golf Course, steps to the golf clubhouse and Assoc pool! Great golf course/city lights view! Unit has granite counters, wood shutters, fireplace, 3 Patio's, mirrored wardrobes,inside laundry, limestone flooring, 3rd bedroom converted to a den with wet bar and fridge, very close to UCI and the 405 freeway.