Reverse Liar Loans

Liar — Rollins Band

Wonder why things are going so well
You want to know why?

cause Im a liar, yeah, Im a liar

Remember all the fun speculators had with stated-income loans? Loan documentation is
usually a routine part of obtaining financing. Lenders ordinarily
require a borrower to provide documentation proving income, assets and
debt. However, during the final stages of the Great Housing Bubble,
loan documentation was seen as an unnecessary barrier to completing
more transactions, and loan programs which circumvented normal
documentation procedures flourished. In short, liar loans were everywhere.

So are these people getting their comeuppance? No. In fact, they are getting a second chance, and this time they get to lie about income in the other direction. Let me explain.

So you stagger back home and wait for nothing
But the solitary refinement of your room spits you back onto the streets

Everyone is doing loan modifications now: Citibank, the GSEs, everyone. They must. You saw in yesterday’s post how destructive the upcoming wave of ARM resets is going to be, and the lenders know this. They will do every loan workout they can to avoid more foreclosures. Part of the loan workout requires the borrower to demonstrate they are unable to make payments, and their income is going to be used to figure out how much principal reduction and other loan terms the bank will adjust to accommodate them. I think you can see where this is going… All the people who exaggerated their incomes to obtain more house than they can afford, are now trying to look as poor as Church mice to get the biggest mortgage principal reduction they can: the reverse liar loan. They lied to get in, now they get to lie in order to keep it. We have a great system in place, don’t you think?

The problem is even bigger than that. The whole loan modification process has built-in moral hazard that is going to burn lenders on a grand scale. I received an email from a realtor friend (yes, some realtors actually like me) that had this story to tell:

friend of mine from college purchased a new home in Victorville for
around $450,000. At the same time many others in his neighborhood
purchased as well. My friend and his neighbor were both paying their
mortgage. However, his neighbor called his mortgage company requesting
a loan modification. The mortgage company explained that he is not in
default and therefore they will not complete a loan modification. My
friend’s neighbor decided to quit paying his mortgage while he
continued to make payments on his four-wheeler, quad, and other toys
and make trips to the desert weekly. He called the mortgage company
back a couple of months later and received a principle reduction of
circa $100,000. My friend, a very smart person, math thesis of the year
award winner in college, with a masters degree in math, vice principle
at a high school making excellent money, expresses to his neighbor that
he is upset that his home is worth $100,000 less than he paid for it,
however his neighbor then explains that he received a $100,000
principle write down by not paying his mortgage and negotiating a loan
modification. Stopping by his house a few weeks ago on the way back
from Las Vegas my friend explained this to me and said he thinks that
he is going to get a modification as well.

These loan modifications are going to cause a chain reaction through entire neighborhoods and communities. Are you going to be the only one in your neighborhood who didn’t quit making payments in order to get a loan modification? It is really that simple: stop making payments, and you will get a loan modification. Keep making payments, and you will not.

What is the morality of this? Is this wrong? The holder of your mortgage is offering to give you a great deal of free money if you stop making payments. You are not forcing them; they are freely offering the loan modifications to anyone who qualifies. By not making a few payments, you qualify. If Uncle Sam said to you that you must pay your full tax bill by April 15th, but if you are 90 days late, we will knock 1/3 off. What would you do? Is it immoral to take the discount?

The government’s and the lender’s response to this financial crisis is evolving from an irritating curiosity to a complete WTF-are-you-doing series of terrible missteps. How much more wrong could they be? How much more damage are they going to do by trying to solve the problem? How much is this going to end up costing the rest of us? Is this where our $700,000,000,000 is going? Let them eat cake.

Today’s featured property is a typical Irvine rollback. The owner bought at the peak with an Option ARM, and now he is giving up and letting the property go. Perhaps he should just do a loan modification and get $200,000 knocked off his mortgage…

4471 Elm Tree Ln Kitchen

Asking Price: $799,000IrvineRenter

Income Requirement: $199,750

Downpayment Needed: $159,800

Monthly Equity Burn: $6,658

Purchase Price: $950,000

Purchase Date: 9/8/2005

Address: 4471 Elm Tree Lane, Irvine, CA 92612

Beds: 4
Baths: 3
Sq. Ft.: 2,643
$/Sq. Ft.: $302
Lot Size: 5,500

Sq. Ft.

Property Type: Single Family Residence
Style: Contemporary
Year Built: 1970
Stories: 2
Area: University Park
County: Orange
MLS#: S539024
Source: SoCalMLS
Status: Active
On Redfin: 128 days

Unsold in 90+ days

Located in the desirable University Park community of Irvine,this
beautiful 4 bedroom, 3 bath family home combines a comfortable classic
exterior with an updated contemporary interior. The totally remodeled
kitchen (completed in 2007) includes custom maple cabinets w/ multiple
pull-outs, granite counter tops and back splash on a center bar with an
over-hang for casual dining, stainless steel counter tops w/ built-in
commercial style sink, DCS stainless steel 48′ natural gas range,
double oven and an 1800-cfm stainless steel hood. The family room is
wired for surround sound, has a beverage service area, recessed
lighting and lots of storage space. The formal living room has vaulted
ceilings, built -in book shelf, pre-wired speaker nooks and a marble
fireplace. Add to that a new Trane central air-conditioning system with
dual drives for energy efficiency and a new Trane furnace with a fully
programable thermostat with touchscreen controls.

I really don’t know what these owners are thinking. This property was originally listed in July for $799,000, and then it was pulled from the market. It was relisted at a higher price in September (must have been that huge rally we had), and now they have lowered the price back to the original asking price. It is still too high. If it was a reasonable price, they would have had offers months ago. I guess losing a lot of money has affected their judgment.

This property was purchased at 9/8/2005 for $950,000. The owner used an Option ARM for $712,500, a HELOC for $100,000, and a downpayment of $137,500. They then spent a lot of money renovating the property and got another HELOC for $143,000 (They probably paid off the other one). The total debt on the property is $855,500 assuming the final HELOC is fully tapped. There is a good chance it isn’t. This seller may be in a holding pattern at $800,000 because that is what they need to pay off the loans. They know their downpayment is gone. All that work, and they get to lose all their money. Bummer.


You think youre going to live your life alone
In darkness and seclusion… yeah, I know
Youve been out there and tried to mix with those animals
And it just left you full of humiliated confusion
So you stagger back home and wait for nothing
But the solitary refinement of your room spits you back onto the streets
And now youre desperate and in need of human contact
And then you meet me and yur whole world changes
Because everything I say is everything youve ever wanted to hear
So you drop all you defenses, Im perfect in every way
cause I make you feel so strong and so powerfull inside
You feel so lucky
But your ego obscures reality that you never bothered to
Wonder why things are going so well
You want to know why?

cause Im a liar, yeah, Im a liar
Ill tear (rip) your mind up, Ill burn your soul
Ill turn you into me, Ill turn you into me
cause Im a liar, a liar, a liar, a liar…

Liar — Rollins Band

83 thoughts on “Reverse Liar Loans

  1. granite

    No bummer yesterday evening for all the IHBers. What a great group to share stories with. I kept thinking what a shame it is the media is missing our side of the story.

    For those who couldn’t attend the book is well worth the read, as it applies to a lot more than Irvine.

    Everybody missed meeting Kirk and AZDavid.

    1. AZDavidPhx


      I considered making the 5 hour drive.

      Unfortunately, this was a very busy week.

      Maybe next time.

        1. wackytimes

          For those of us who couldn’t make the big event last night, and I’m sure there were many, do you have another signing scheduled, yet?

          1. IrvineRenter

            We haven’t scheduled on yet, but I think we are going to try to have them monthly. We will try to schedule one before Christmas, depending on availability of the venue.

      1. MalibuRenter

        I came from Malibu and people thought it was a bit of a drive. I’m sure Phoenix would be regarded as really impressive.

        It was good to meet a batch of people, none of whom looked like the avatars/pictures they use in the forums.

    2. AZDavidPhx

      That’s too funny, thanks.

      If I did, I was planning on saying that my name was “John” just incase a hater showed up. 🙂

      Unfortunately, this week I am running around like a chicken with its head cut off.

      I’m sure there will be more though.

    3. tdog

      I think the media is catching on according to this article on msn homeowners are in “denial”. I seem to recall reading a blog about this here I was looking for it an could not find it. Blog was about the Seven Cycles right? Are we in the denial stage?
      Can someone post a link to this again I want to view it again. Thanks


    4. TurtleRidgeRenter

      Last night’s book signing was the most fun Mr. TurtleRidgeRenter and I have had in a long time. It was wonderful meeting so many of the good people who post here, and in real life everyone was exactly as I imagined them to be. Of course our author, IrvineRenter is an incredibly warm and gracious person.

      We wanted to stay longer, but Mr. TurtleRidgeRenter had to catch a 7am flight today. We both look forward to more meet-ups with this intelligent and witty group of people.

  2. maureen

    IR, It was great meeting you and all the people from IHB. I had a great time! Jeff Collins from the OC register was floating around and talking with some of us, so hopefully more of our point of view might be presented during this “housing crisis”. For many of us the crisis was this fake boom that caused housing prices to become unaffordable.
    This bailout plan is beyond crazy! Maybe I should prepare my middle school students to adjust to this new world. I know! I will make an announcement to them that any student that does not turn in an assgnment will “qualify” for an A+ if they turn in 50% of that assignment the next day. As for those that turned in their assignments complete and on time, well they will recieve the traditional grading system. Also – let’s stop giving scholarships to A/B students. We need to be rewarding D/F students with these prizes.

    1. Alan

      Of course those students who find themselves failing your class must be able to walk away from it without penalty. Or at least, after waiting 5 years or so, they get treated as though they passed.

      Those who still bother to pass under the old, quaint system can learn how their study and work is devalued by being grouped indiscriminately with those who pass using the new system.

      We just need to make sure that all science, engineering, manufacturing jobs are off-shored before these students hit the work force. Hmmm, actually pilots, drivers, cooks, … too. The list is getting long.

  3. cara

    I’m pretty sure it’s not that easy.

    The most recent bailouts for homeowners (a) emphasize principal forebearance or deferral not forgiveness, which means all the “equity sharing” goes to the lender, and (b) require proof of change in income or other extenuating circumstances.

    While your 3rd hand story undoubtedly has some truth in it somewhere, I doubt it’s that cut and dry and easy to do.

    Perhaps all these calls to become 90 days late and recieve a free pony will actually be the catalyst for the next major wave of foreclosures when these people find that their new crappy credit rating made their credit card interest leap by a factor of 3 or more, and they can no longer transfer that debt to the house, and they can’t afford the accumulation of late fees associated with the mortgage. And lenders are left with no choice but to foreclose on some of these posers who are intentionally deliquent or lied in the first place, both of which are breaches of contract.

    It will be interesting to see, if the data can be compiled, what percentage of new delinquencies are “cured” with loan modifications. And what percentage just dug themselves a bigger hole.

    1. Perspective

      It sounds too easy, but it may be so. The qualifications being thrown around currently are 90 days DQ and stretched (i.e. housing DTI greater than 38%). When you consider that most Californians who bought or cashed-out equity in the past few years took on steep DTIs, then all it would take is three missed payments.

      Any family who “qualifies” for this will still struggle and may not even be better off.

      1. Shevy

        First- IrvineRenter- Thanks for shedding light on this issue.

        I have shared a number of stories with IrvineRenter that were shared with me by different people. I believe that stories like this are the exception and not the rule. Nevertheless, good news travels fast bad news travels faster. If even 1/10 people are able to get mods like this and they tell their friends there is a good chance that at least 4 more bad loans are created, regardless if they end up getting a favorable mod or not. What affect will this have on our economy? I cannot imagine it will be favorable. Moreover, most of the companies specializing in mods were the brokers that mastered the art of the liar loan to begin with. If they can master getting those loans through the will not have any trouble showing that people make as little as possible. Although it is possible that my friend was misled regarding how fantastic the modification process is, he still believes it, and so will others.

        I have another friend that owns a mortgage company and has partnered with a law firm. His stories regarding the types of mods they are doing are are more egregious and unbelievabe.

        IrvineRenter told me about a real estate agent in San Diego that purchased her home for $200,000, pulled $400,000 equity out, hasn’t paid her mortgage in months as is being foreclosed on but not without a fight and the support of community groups fighting to keep her in the home. Some would consider her actions bank robbery; while her supporters have a different opinion. What about the millionaire living in Newport Beach that a friend of mine whose company completed 400 loan modifications last month told me about? The millionaire stopped paying his mortgage because he wanted a modification, saw others doing it, and could use the extra cash each month. What about the homeowner in Costa Mesa that realized they could not afford a $642,000 mortgage and opted for the short sale? Instead of a short sale Countrywide rejected a short sale offer of $450,000 and elected to reduce their principle to $382,000. There are hundreds of stories like this and their will be hundreds of thousands more if something is not done about this issue.

        I write about this on my blog at;

        1. Perspective

          Speaking of brokers teaming-up with attorneys, I know a couple of attorneys who are doing this “on the side.” There are also numerous job postings on Craigslist and the Daily Journal (legal site) for “loan modification attorneys.”

          I’m guessing it’s all pretty shady. The slimy brokers have found another way to squeeze cash from people and they’re searching for attorneys to provide some sort of legitimacy to their business.

          1. Shevy

            The brokers charge between $3000- $5000 for this service. It’s not a tough sell they tell the borrower to send their next to mortgage payments to the attorney instead of the bank. Pretty easy. The sad part is that there are some people out there that really did get tricked by the lenders and this makes it even more difficult to distinguish between those that were lied to and those that only say they were lied to for a bail out.

        2. stepping_up

          I’m not familiar with the Costa Mesa mod, but when was this one done? I’m just wondering if it was somewhat recently, then perhaps Countrywide did this because the lawsuit might have made things worse for them if they didn’t?

          1. Shevy

            Another agent in my office told me about this last week— and it happend last week. He speculated that it was a result of the law suit and/or the bail out. He speculated that the goverment has agreed to buy the loans at a certain percentage of face value and based upon that they recieved more than than if they would have accepted the short sale at $450,000, however, it seems that what Paulson said yesterday regarding buying toxic assets contradicts that. Therefore, it must have something to do with the lawsuit? It would be speculation for me to say, however, I would be interested to find out.

        3. Major Schadenfreude

          “Moreover, most of the companies specializing in mods were the brokers that mastered the art of the liar loan to begin with”

          I’ve heard that they reside in the Second Circle of Hell.

  4. awgee

    Maybe it just seems like a couple of years, but for a couple of years, I keep hearing how loan mods are less expensive than foreclosures and how stupid the lenders are for not working with the borrowers. And every time, I point out that moral hazard leads to financial cost, or in other words, loan mods will cost more in the long run because when folks hear that their neighbor got a loan mod, they will stop paying on their mortgage. And the banks know this. This is not the first time for the banks. The banks have written policies which explain why they are extremely adverse to loan mods. Are you listening Fair Economist?

    And is my habit, a point made as a question: just how many folks do you think are going to go for a loan mod if the principal and interest is just tacked on to the back end and the bank will benefit from any profit?

  5. stepping_up

    I was under the impression that one of the criteria for qualifying for a mod is that the borrower must not have lied on their loan application.

    I had a roommate with her real estate and mortgage broker’s licenses. She wasn’t the sharpest tool in the shed, so she had me write a letter to a seller requesting a credit for some repairs that came up in the inspection. Well, then I look at what the guy was buying, a $750K duplex in lakewood and he was a cook. She did a liar’s loan for him.

    So now if he goes back and asks for a mod and if he’s at the same job, isn’t it going to be obvious that he lied on the loan app and be disqualified from the mod program? Or, do they just blame it on the mortgage person? Any chance someone would track my former roommate down for fraud in that case?

    1. IrvineRenter

      I wonder who would have the burden of proof as to whether or not the original loan application was fraudulent? The borrower could claim the sideline business they had that provided the extra income failed recently. Now their income is, well, their real income. There would be some applicants for whom this is the truth. And what about the guy who has taken what is likely a temporary pay cut during the recession? Should he be able to get a loan mod based on having 30% less income? When the economy recovers and his salary recovers, he would be getting quite a windfall.

      There are no easy answers.

      1. stepping_up

        This was in ’06 at the very height of the crazy loans so he wasn’t even claiming a side business. She literally just put down his occupation as cook with some outrageous salary. I was thinking “who in the world is going to believe this?” Countrywide did.

        Couldn’t they ask for tax returns for the year the loan was originated? I’m sure these people weren’t claiming the same income on their tax returns as they were on their loan apps.

        But you’re right… the borrower could just say they didn’t know. On one of the This American Life’s a few months back they did a program on the mortgage scandals and there was this one guy who was shocked to see the real loan docs two years later when he was severely behind on his payments. He told the mortgage broker his real income and the broker put something else in and put him into a loan that was worse for the buyer but made him a ton more money.

      2. phil

        Applying this question to the Vice Principal scenario, it sounds like he would have to quit his job in order for the bank to agree to a lower amount. Clearly they are going to want to see the w-2’s and short of walking away from that job and becoming a burger flipper, I don’t see how that can work. This may have made sense at a time where jobs were plentiful, but it seems like madness to give up a good job in today’s climate.

        1. IrvineRenter

          I doubt anyone with a good job would leave just for the reduction, but I know many people right now that are underemployed because of the economy. Those are the people who could get loan mods based on their current income and receive a windfall when things pick up again.

        2. Shevy

          Not necessarily. If you were told that if you could show less income you could have $100,000 written off of your principle would it be hard to stop coaching the football team? Have your wife quit working her part time job until you go the mod? Maybe produce your true tax returns if your self employed?

    2. Walter

      Bottom line is the lender does not want yet another foreclosure. If they think you will be able to keep making the payments, I am sure they will look the other direction when it comes to the application.

      In addition, the broker is not the underwriter, the lender is. Shouldn’t the underwriter bear some of the responsibility for the quality of the information on the application. So to a certain extent, the lender is forgiving themselves for looking the other direction during the approval process.

      Leaving them with what is less of a train wreak: foreclosure (certain big loss) or knocking down the loan with a quiet 2nd trust deed and hope they will get their money in the end.

      Will they hunt down your friend? I guess it is a remote possibility. But so many people were involved at every step of the process that I doubt they will bother except for the most extreme cases.

    3. Shevy

      My understanding is that would give them a better chance of a favorable modification. The cook will plead ignorance and that he was just doing what the broker told him to do. There is so much fraud going on that the government does not have time to look at 2% of it. Nevertheless, these mods are going to multiply the fruad and allow many of those practicing fraudlent behavior to continue benefiting from it.

      The attorney’s are going through and pointing out everything wrong in the loan, the docs are so extensive and for the most part the people doing the loans were under educated and under trained with little supervision and almost no audits that there is always something wrong. The attorney’s then threaten to file a law suit if the loan is not modified with favorable terms to the borrower. That is how the inprudent are getting favorable modifications.

  6. newbie2008

    Why work when you live in America with all the bailout and loan adjustments?

    I made a mistake in getting a Ph.D., advance studies, associate professorship, saving and forgoing ….

    I see no adjustment or bailout for the 401k and Roths.

  7. roundcorners

    IR thank you for touching on the subject of MODs. So it is safe to deduce that MODs will most likely not deter prices from lowering further. The 2-3 year time line till the bottom still stands; however with less foreclosures, does this mean less inventory when the times to buy? I agree, this again screws the renters who saved, delayed gratification and are still waiting…

    1. brea

      Don’t be sad. Think of all the money you saved. And time too. You have not wasted your weekends making repairs.

  8. Shevy

    IR/ Roundcorners— IrvineRenter is the resident expert, however, I’m going to chime in and I’m looking forward to IR’s response.

    Basic economics indicates that prices will come down until they reach levels of sustainable affordability. These types of mods will have little impact on where prices will eventually go, however, could serve to delay the process and exacerbate the problem.

    Moreover, if this continues in the direction and on the the scale that it is going it has the potential to be a larger disaster than the original exotic loan problem it’s trying to solve.

    There is no easy solution to the current problem, however, legislation that encourages the type of loan modifications explained above and legislation that delays the foreclosure process are not the answer and only make the problem worse. Most would agree that the problem started with housing and that the problem needs to end with housing. The debate is how the problem should be solved. Current legislation seeks to reduce foreclosures and supply instead of addressing affordability and demand.

    Affordability needs to reach sustainable levels in order for a stabilization of the housing market. The quicker affordability is reached the quicker we can start to recover. Politicians are currently trying to swim up stream fighting hard against lowering prices while their legislation is only making the current stronger and the problem worse. If we really want to move forward legislation needs to pass that will allow everyone that currently owns a home or has good credit the opportunity to refinance into or take a new loan at 5% fixed and fully amortized for 30 years.

    Of course this will not help many people that purchased more home than they could afford and they will face foreclosure, an assistance program to help these people find a rental, learn about credit, repair their credit, and prepare them to purchase a home responsibly in the future should be provided.

    Current legislation is attempting to solve the problem by decreasing supply and slowing the rate of decline. Basic economics indicates that until affordability reaches a sustainable level, prices will continue to decline. Current legislation and bank strategy will temporarily slow the rate of decline, cause the problem to last longer, and cost our country more.

    Of course the solution offered here will increase supply in the short term, drive prices down to affordable levels, and thus has not been considered viable. Supply will increase until demand catches up which will occur once homes reach the proper level of affordability. Using this method we will reach proper affordability levels quicker and begin to recover quicker. Nevertheless, if the pain becomes too great and the government insists on providing assistance to dull the pain it should come in the form of legislation that increases demand rather than by attempting to artificially decrease supply. Legislation that increases demand encourages people to stay in their homes, and helps to solve this problem quicker has been sent to numerous politicians and is looking for support. The bill I am proposing will allow prospective homeowners to put money into a designated HEA (Home equity account) and if used within the 360 day period will allow them to write the money off for income tax purposes, similar to a SEP IRA, if used for the down payment or closing costs on a primary residence. In addition, this legislation will allow current homeowners that have less than 10%-30% equity to place money into an HEA account designated for homes they purchased after January 1, 2002 and before Jan 1, 2009 or 180 days after this legislation takes affect, whichever is later.

    Finally, it allows current homeowners that participate in this program and remain current on their mortgage to go back as far as 2002 and claim an income tax deduction on any money paid toward the principle of their home including their original down payment. To participate in this program homeowner must be in or re-finance into a fully amortized fixed rate 1st mortgage. The legislation should take affect immediately upon passing and be limited to 360 days with options for extensions. The writer of this legislation believes that housing is already over subsidized and also proposed a future cap on mortgage interest write off, however, it has not been determined if this will be included in the bill.Although this is only a brief summary of the legislation you can learn more about the legislation and current housing issues and contribute to the discussion by visiting

    1. brea


      What keeps the homeowner from making an equity withdrawl after he has his tax break?

      Why entice people into an overpriced market using government incentives?

      Since we have deficits, why shouldn’t we tax income that will be used here to make a personal purchase of a house?

      IRA’s are taxed when the money is withdrawn. When would this income be taxed?

      Education savings in a 529 account is made with after-tax income. Wouldn’t this model be more appropiate?

      1. Shevy

        Hi Brea— I think you are missing the point. This is offering an alternative to buying bad loans and encouraging modificaitons which will cost our contry a lot more.

        I have not written the legislation out fully— however, it is a good idea to have legislation that taxes home equity on all HELOC and refinances— this would address your concern in this legislation and would have made the purple cool aid less potent.

        Again, if you notice my email above, I took your comments before into account 100% and I agree. The only way the HEA and further subsidization should be used is if a certain threshhold is crossed and the government insists on stepping in and doing something. Unfortunately they already are using tax dollars but they’re only making it worse encouraging modification to 90% of their current value.

        My use of the word account is confusing you. If the goverment gets to that point it would simply be money in a certain time period put towards the downpayment, closing costs, or principle. It would be written off and taxed when the house is sold unless tranferred into another property similar to a 1031 exchange for primary residence.

        The 529 account may be appropriate if we can wait 18 years for the person to buy a house.

    2. awgee

      Basic economics only works in a free market economy, not a centrally planned economy with manipulated interest rates.

    3. eastcoaster


      “Finally, it allows current homeowners that participate in this program and remain current on their mortgage to go back as far as 2002 and claim an income tax deduction on any money paid toward the principle of their home including their original down payment”

      What you are proposing is thousands of homeowners amending prior year tax returns. IRS tax laws limit this to the prior three years. You need to revise your date from 2002 to 2005.

      “Generally, for a credit or refund, Form 1040X must be filed within 3 years after the date you filed the original return or within 2 years after the date you paid the tax, whichever is later.”

  9. Kelja

    I’d stop paying my rent and hope for a reduction. Somehow I think I’d be out within a month, maybe two.

    What is going on Sucks the Big Wazoo.

    I’d write a congressman, a senator, a president, but I don’t think they’d give a flip.

    1. Shevy

      Hi Kelja: I’m trying to gain support for the legislation that I outline above. I have a friend that used to work for John Campbell and John Campbell even wrote is letter of recommendation for Grad school. However, I need to first show community support that stands out against the type of cowboy modification listed above and supports an alternative solution. Once we have community support I believe that I can get OCAR, the Orange County Business Council, and the real estate department at UCI to sponsor the bill and bring it to John Campbell. The bill is still a work in progress, however, once I have support I’ve been told that there will be groups that can assist with the writing of the legislation. It definately needs to be addressed: my blog is: please forgive some of the info that doesn’t apply to this— I need to make a living

      1. ocjohn

        John Campbell voted for the bailout. I don’t recall if he voted yes or no before the $150B in extra pork for the special interests were added, but I actually wrote to my representatvies before the second vote along with Senators Shelby and Bunning to filibuster it.

        I was really disappionted with Campbell’s response (probably automated) on why he voted for it despite opposition from his constituents. One of his arguments was that look what happened when the first House vote killed the bill – stock market down 700 points. Isn’t that what an extortionist does? Give me money or something bad will happen. The bill passed the second time and the market still fell afterwards. Just weak all the way around.

        I will forever withhold my vote for any anybody who voted for the bailout.

  10. T!m

    Wow, a 48 foot range! They must have used a special lens on the camera, because it doesn’t look that big in the photos.

  11. Beinformed

    IMO I think some very important elements to all this talk of bailouts and loan modifications are missing. First the unemployment rate, second when has the government ever helped out the middle class? I really don’t think that much of the money given away is for the tax payer or Joe Middleclass. When has a bank ever helped a homeowner out, unless it was to the banks advantage, they do not get rich giving away money. I read that these so-called modifications that the government is trying to sell, literally makes renters out of homeowners, serfdom. So I think anyone with half a brain will not go for the governments form of loan modifications. And if it is a second home, than your SOL dude.

  12. SeattleDave

    A little off topic — but a co-worker showed me this YouTube video and it’s hilarious. Fits right in with so much of what we talk about on this blog.

    The video does not have a separate link, so go to the homepage and scroll down a little ways to the first post from Tuesday, November 11, entitled “Real Estate Downfall” You won’t stop laughing for the next four minutes.

    1. Bitter Renter

      You can always get the URL of an embedded YouTube video by clicking inside the video window once it’s playing. The URL for this video is:

      It only made me chuckle until the last minute or so, but then there were some good LOLs.

      I didn’t realize resubtitling this scene had become a meme. The first version I saw was “If Hitler Ran Universal”:

      which is pretty hilarious if you’re a Universal Studios fan.

  13. trrenter

    Only first mortgages held by the bank can be modified.

    Any person with a second lien will not be modified unless the second lien holder will agree to write off the debt.

    Usually only mortages wholey owned by the banks will qualify as well. Packaged mortgages are too difficult to modify.

    From most of the plans I have seen require a silent second or equity sharing. Anyone that can get foreclosed on today and live rent free for a year probably will. The will save the money and have a down payment on another house that they will keep all future equity.

    There are plenty of people that deal with credit repair and I am sure that it will be easy enough to get the foreclosure removed because nobody knows who owned the loan.

    I would think a simple letter to the credit reporting agencies disputing the foreclosure will result in a removal 30-50% of the time.

    California is still hosed because of the 80-20 mortgages.

    1. brea

      “There are plenty of people that deal with credit repair and I am sure that it will be easy enough to get the foreclosure removed because nobody knows who owned the loan.”

      The loans all have servicers. They are remitting any payments to investors. They should know.

      Back in the 90’s, a friend was forclosed on and soon after bought a house. We were mad that he did not suffer more. We did not have the nerve to asked how he managed the purchase. May have had a co-signer. Could have had enough down to motivate the lender.

  14. Kelja

    The following is from

    It’s heartwrenching and goes to the heart of it all:

    SarahJ Said:
    November 11th, 2008 9:30 pm

    Mr. Mortgage,

    I found your site about a month ago , and it has been SO informative for me.

    My husband and I are currently grappling with the decision to default or not. We purchased our home in CA’s Central Valley area in the summer of 2007, after renting in the Bay Area. Since that time, the house has lost close to 50% of it’s value. My husband still works in the Bay Area ( about 75 miles away ), and his job has become more complex and time consuming. His current commute averages about 3 hours of drive time a day, in addition to what is now a 12 hour workday for him. As a result, we must move back closer to the Bay Area. We had no idea his job would change into what it has become, and now with today’s faltering economy and rising unemployment, there is no wiggle room/option to change jobs.

    We bought when we did because we mistakenly thought if we did not buy soon that we would be priced out of the market (shows what we knew)after years of watching prices rise steeply…a fear-based decision that has proven disastrous for us and so many others.

    We do have a conventional A paper, 30-year fixed rate loan at a 6% rate, which I know is good. But, we are now trapped, because we cannot sell and renting out the home is a joke, as there are already soo many other homes in our area that are turning into rentals, and that is not good for any neighborhood. Also the rental money we could get from it would hardly cover half of the monthly mortgage expenses, and we would still need to obtain a rental for ourselves ( pricey in the Bay Area ), as well other expenses and liabilities associated with renting out a property.

    We feel guilty and shameful about considering defaulting on our mortgage, but we have come to the point where we have no other option. We’ve never defaulted on any other obligation, and besides some credit card debt, have excellent credit histories. If our values had held steady or were even somewhat close to what they were, we would simply sell our home and take a minor loss. But, now we are currently underwater by close to $150,000.

    All these people who are angry about people like us, who are considering walking away, seem to be unable to put themselves in a position like ours, where your home loses half it’s value in a year and is still headed down even further through NO fault of your own.

    My question to you, Mr. Mortgage, is should we walk away or should we reconsider renting the property, if we were able to somehow get a loan mod? We currently have one purchase money ( no seconds or helocs ), non recourse loan, and I am INCREDIBLY concerned about these loan mod offers that seem to be nothing more than scams to hold off the inevitable housing market price correction that this country needs. It almost seems like defaulting will be better for the economy in the long term, as far as bringing things back to reality in the housing market. Btw, Citimortgage is my loan servicer and Fannie Mae is my loan investor.

    What should we do? We never dreamed we could be so utterly torn about any decision, but here we are. I guess we know what we need to do, it’s just so gut-wrenching. For all those who think people like us take this decision oh so lightly, think again.

    Thanks Mr. Mortgage.


    1. Jwinston2

      “All these people who are angry about people like us, who are considering walking away, seem to be unable to put themselves in a position like ours, where your home loses half it’s value in a year and is still headed down even further through NO fault of your own”

      I am sorry but I do not care. They are at fault for buying. It is time for people to take responsibility for what they do. Did they get screwed, sure, but they are responsible, not you or I but them. I am getting so sick of these sob stories, I did not tell them to buy a home, now I have to pay them because they made a bad decision?

  15. Shevy

    There are no doubt good people got cought up in this. IrvineRenter documented how loan mods are bad because of how inprudent can take advantage of them, while this email outlines why they are bad when the bank takes advantage of them.

    I do not feel that modifying a loan into another 3,5, or 10 year ARM with equity share is any better for the economy than doing a straight principle reduction. In fact, instead of addressing the situation in the next 6 months, letting prices come down to affordability levels and letting supply and demand run it’s course to solve this the modifications could draw this problem out for years and years.

    Although I have not studied Japan’s economy maybe someone can touch on what happened there. I have been told that they had a similar scenario about 20 years ago and used similar tactics to attempt to address it and they are still trying to fully recover 20 years later.

    The moral of the story is our politicians are wrong if they think that the type of modifications that are occuring are going to get us out of this mess. In fact, best case scenario is they don’t make it 5 times worse.

    1. brea


      I feel compelled to address your posts more than others since you are actively trying to change the natural course of the correction.

      Allowing Lenders to cut their best deal with the borrowers give them the best change to reduce their losses, which will reduce our cost in this bailout. Since lenders are more experienced in business than the borrower, wouldn’t we assume they would have the upper hand. If lenders make a modification, we have to believe it is in their best interest. I have read that these modification will turn a non-recourse loan into recourse loan. That could make a difference depending on the borrower. Also, if they are only restructuring the loan payments, they will keep the borrower in the house waiting for the next bubble. Even splitting the difference in the underwater amount to keep the borrower from walking will reduce the loss. Regardless of the outcome of these loans, lenders and borrowers are the two parties on the contract. Since we still have the option ARMs out there through 2011, I am not that worried that the modifications really going to slow the correction down much.

      There will still be forclosures and with the new lending guidelines, we will get reasonable loan amounts. Prices will stay inflated until all the knifecatchers have surfaced and been exhausted. They are willing, so we may as well let them fund the banks on the way down.

      Now, a bill that would allow people to save more for their downpayments, would also effect affordablity. If everyone could save more, wouldn’t they just start bidding the prices up. We have enough incentives to purchase homes. There are renters, that are renters because they move around alot. Why should the government encourage homeownership with their tax dollars?

      Sorry to dump on your bill, but IMO, it looks like bad policy.

      1. Shevy

        Hi Brea— no worries, you bring up great points. Ironically I think we’re on the same page, however, we just have different opinions regarding the enormity of the issues that can arise from loan modifications. I agree that for the most part the banks will make out better on the loan modifications than if they foreclose on an individual loan by loan basis basis. Again, what I think you are missing is the 2+ bad loans that are created for every modification. If I did not know the owner of one of the largest loan modification companies in the country and hear his stories, I too would believe the mods are a necessary evil. However, I have heard the stories. In addition, I believe that every modification leads to two more modifications— it doesn’t take much to see that this could be really really bad. Don’t forget, if the bank writes the loan down to 90% of the homes CURRENT value the government will INSURE IT. That means you and I insure it— the bank has been set free for the rest of the losses.

        I understand that you do not believe anything should be done, if you read my blog you will see for the most part I agree. You wrote
        “Back in the 90’s, a friend was forclosed on and soon after bought a house. We were mad that he did not suffer more. We did not have the nerve to asked how he managed the purchase. May have had a co-signer. Could have had enough down to motivate the lender.”

        I’m trying to figure out how it made you mad that he was able to re-purchase once foreclosed on, while you’re not outraged that today the goverment is pushing to reduce his loan to 90% of TODAY’S VALUE give him 10% equity, which is probably circa $50,000 more than he put in to begin with. I can’t imagin that you think this is good policy? If you look close I learned from when I originally mosted. The meat of the policy I would like to see is a 6 month window to address all currently bad loans and all loans that look like they will be bad in the future. Give everyone an opportunity to refi- into a 30 year fixed fully ammortized loan at 5% if that doesn’t work to bad. If you tried you won’t get hit on the taxes for the loss, if you didn’t and default after the 6-month window you will pay taxes on the loss (phantom gain)

        Then only if the pain becomes too great should the government even consider legislation that increases deman instead of decreasing supply. Moreover, as part of the subidization for mortgage interest write off should begin to phase out in 5 years over circa $500,000 in mortage balance

        1. brea


          I went to your blog to read your latest version, but could not find it. So I am not clear on the changes.

          The reason I have some compassion for the borrowers today is because lenders have shown a pattern of predatory lending. Countrywide/BofA is required to modify loans as part of settlement. That is one reason lenders may be generous with the modifications and write-offs. My guess is that they could be sued for reductions in principal under the Truth in Lending law. They may be thinking they better fix those loans quietly before borrowers catch on. Qualifying a borrower for a loan based on the teaser payment should be enough to prove it. I am not a lawyer, but that and the fact that purchase loans are non-recourse in California tell me that the lender should shoulder these losses. Now with this line of thinking, if a borrower can afford their payments, they would not be entitled to a modification/settlement. Just like if I was crossing the street and the person next to me gets hit by a car and gets a large settlement, that does not mean that I should have got one too because I could have been hit. You could sue the lender because his predatory lending made prices rise, but I know how far you would get.

          Regarding write downs to 90% of value. I don’t know why a bank would do that. Why not foreclose? Could they inflate the values so the borrower is still at 100% or more. Would we know? Haven’t we been hearing that these government measures don’t help most people. I do not feel the government should take on that risk.

    2. ocjohn

      I was there when the bubble burst in Japan. Noboday had any idea that 1990 would be the last good year of growth in Japan. Japan’s twin stock and real estate bubbles popped at the same time. At it’s peak, the value of land in Japan was worth more than the U.S. – sounds good to me let’s swap. The Nikkei peaked around 38 or 39K and was down to a multi decade low of about 8K a couple of weeks ago. After dropping for most of the last two decades, some real estate rose in value last year.

      The Japanese government basically bailed their their banking system. However, for a long time, banks were allowed to ignore bad debt. So there were a lot of zombie companies including banks that should have died, but were kept afloat for a long time. Perhaps too late, Japan went for ZIRP – zero interest rate policy to revitalize the economy with no impact. Japan, the second largest economy in the world, still hasn’t recovered. During this time, the American government recommended Japan to come clean with their bad debt problem and just write it off.

      Now our government is a bunch of hypocrites. I fear under Bernanke and Paulson, that we are turning Japanese. Ignore bad debt – checked. Ignore mark-to-market accounting to ignore bad debt – checked. Bail out the system – checked. ZIRP – coming to us pretty soon.

      I believe Anna Schwartz wrote a correct op ed piece in the Journal. Bernanke is fighting the wrong war – the Great Depression instead of the Japanese economy post 1990. This could get uglier for the U.S. economy, but life still goes on in Japan. People eventually adjust to reality.

      1. Boston2theBay

        The Japanese save more, work more, spend less and make about the same wages as the US with similar if not lower taxes. They value capital preservation over investment returns and flood their Postal Savings system with trillions of $$$ in 0 percent yielding account. Property ownership is no longer desired as most hold the view that property values never go up. The entire mentality of the country toward real estate and equity investments changed from 1988 to 2008. Will this happen here?

        If you’ve never been, Japan is probably the nicest, cleanest and safest place in the world. And the bars in Tokyo stay open all night.

          1. Shevy

            I only read the headline, however, I find it it said enough. I’ve often wondered what effect the housing bubble will have on people’s retirements when many were/are spending more than 50% of their income on housing. How could they save any money for retirement? I never guessed that the bubble would have such a profound effect on the stock market and jobs and even severely effect MY RETIREMENT. With the social security issues we have, the huge drop in the stock market, and the group that will be “saved” with bad modifications, we are setting our selves up for huge issues when many hit retirement age.

    1. Bitter Renter

      Yeah, thanks for the Beavis & Butt-Head fix, IR. 🙂

      On today’s profiled property, wow, an Irvine house classified as Contemporary that actually looks pretty modern! I kinda like it.

  16. Hizkel

    I think it is not right to bring in morality in financial transactions. Financial transactions should be based on the law and not morality. Any financial transaction involves at least two parties: buyer/seller, lender/borrower, etc. Each party can (and should) do whatever is legal to maximize their gains with no regard to marality. So, regarding your friend’s neighbor, as long as there is a lender (or government or tax payer) who gives him 100K with out requiring him to do anything illegal, obviously he is right to take it. I think your friend also should stop his payment and get whatever he can get. I do not think the lack of morality is the problem. In fact the reverse is the problem – it is morality which is causing the government to provide free money and to interfere in the housing market. This in turn ends up hurting the other participants of the market who are not getting the free money. I.e. the government ends up doing immoral things to buyers like me while tring to be moral to those who bought during the buble.

    1. newbie2008

      Laws should be based on morality. Any group in power can make immoral laws that robs the weaker group to give to another group. That’s what the bailout is: using tax money to support the investment bank, consumer banks, and very little help for most of the middle class. The US bailout should not be a repeat of Japan. You can read about a generation that graduated and never found a long-term job unless you consider play video games while living with their parent jobs.

  17. Captain Obvious

    Wish I didn’t miss last night, sounds like it was fun. In regards to yesterday’s OC Register plug, I AGAIN want to thank you IR for saving me from walking onto a financial landmine as I almost fell pray to becoming a knife-catcher. Forget the player-haters that bash you, you are a Godsend and a life saver of epic proportions.

    One observation (and correct me if this doesn’t already exist) but can’t we solve all of this “I didn’t know” nonsense in the future by having homeowners sign a bold-font disclaimer (similar to stocks, or how the APR is now in bold on credit card applications) that reads “THIS HOUSE MAY GO DOWN IN VALUE”?

    I know it’s not an astute observation, but an observation nonetheless.

  18. awgee

    Yeah, I am not so comfortable with “astute observations”. “Smart alec remarks” may be a bit more appropriate.

  19. ochomehunter

    Sorry I missed the meeting. May be next time. On loan modification, the domino effect will be huge.
    No one is talking about new wave of upcoming foreclosure that will be the result of job losses. We just passed weekly job losses mark of half million. Monthlt, 2 million jobs are being lost with no chances for any replacement jobs. Banks can do all it wants, at the end of the day, foreclosures will pile up! The whole system is jacked up and every effort the govt. is making is failing. Bailouts are the biggest joke.

    I say we are heading modern great depression-2. We need to worry about survival for now, homes would be plenty. Even those who got adjustments may not live there long. This is a hard fact!

  20. QualityPicks

    I thought on loan modifications, you were required to be current in your payments. At least JP Morgan was saying that. I thought “Be current? that sure disqualifies anybody that needs one :))”
    Lying was easy on stated income loans. But if lenders verify your income information, then, the problem might not be as serious as “stated income”.
    However, it does make me really angry to know that somebody that was irresponsible, first, got to live in a house they didn’t deserve, and now, they may get to keep it as a “reward” for being irresponsible. Meanwhile, responsible renters get to pay for this bailout. Nice isn’t it? To add insult to injury, homeowners get to deduct their interest payment, while renters get squat. Sometimes I wish I were very irresponsible.

    1. Landmark

      I read a bit more about Citibanks modifications and I think that they have this rule now too. It makes a lot more sense than only doing mods for those that are late.

      Maybe not as serious as stated income, however, as IrvineRenter pointed out most have already lied to get the loan which was the hard part, now they could just give real numbers and it will be a true windfall. Moreover, it’s not hard to work a bit less, have your wife quit for a bit, etc, and show much less income.

      Moreover, there are some good people that did not overspend that are truely hurting to no fault of their own because they lost their jobs or have had medical issues and Citibank made it clear that they would foreclose on those people day 1. It seems that our country has it backwards.

      Great link to NPR program that outlines the credit crisis from numerous points of view.—-

      1. QualityPicks

        I’m not disagreeing, I’m sure it will happen. I’m just saying it might not be as easy or as common as it was lying on a stated income loan. Still, it might be common enough.

        I agree that our country seems to have it backwards (overall) with regards to this financial mess. And every new measure just seems to add insult to injury.

  21. Mooser

    If you’ve never been, Japan is probably the nicest, cleanest and safest place in the world. And the bars in Tokyo stay open all night.

    What’s really amazing is how open and objective they are with foreigners. No part of Japanese life or culture is hidden at all, and no effort is made to impress visitors. Any visitor can see the full spectrum of Japanese life in all its complexity everywhere he looks.

  22. Craig

    What is the morality of this? Is this wrong? The holder of your mortgage is offering to give you a great deal of free money if you stop making payments. You are not forcing them; they are freely offering the loan modifications to anyone who qualifies. By not making a few payments, you qualify. If Uncle Sam said to you that you must pay your full tax bill by April 15th, but if you are 90 days late, we will knock 1/3 off. What would you do? Is it immoral to take the discount?

    That’s easy, because the two situations are quite different. You are morally obligated to make the mortgage payments, because you agreed to them. Uncle Sam on the other hand, takes what he wants when he wants, with no agreement on your part, so the only reason to pay is fear of punishment, imprisonment, garnishment, etc. If he offers a way out of that, take it. Unfortunately, he won’t.

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