Barry Ritholtz is leading the chorus demanding that lenders get on with the foreclosure process and get the economy moving again.
Today's featured property may have the Irvine record for HELOC abuse. We are up over $1,000,000!!!
Irvine Home Address … 58 CEZANNE Irvine, CA 92603
Resale Home Price …… $1,600,000
Tell it like it is
Don't be ashamed to let your conscience be your guide
Life is too short to have sorrow
You may be here today and gone tomorrow
You might as well get what you want
So go on and live, baby go on and live
Aaron Neville — Tell It Like It Is
I like people who tell it like it is, and I try to do the same. I think "balanced" reporting is one of the reasons for the death of newspapers. Most issues in life are shades of gray, and presenting both sides of an argument can be helpful for people to decide for themselves what they believe is right and what is wrong. However, there are many issues that fall much more to the extreme of black or white, wise or foolish, good or bad, right or wrong. When these issues are presented in a balanced way, it distorts the truth.
I think the various bailouts for both lenders and borrowers are wrong — 100% wrong. There is no balanced middle where some moral hazard is acceptable. Taxpayer funded bailouts are state-sanctioned theft, not in the general sense of government compelling us to pay taxes, in the specific detail of my tax dollars going to support foolish and greedy lenders and borrowers who will inflate another housing bubble and take my money again. It is 100% wrong, and no amount of balanced coverage is going to change that fact.
Barry Ritholtz is one of my favorite writers concerning the real estate bubble because he sees the issue so clearly, and when he writes about it, he does not sugar-coat what he sees.
By Barry Ritholtz – March 25th, 2010, 7:15AM
I have been dismayed about the latest actions out of Washington and Wall Street. The banks are now pushing all manner of mortgage mods and foreclosure abatements. These are little more than “extend & pretend” measures, designed to put off the day of reckoning. They are not only ineffective, they are counter-productive. They reward the reckless and punish the responsible, and create a moral hazard. Worse yet, they penalize middle America for the sake of giant Wall Street banks.
It may sound counter-intuitive, but the best thing for the nation (but not necessarily the banks) is to allow the foreclosure process to proceed unimpeded. We need more, not less foreclosures.
How did we get to this bizarre place in history? A brief recap of our story so far:
It started with the ultra-low rates of 2001-04. It was aided and abetted by an abdication of traditional lending standards, at first by non-bank lenders, but eventually, by nearly all. The Lend-to-Sell-to-Securitizer NonBanks pushed lending standards ever lower to the point of non-existence. This increased the pool of potential mortgage buyers, credit worthiness be damned.
The net result of all this was a credit bubble. I estimate that making mortgage requirements disappear brought between 10 and 20 million marginal new home buyers into the real estate market during the 2,000s decade. This drove prices to unsustainable levels, leading to a huge boom and eventual bust cycle in housing.
Prices have fallen about 30% nationally from the 2005-06 housing peak. As the artificial demand created by free money and an accompanying gold rush mentality disappeared, the housing market collapsed.
Despite this, even down 30% or so, prices still remain elevated by historical metrics. The net result has been 5 million foreclosures and counting. One in four “Home-owers” are underwater — meaning, they owe more on their mortgages than their houses are worth. There are another 3-5 million likely foreclosures coming over the next 5+ years.
The net results of the credit bubble are as follows:
1) An enormous number of families living in homes they cannot afford.
2) Bank balance sheets laden with current bad loans and lots of potential future defaulting loans.
3) Real Estate Sales, despite being propped up with historic low mortgage rates and tax purchase credits, are continuing to slide.
4) A weak overall economy with a very slow, soft recovery.
Whether a function of populist politics or bad economics, the proposals so far appear to address items one and three. But upon closer examination, they do nothing of the kind. In fact, they are actually gaming the system to help issue two — the bad loans the banks are carrying.
Even worse, they are making issue #4 — the economy — increasingly problematic.
We should allow the real estate market to experience a healthy price normalization process. Even though home prices have fallen dramatically, they have yet to reach their historical means relative to income or the cost of renting. This is to say nothing of the usual careening past the median towards under-valuation that typically follows a massive mis-allocation of capital.
We own a home, and have a vacation property. Rooting for falling prices is “talking against my own book.”
Why is it so beneficial to allow foreclosures to proceed unimpeded? Consider the following benefits of foreclosure:
• Increasing Economic Activity: The areas of the country with the greatest foreclosure rates have seen the biggest increase in real estate activity. Look at California and Florida — they have seen enormous upticks in sales versus the lower foreclosure states.
The process moves real estate holdings from weak hands to stronger ones. When someone purchases a home they actually can afford, they end up spending quite a bit of money on additional goods and services. They do renovations, hire contractors, make durable goods purchases, buy cars. They do lawn work, plant gardens, paint and repair. They even hire baby sitters, go out to diner and movies, they spend money in the local community.
The people who are hanging on by their fingernails, however, do almost none of these things. They pay a vastly disproportionate amount of their incomes to service their mortgages. This is not productive economic activity.
• Helping Families: Foreclosures, wrenching thought hey may be, move over-stretched families into housing they can afford. They avoid a steady stream of all manner of excess fees. The banks squeeze whatever they can from delinquent homeowners, who end up futilely tossing $1000s of dollars down the drain.
Worse, the HAMP programs have been totally ineffective in keeping families in their homes. The vast majority ultimately default anyway. More fees paid, more debt accrued, for nothing. The last thing these families need is a banking fee orgy, before they ultimate lose the house anyway.
The HAMP programs have been an enormous taxpayer subsidized boondoggle for the banks, however.
• Punishing the Prudent: The boom and bust saw irresponsible and reckless behavior by lenders and home buyers alike. They overused leverage, disregarded risk, ignored history. Having the taxpayers subsidize this behavior presents a moral hazard.
Worse than that, it punishes the people who behaved prudent and responsibly. Those who refused to buy a home they could not afford, chose not to over-extend themselves, and have been saving for a down payment are the net losers in this.
By working so feverishly to artificially reduce foreclosures and prop up home prices, we punish the first time home buyer, the newlyweds, the savers who want to buy a house they can actually afford.
The net result of all these programs and subsidies for recklessness is that we prevent home prices from normalizing. The people who are punished the most are the group that was not reckless, speculative or foolish.
• Rewarding Bad Banks: Despite the helping families rhetoric, it is not what these mods are about. The various foreclosure abatements, mortgage mods and capital write-downs are little more than a game of kick the can down the road. All of these programs are part of a broad “Extend & Pretend” mind set. They are an extension of the FASB 157 rule changes that allows banks to hide their bad loans.
The entire set of proposals can be described as “What's good for the banks is good for America.” Only they are not. The various foreclosure programs are essentially a way the banks don’t have to take their write offs now. Avoid the hangover, have another shot of tequila, push the pain of into the future, regardless of economic cost.
Were the banks required to report their mortgages accurately and/or write them down, they would be revealed as insolvent.
Now we get to the ugly Truth: The mortgage mods and foreclosure abatement programs are really all about propping up insolvent banking institutions on the taxpayer dollar and at the expense of the middle class. These programs are another losing round of helping Wall Street at the expense of Main Street. It is the worst kind of trickle down economics.
Herbert Spencer wrote, “The ultimate result of shielding men from the effects of folly is to fill the world with fools.” We have done precisely that.
Barry has a clear understanding of the situation, and he is one of the few who openly tells it like it is.
Good Stoploss Management
The Ponzi Scheme in California went on for too long. There are adults whose entire financial life is an illusion sustained only by lender greed and stupidity. Many California borrowers believe a money-rentership position in real estate can provide them sustainable productive income they can extract through mortgage equity withdrawal.
To them, periodic trips to the housing ATM is simply good cash management. It's like getting a paycheck. But is also serves one other useful purpose; by periodically extracting all the equity available in real estate, borrowers can shift any risk of loss to lenders and maximize their gains.
One of the most perplexing issues with trading is management of exits and getting back into cash. If you don't take profits as they accrue, you risk losing them when prices reverse; however, if you sell and take profits, you miss the remainder of the upward price move. Fortunately, lenders make it very easy to manage cash exits with HELOCs.
By periodically removing all profits through mortgage equity withdrawal, very little potential cash profit is left to the market. Also, since this is a loan and not the reduction in an equity position like selling part of a stock holding, the borrower gets to obtain the full cash advantage of owning real estate while prices were rising.
Of course, the best part of the system is getting to pass all losses on to the lender. When prices go south, the lender is holding the bag.
So far the only potential downside is a negative credit report and the potential for a lender to go after other assets. This is probably not a big concern for sophisticated borrowers because the spendthrifts no longer have any assets, and the clever ones probably figured out some tax shelter to hide them.
Lenders are going to get crushed again after the next housing bubble. I hope taxpayers don't have to backstop that one as well.
Today's featured HELOC abusing squatter
Now that I am watching the trustee sale market more closely, I am seeing the turds float by that bypassed the MLS. Very few properties scheduled for auction appear on the MLS. When they do, they are like today's.
- This property was purchased for $1,262,500 on 4/9/2004. The owner used a $883,557 first mortgage and a $378,943 down payment.
- On 8/8/2005 he refinanced with a $1,260,000 first mortgage and obtained a $180,000 HELOC. So far so good. There is no evidence he used the HELOC.
- On 5/26/2006 he obtained a $500,000 HELOC.
- On 11/21/2006 he refinanced with a $1,750,000 first mortgage and another $500,000 HELOC.
- Here is where it starts to get fishy: On 3/9/2007 he sells the house to a couple for an undisclosed amount, then on 12/17/2007 it is deeded back to the original owner. This appears to be in preparation for default.
- On 5/6/2008 the lender files a notice of default
- On 6/4/2008, the owner transfers ownership to an entity he formed. My guess is he did this to try to shield himself from liability to the lender. Good luck with that.
- Total property debt is $2,250,000.
- Total mortgage equity withdrawal is $1,366,443, including his down payment. That may be a new Irvine record!
Recording Date: 03/23/2010
Document Type: Notice of Sale
Recording Date: 08/12/2008
Document Type: Notice of Sale
This owner has not made a payment since late 2007, perhaps early 2008. He is scheduled for auction, but do you think a lender is ready to absorb the loss on this one? They will lose $750,000 or more.
Irvine Home Address … 58 CEZANNE Irvine, CA 92603
Resale Home Price … $1,600,000
Home Purchase Price … $1,262,500
Home Purchase Date …. 4/9/2004
Net Gain (Loss) ………. $241,500
Percent Change ………. 26.7%
Annual Appreciation … 4.0%
Cost of Ownership
$1,600,000 ………. Asking Price
$320,000 ………. 20% Down Conventional
5.23% …………… Mortgage Interest Rate
$1,280,000 ………. 30-Year Mortgage
$340,024 ………. Income Requirement
$7,052 ………. Monthly Mortgage Payment
$1387 ………. Property Tax
$400 ………. Special Taxes and Levies (Mello Roos)
$133 ………. Homeowners Insurance
$398 ………. Homeowners Association Fees
$9,370 ………. Monthly Cash Outlays
-$1609 ………. Tax Savings (% of Interest and Property Tax)
-$1474 ………. Equity Hidden in Payment
$663 ………. Lost Income to Down Payment (net of taxes)
$200 ………. Maintenance and Replacement Reserves
$7,151 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$16,000 ………. Furnishing and Move In @1%
$16,000 ………. Closing Costs @1%
$12,800 ………… Interest Points @1% of Loan
$320,000 ………. Down Payment
$364,800 ………. Total Cash Costs
$109,600 ………… Emergency Cash Reserves
$474,400 ………. Total Savings Needed
Sq. Ft.:: 3200
Lot Size:: 0.28 Acres
Year Built:: 2004
Days on Market: 654 days
Property Type:: Residential, Single Family
Community:: Turtle Ridge
Style:: One Level, Other
Rare single story home with upgrades, large lot. desirable entertainment backyard with gazebo.