Keeping the truth straight is difficult with good information, but once policitians and political operatives get involved with the flow of data, truth can be obscured and elusive.
Today's featured property belongs to a family that skimmed the appreciation and sold just in time to avoid a short sale.
Irvine Home Address … 34 CAPOBELLA Irvine, CA 92614
Resale Home Price …… $745,000
Wouldn't it be nice if we were older
Then we wouldn't have to wait so long
And wouldn't it be nice to live together
In the kind of world where we belong
Maybe if we think and wish and hope and pray it might come true (run, run, run)
Baby then there wouldn't be a single thing we couldn't do
Beach Boys — Wouldn't It Be Nice
Wouldn't it be nice if houses really could provide lifelong income? California is truly a remarkable place. People here actually believe permanent, life-sustaining home-price appreciation happens. It does occasionally, and people build a life around it.
Wouldn't it be nice if politicians used real information to make substantive decisions? Instead we get and endless barrage of lies and manipulations. Politicians make realtors look honest.
Housing Bubble as Political Rugby
The housing bubble was a bipartisan failure. Both sides of the political spectrum have tried to blame the other for the housing bubble. It is all nonsense.
The political Right has touted the "Barney Frank inflated the housing bubble" about as far as it can go. The Right likes to forget that Barney Frank was in the impotent minority in the House from 1994-2006. He was a loudmouth who wasn't responsible for anything; although, he was effective as an annoying loudmouth. Personally, I think Barney Frank is a tool, and I wished he were not as powerful as he is today, but the characterizations from the Right about his involvement in the bubble are silly.
The latest evolving narrative on the Left is a populist appeal to blame the evil banks and get that bailout money back home to Main Street where we can bail out some victimized homeowners. That is nonsense too.
Do homeowners who are underwater on their mortgages deserve to lose their homes? That's what finance commentator Barry Ritholtz says, in a post called "More Foreclosures, Please." Ritholtz must have been channeling his inner Rick Santelli when he wrote that "the boom and bust saw irresponsible and reckless behavior by lenders and home buyers alike," adding that mortgage relief programs for homeowners reward those who were "reckless, speculative, and foolish" while punishing those who are not.
It's not reasonable to put Barry Ritholtz in the same category as Santelli, of course. Ritholtz is a highly informative, widely quoted writer on economic issues. Santelli's the frat-boy trader turned CNBC host whose rant about "rewarding the losers" got a cheer out of some morons on the Chicago Mercantile Exchange (and started the Tea Party movement). But Ritholtz puts financially beleaguered homeowners in the same "moral hazard" dumping ground as the banks who wrote their mortgages, suggesting that both of them "overused leverage, disregarded risk, (and) ignored history." Is that really fair?
Yes, It is.
After all, what kind of information was available to the average home buyer during the last decade? How would the average reasonable person have decided whether to buy a home or what kind of mortgage to use — in, say, 2004?
They probably read articles like the one published in February of 2004 in USA Today ("America's newspaper") with the headline "Greenspan says ARMs might be better deal." "Overall, the household sector seems to be in good shape," said Greenspan, who added that adjustable-rate mortgages might be the right choice for many homeowners. Greenspan enthusiastically promoted the new-style mortgages that later played a big role in the meltdown: "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," he said.
Greenspan wasn't just Chairman of the Federal Reserve at the time. He was the man the press kept touting as a genius, the one they called "Maestro." Were homeowners guilty of a "moral hazard" for listening to him? Should they face foreclosure because they weren't reading Nouriel Roubini or Paul Krugman or Joseph Stieglitz?
This just underscores the depth of Greenspan's failure. He was market cheerleader and irresponsible Federal Reserve chairperson largely responsible for unregulated derivatives that inflated the housing bubble. This guy's argument also ignores the more important role of the National Association of realtors. Nobody buying a house during the bubble paid any attention to Alan Greenspan; they were paying careful attention to their realtor telling them house prices were going up. They were also paying attention to their mortgage broker who was telling them they could borrow and spend that money as soon as it appeared from thin air.
Ignorance of the law is no defense, but ignorance of contrarian economic thought circa 2005 should be. If Greenspan and Geithner and Paulson and all the talking heads on CNBC and the other networks couldn't see the bubble, how could the average home buyer?
I can't believe he is making that argument. Ignorance is ignorance, and if it costs someone money, too bad. He is setting up ignorance as some reason people should be given a bailout. That is ignorant.
The truth is, most people buy homes because they need a place to live — and because for generations they've been told that buying a home is preferable to renting. Our tax code is structured to encourage home ownership, and the ownership message is reinforced in everything from news reporting to popular culture. (Think Miracle on 34th Street.)
BULLSHIT!!! (pardon the realtorspeak) People bought during the bubble because they wanted to get the appreciation and spend it. Very few people bought because they needed a place to live during the bubble. It was always a speculative investment they could also live in.
And generalizations about irresponsible, speculative borrowing overlook the fact that the nation's housing problems vary widely by geography. Some areas aren't having a housing bust:
Is a homeowner in Glens Falls, NY any more "reckless, speculative, and foolish" than one a couple of hours down the road in Poughkeepsie? Poughkeepsie experienced a boom in prices followed by a bust, while high-performing Glens Falls experienced a boom with no bust. West of Glens Falls, my home town of Utica did pretty well too, as this chart illustrates:
It probably helps that Utica experienced its financial collapse a long time ago, so housing prices were already unusually low.
Above is a fine example of the intentional use of confusing and misleading data. If you can't dazzle them with brilliance, you can baffle them with bullshit. Obfuscation is helpful when there is no point to be made. The fact that the housing bubble varied by region was caused by many variables, and irresponsible borrowing and speculation are chief among them. This author is throwing up a mud screen of meaningless and confusing data to dupe you into thinking he must be some kind of special expert who understands these things. He is an idiot with an agenda.
Here's something interesting: The areas with stable housing prices had a much lower percentage of nonprime loans than the country as a whole. As the report's authors mention, the explanation for that probably "runs in both directions–an increase in nonprime lending led to more significant home price appreciation, and more rapid home price appreciation led to a rise in nonprime lending."
In other words, it was a cycle: Risky loans drove housing prices up, and climbing housing prices led to greater availability (and selling) of risky loans. That's not a borrower problem — it's a pattern of lender behavior. It's a sign of banks driving a speculative frenzy as a "get rich quick" scheme, then leaving the borrowers with the wreckage.
It takes two to tango. This is clearly a lender problem, and I have argued that Lenders Are More Culpable than Borrowers, but the endless stream of HELOC abusers and squatters I find right here in our affluent community of Irvine, California, show how widespread borrower malfeasance was. Hard-working honest borrowers are not the ones in trouble right now. Speculators and foolishly over-extended borrowers are the ones who are asking for bailouts.
Ritholtz makes some excellent points about the weakness of HAMP (the Home Affordable Modification Program), and its tendency to reward banks for their very real "moral hazard." The biggest problem with the revised HAMP program isn't that it's too generous to troubled homeowners. It's that it's a "pretty please" program that only requires lenders to consider lowering the principal on home loans (or, in the Orwellian language of the program's Fact Sheet, "servicers will be required to consider an alternative Modification approach" – "required to consider" being one of those self-contradicting phrases George Carlin used to rattle off, like "jumbo shrimp.")
But the idea of principal reduction — whether it comes from HAMP or individual lenders like Bank of America — is a reasonable one. Most reductions in principal will still leave homeowners owing more than their house is worth, which should give them their just portion of punishment for any "moral hazard."
The idea of principal reduction is not a reasonable one. It is a really, really stupid idea. They have received no punishment at all for their behavior, and that is exactly why moral hazard is a problem. The only people who think it is a good idea are the people whom might personally benefit from principal reduction. Of course, the author knows this. He is pandering to those people in hopes that they will support him. This is part of the evolving left-wing narrative and populist appeal.
"More foreclosures, please" is exactly what we don't want. Ritholtz is understandably concerned about the unfairness of "rewarding" homeowners who got in trouble in a way that keeps prices higher for those who behaved responsibly. But he paints an overly rosy scenario of bad actors being driven from their homes like poltergeists, so that new and vibrant families can move in — families that can afford the mortgage and have money left over to spend in the local economy. The real solution is going to look less like a ghost story and more like Tim Burton's Beetlejuice, where the ghosts and the living learn to live together happily.
More bullshit. Barry is exactly right, and this guy is exactly wrong.
The millions of homeowners who got in over their heads have already suffered a lot. Let's get them some help. And let's keep the focus on the people who caused this problem: The bankers who got rich off these schemes, and the politicians and regulators who let them do it.
I actually agree with his conclusion that we should focus our efforts on regulating banks and stopping the huge bankster ripoffs. However, the millions of fools who got themselves in trouble deserve not one penny of our tax money in bailouts. Not one penny.
I don't care about party affiliation, and I don't identify with labels of Progressive or Conservative. Any politician who supports bailing out anybody has lost my confidence. This shouldn't be a battle between the side the supports the lenders and the side the supports the common man. Both sides of that argument are wrong. Where is a good Libertarian when you need one….
Calculated HELOC use?
Occasionally someone will defend HELOC abuse as ordinary HELOC use, as if it is okay to spend home equity and use a house like a credit card. If there were no government bailouts, I might be more persuaded, but since we are all paying for the abuses, the line between "use" and "abuse" gets pushed much closer to zero use.
- This property was purchased ages ago on 6/22/1993 for $334,000. The original loan information is not present, but we can assume they used a $267,200 first mortgage (80%) and a $66,800 down payment.
- On 10/26/1999 they refinanced into a $307,500 first mortgage.
- On 1/7/2000 they opened a HELOC for $60,000.
- On 3/17/2003 they refinanced with a $424,000 first mortgage.
- On 9/14/2004 they refinanced into a $540,000 option ARM. It appears to have blown up 5 years later.
- On 12/22/2004 they opened a $116,000 HELOC.
- Total property debt is $656,000 plus negative amortization.
- Total mortgage equity withdrawal is $388,800.
Recording Date: 02/23/2010
Document Type: Notice of Sale
Recording Date: 01/04/2010
Document Type: Notice of Default
Recording Date: 11/20/2009
Document Type: Notice of Default
This property is scheduled for auction on 20 April 2010. Do you think the sale will close in time or will this go REO?
The borrowers who are about to sell today's featured property obviously grew their mortgage to obtain and spend their equity. They avoided a short sale; although, they spent most of their equity, and their credit is trashed. What lesson have they learned? Why won't they do this again on their next property?
The lesson this family learned is that they could spend their home equity the moment it appeared, and there is no real consequence. Of course, they could be leaving home with several hundred thousand dollars more in a closing check, but they wouldn't have had all the fun with their HELOCs. Do you think this behavior is wise? They do.
Renting with housing income
There is another way to look at this transaction. It may help explain why California homes are so desirable.
Lets say someone rented this home for 10 years with an average rent of about $2,500. It may rent for more now, but it probably rented for less in 2000. A renter would have spent $300,000 on housing during a ten-year period ($2,500 X 12 X 10 = $300,000).
These owners started their HELOC frenzy around the millennium, so they probably paid more in cost of ownership than they would have spent in a rental, so their total cost of ownership would have been closer to $360,000 during the same ten-year period ($3,000 X 12 X 10 = $360,000). At first glance, it would appear that owning was not a big advantage; however, If you factor in the mortgage equity withdrawal of $388,800, their net cost of ownership was less than zero. The house paid for itself.
That's why everyone in California wants a house.
When this family moves out, they are no better or worse off than a renter. They will leave with no equity. But the renter would have endured a housing cost whereas this owner endured none.
Irvine Home Address … 34 CAPOBELLA Irvine, CA 92614
Resale Home Price … $745,000
Home Purchase Price … $334,000
Home Purchase Date …. 6/22/1993
Net Gain (Loss) ………. $366,300
Percent Change ………. 123.1%
Annual Appreciation … 4.8%
Cost of Ownership
$745,000 ………. Asking Price
$149,000 ………. 20% Down Conventional
5.23% …………… Mortgage Interest Rate
$596,000 ………. 30-Year Mortgage
$158,324 ………. Income Requirement
$3,284 ………. Monthly Mortgage Payment
$646 ………. Property Tax
$67 ………. Special Taxes and Levies (Mello Roos)
$62 ………. Homeowners Insurance
$41 ………. Homeowners Association Fees
$4,099 ………. Monthly Cash Outlays
-$811 ………. Tax Savings (% of Interest and Property Tax)
-$686 ………. Equity Hidden in Payment
$309 ………. Lost Income to Down Payment (net of taxes)
$93 ………. Maintenance and Replacement Reserves
$3,004 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$7,450 ………. Furnishing and Move In @1%
$7,450 ………. Closing Costs @1%
$5,960 ………… Interest Points @1% of Loan
$149,000 ………. Down Payment
$169,860 ………. Total Cash Costs
$46,000 ………… Emergency Cash Reserves
$215,860 ………. Total Savings Needed
Sq. Ft.:: 2325
Lot Size:: 4,695 Sq. Ft.
Property Type:: Residential, Single Family
Style:: Two Level, Other
Spectacular Westpark location with 3 spacious bedrooms and a loft. Extremely private with property angled so neighbors cannot see in. Property is light and bright with cathedral ceilings and recessed lighting. The family room features a fireplace and the kitchen has GE Profile stainless steel appliances with dual convection ovens. The home has an in-ground spa and will be perfect for entertaining.