Banks Refuse to Recognize HELOC and Second Mortgage Losses

Holders of HELOCs and second mortgages are going to lose a great deal of money. So far, few of these losses have been recognized, and lenders are in no hurry to do so.

Irvine Home Address … 41 MOJAVE Irvine, CA 92602

Resale Home Price …… $900,000


This bloody road remains a mystery

This sudden darkness fills the air

What are we waiting for?

Won't anybody help us?

What are we waiting for?

We can't afford to be innocent

Stand up and face the enemy

It's a do or die situation

We will be Invincible

This shattered dream you cannot justify

We're gonna scream until we're satisified

What are we running for?

We've got the right to be angry

What are we running for?

When there's no where we can run to anymore

Pat Benetar — Invincible

None of us knows how the housing bust will play out. Some contend it already has, but those living in the reality-based community know we have a tremendous problem with delinquencies lenders are unable to resolve. What are we waiting for? Lenders to take losses.

The delinquency problem will be resolved through a combination of loan modifications, short sales and foreclosures. Those are the only three viable options. Loan modifications are proving to fail, so that leaves short sales and foreclosures. Either solution will push prices lower.

Short sale approval takes many months, and many times, no approval is given. Lenders fail to foreclose on houses even when the borrowers quit paying and make no effort to work out a deal. These strange lender behaviors are caused by the same root problem: pending losses exceed the value of capital in our banking system.

When short sales are not approved, and when squatters are allowed to stay in property without paying, resale transactions do not occur that would ordinarily would be happening. Therefore, sales volumes are well below normal.

Our local inventory is still very low relative to historic norms.

Prices are only sustained by very low inventories which are a result of lenders refusing to foreclose. The inventory we do have looks more abundant than it really is because a significant portion of that inventory is short sales that have been sitting on the market for months with 20 waiting offers.

Lenders are not going to let borrowers squat until prices come back. Why would they? If they are not going to get any wage income from the borrower, it makes more sense financially to boot them out, rent the property to a paying tenant and wait for appreciation to bail them out. They are going to receive the benefit of appreciation either way, so they might as well get some income from the occupant.

Once lenders can absorb the losses on their financial statements, they will begin to push squatters out. The only question is when this will happen. Since Bank of America to Increase Foreclosure Rate by 600% in 2010 and The Debt Star Has Cleared the Planet, it looks as if now is the time. Or perhaps it is more accurate to say that now is the beginning of a process that will go on until the excess debt is cleared from the system.

Second Lien Position is a total loss

Lenders are concerned about losses on their first mortgage portfolios, but the array of market props has likely provided a stable floor in many markets (not ours) that should limit losses. However, second mortgages — and that includes HELOCs — only recoup their capital after the first mortgage is paid in full. If the first mortgage takes any loss at all, the second mortgage is completely wiped out.

When you look at a lender's balance sheet, they show loans as an asset. The value of that asset is based on the likelihood of repayment and the claim to underlying capital in foreclosure. In the case of second mortgages and HELOCs, the likelihood of repayment is very low, and the value of the claim to underlying collateral is less than zero. In short, holders of second lien mortgages are screwed.

Refusal of holders of second lien mortgages to recognize their losses is the primary barrier to market clearing through increased short-sale volume.

Look at a short sale transaction from the perspective of a second lien holder: If the house sells, the second lien is wiped out, so the asset is worth nothing. If the second lien holder blocks the sale, there is a chance, either someone will pay them something to go away, or appreciation will bail them out. They have no incentive to consummate a transaction today that wipes them out, and they have every incentive to block the sale until a better day. The only power they have in the negotiation is the power of no, and since they have everything to lose and nothing to gain, they say no most of the time.

HAFA is designed to give something to second lien holders to get them to participate in the short sale process. If lenders take the government payoff through HAFA, short sales will occur in large numbers. If lenders do not take the deal, foreclosures will clear out the rest. Since the short sale nets something whereas the foreclosure nets nothing, lenders are strongly encouraged to take what they can get.

The HELOC Bust: Next Problem for Big Banks?

By Charles Feldman Apr 13th 2010

Say it ain't so. If a prediction from a leading research firm turns out to be accurate, three of the country's biggest banks are poised for colossal losses of up to $30 billion — this time because of their exposure to home-equity loans.

The research firm, CreditSights Inc., says that Bank of America, Wells Fargo and JPMorgan Chase — the three biggest U.S. consumer banks — are particularly vulnerable to "changes in the consumer cycle," reports Britain's Telegraph. And HELOCs, as the home-equity loans are known, are shaping up to be the next problem area in housing.

HELOCs and seconds are just now surfacing as problems because lenders have ignored the truth of these loans with a few years of mark-to-fantasy accounting. The problem was always there. Its shape was formed years ago. Now is the first time the media has paid any attention to it, so more bank write downs from HELOCs and seconds is merely the next of the many housing market problems the media is finally making the weary masses aware of.

In case you forgot how we got here:

Irresponsible lending caused this problem.

In the last quarter of 2009, late payments on home-equity loans hit record highs, according to the American Bankers Association. The loans, typically taken out on top of a primary mortgage, are a source of dispute among lenders and those who advocate reducing mortgage principal to stem foreclosures — and the subject of a Congressional hearing being held today. Second loan holders are forced to take a loss when the first mortgage loan is modified, which they are loathe to do.

JPMorgan Chase CEO Jamie Dimon, says Bloomberg, told investors in the bank's annual report in February that quarterly writedowns in home-equity lending "could reach $1.4 billion" this year. But CreditSights believes the HELOC problem could be so bad that the three banks could see their 2010 profits — estimated at $30 billion — completely wiped out, the Telegraph reported.

Do you see the game the Federal Reserve is playing? By giving banks money at 0% and allowing them to earn 5%, the Federal Reserve allows them to make billions of extra dollars. Unfortunately, they lost so much money from their bubble foolishness, that an entire years earnings will only cover their losses on HELOCs and seconds (if the estimates are correct). What about their derivative losses? What about the commercial real estate losses they have not written down yet? Despite the common belief that inflation will come, the deflationary winds are still blowing hurricane force.

CreditSights, by the way, reputedly predicted the housing downturn back in 2006, so people are taking notice of its latest warning.

In an interview with Bloomberg, CreditSights' senior bank analyst Baylor Lancaster said: "While a lot of people are looking for dramatic improvement in the short term, one area that still has to be worked through in a material way is home equity." The writedowns from HELOCs are not likely to show up in earnings reports until later this year, Lancaster said.

Together with Citigroup the banks hold about 42 percent of the $1.1 trillion in second-home liens. Unlike first mortgages, they are typically not bundled and sold off to investors but kept on the banks' books. The biggest home-equity lender in the U.S. is Bank of America, holding some $138 billion in such loans. Wells Fargo has about $123.8 billion of home-equity loans.

Charles Feldman is a journalist, media consultant and co-author of the book, "No Time To Think-The Menace of Media Speed and the 24-hour New Cycle." He has written about real estate related issues for several years.

The endless array of failed bailouts and the neverending mortgage crisis occurs to disguise the insolvency of our banks. Lenders have not taken the write downs on what will likely be huge losses on all these loans. I have profile massive losses day after day just here in Irvine. The HELOCs and second mortgages are almost always a total loss, and our market hasn't fallen as much as others.

The dance between lenders and borrowers has gone on for so long because lenders had few viable options in 2008 and 2009. If they would have processed their foreclosures in a timely manner, their losses would have been staggering, bank insolvency would have been exposed, and we would have been forced to nationalize the banking system. By pretending for a couple of years, they made enough money to expose their dirty laundry, take their necessary write downs, and keep their jobs and their bonuses.

Punished for restraint

  • This property was purchased on 4/21/2004 for $1,175,000. The owners used a $881,250 first mortgage and a $293,750 down payment.
  • On 12/28/2004 they obtained an $82,200 HELOC.
  • On 3/27/2006 they refinanced the first mortgage with a $915,000 Option ARM.
  • On 4/13/2006 they obtained a $200,000 HELOC.
  • Total property debt is $1,115,000.
  • Total mortgage equity withdrawal is $233,750.

Today's HELOC abusers are not as bad as most. I give them a D. They put a sizable amount down, but they steadily withdrew it and added to their mortgage balance. They didn't take out more than they paid, so they didn't get back all of their down payment. They probably wish they had because now they are losing their house, their credit is trashed, and their down payment is lost. I hope the down payment money wasn't a gift from parents or something like that. The parents would be pissed.

If this family had been more foolish, they probably could have taken several hundred thousand more than they paid out of the property. They received no reward for prudence. What are they going to do next time?

Irvine Home Address … 41 MOJAVE Irvine, CA 92602

Resale Home Price … $900,000

Home Purchase Price … $1,175,000

Home Purchase Date …. 4/21/2004

Net Gain (Loss) ………. $(329,000)

Percent Change ………. -23.4%

Annual Appreciation … -4.3%

Cost of Ownership


$900,000 ………. Asking Price

$180,000 ………. 20% Down Conventional

5.24% …………… Mortgage Interest Rate

$720,000 ………. 30-Year Mortgage

$191,479 ………. Income Requirement

$3,971 ………. Monthly Mortgage Payment

$780 ………. Property Tax

$333 ………. Special Taxes and Levies (Mello Roos)

$75 ………. Homeowners Insurance

$90 ………. Homeowners Association Fees


$5,250 ………. Monthly Cash Outlays

-$981 ………. Tax Savings (% of Interest and Property Tax)

-$827 ………. Equity Hidden in Payment

$374 ………. Lost Income to Down Payment (net of taxes)

$113 ………. Maintenance and Replacement Reserves


$3,928 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$9,000 ………. Furnishing and Move In @1%

$9,000 ………. Closing Costs @1%

$7,200 ………… Interest Points @1% of Loan

$180,000 ………. Down Payment


$205,200 ………. Total Cash Costs

$60,200 ………… Emergency Cash Reserves


$265,400 ………. Total Savings Needed

Property Details for 41 MOJAVE Irvine, CA 92602


Beds: : 4

Baths: :3

Sq. Ft.: : 3456

Lot Size: : 5,775 Sq. Ft.

Property Type:: Residential, Single Family

Style:: Two Level, Other

Community: : Northpark

County: : Orange

MLS#: : P717754

Source: : SoCalMLS


Beautiful home in Northpark, totally remodeled.

56 thoughts on “Banks Refuse to Recognize HELOC and Second Mortgage Losses

  1. scott

    1). If only the realtor had inserted the word “like” before “totally”. This would have been the most awesome description fer sure.

    2) On scoring I’m not sure this is a D? That they never withdrew above 2004 price isn’t – relatively – that excessive. I’d go for C

    1. IrvineRenter

      I debated that one to myself as well. It is hard to give them more than a C, but since they did withdrawal almost a quarter million dollars, it is hard to imagine this was simply paying off a few credit cards.

      1. Alan

        Just out of morbid curiosity, can you tell that they actually used the HELOC? Ludicrous as it may seem for Californians, could they have opened a line of credit but not actually tapped it?

        1. IrvineRenter

          That is true. It is possible this particular HELOC was not tapped out.

          Usually, I find these at the end of series of smaller refinances or they are terminated by a stand-alone second so I am confident they were used. This one might not be.

          If the final HELOC is not used, then these borrowers earn a C. They still increased their mortgage and used an Option ARM, so they don’t deserve better than a C, but perhaps the D is too harsh.

      2. AZDavidPhx

        IrvineRenter what are you suggesting? Isn’t it obvious that the quarter MIL was spent on medical bills? Irvine housedebtors are clearly experiencing an uneven distribution of medical bill hardship. The equity withdrawal combined with a socio economic class with no access to health insurance is a problem in your community. I would like to see more posts that address Irvine’s health problems and a little less smarminess. Thank you.

  2. winstongator

    I’m surprised this quote never got trotted out during the bust:
    I won’t fail. I’m not afraid.
    You will be. You… will… be.

    1. AZDavidPhx

      Most definitely in a makework cicrclejerk tail wag the dog economy such as ours. It’s all about workfare for the masses.

      It’s like when someone asks me how the streets are here in AZ – I tell them “Great! The second that we finish building them we rip them out and do it all over again! Brand new streets everywhere all the time!”

      This is how it works in economies that equate progress with “growth” and spending. We get a whole lot of unproductive activity and wasteful spending.

  3. scott

    Its also interesting/coincidental that a $900k listing price is basically the max price to get a conforming 80% LTV loan. If you go for say a $1m listing price and you seek 80% LTV financing your affordability declines significantly Now over a certain sales price ($2.0m?) I’m not sure the spread between jumbo and conforming matters that much given the buyer pool at those prices. In any event with the wider spread on jumbos it seems like there will be a world of hurt coming in the market for houses like that that were probably in the c. $1.2-1.5m range at the peak of the market.

    1. Planet Reality

      FYI, current listings have this house valued at $1.08M and recent sales value it at $1.07M.

      It’s no wonder the sale is pending. Probably for a higher price. It would be great to see a list of all high end homes profiled here and what they eventually sold for compared to blogger comments.

      1. AZDavidPhx

        I say we start with a house that PlanetReality sold to some sucker in 2007 or 2008. Perhaps IrvineRenter could stage a virtual reunion where the buyer can come on here and talk about how well their purchase has worked out and how grateful they are to PlanetReality for getting them in before being priced out forever. We could look at the purchase price and compare it to recent purchases and see just how well they have done.

        PlanetReality please send a list of your 2007 and 2008 sales to IrvineRenter so we can begin at once.

  4. ElvisInMiami

    the 900K is an interesting number for a couple reasons:

    1) this is the cutoff point (in traditional lending) between the top 2% of earners (as per Obama’s definition) and the rest of the country
    2) looking at sold homes nationwide (on zillow) this is the price point for the top 2% sold. Oddly enough it is more like the price point for the top 5% of listings

    I think the 900K needs to drop closer to 750K in order to restore order and allow for moderate future growth. Maybe a large round of foreclosures over the next 2 years will help facilitate the decline of the magic 900K.

  5. Geotpf

    Believe it or don’t, the autocomps seem to show that this house is currently worth closer to $1.05 mil than $900k. (For a million dollars I expect to not be able to pass the Grey Poupon through the bedroom window to my neighbor, but welcome to Irvine.) It was also on the MLS for a whole day (with one photo and a one sentence description), so I suspect this was some realtor shenanigans-they have a favored client who got this for ~15% less than the going price, screwing over the bank. Of course, it looks like the bank might not be falling for this and plans on foreclosing eventually anyways.

  6. cara

    But in the case of recourse HELOCs, the second may eventually get something out of a foreclosure. They can pursue the borrower. Whereas in a short sale there’s the issue of whether or not they not only allow the sale but also release the debt. It’s my understanding that the actual releasing of the debt may or may not happen, and some former owners may sign off on the sale without this key provision from both lenders.

    Or do I have this all bungled?

    1. flyovercountry

      Are there any publicly traded debt collection companies? That is going to be a growth industry. There is no way that the financial world is going to let that opportunity pass by. Heloc and 2nd mortgage debt will be sold for pennies on the dollar, and someone will profit by managing to collect on some of that debt for dimes on the dollar.

      1. Major Schadenfreude

        “There is no way that the financial world is going to let that opportunity pass by.”

        You are correct. It will be a simple two step process and this is how it will be implemented:

        Step 1: Bank/Wall St. firm will bribe legislators to create a situation where gains are privatized and losses are socialized.

        Step 2: Bank/Wall St. firm opens a division under a different name; something which conveys patrician prudence, like, “Berkshire Financial”. Business plan is then executed and all the players will make money except for the taxpayer.

        Its quite simple, really.

    2. Alan

      “In short, holders of second lien mortgages are screwed.”

      It would mess up this really nice play on words though.

  7. Charles Nelson Reilly

    Thanks for this on HELOCs.
    Today most decent single-family homes with 4 beds and 2 bath are priced at $600k-$650K. Putting down $150K means you’ve got to get creative in terms of financing the remainder. After you get a conforming $417K 1st mortgage, lenders try and sell you a HELOC for the remainder rather than lump buyers into a conforming jumbo loan (that comes with a higher rate). If you pay off the HELOC early, there’s a fine of $150 to $500, but the rate of interest is low.

    I spoke to a lender yesterday in OC because I’m interested in buying a home around $625K, put $185 down. Maybe take a $417 (4.875%) plus a HELOC of $23K (4.5%). I joked with him over the phone about getting extra cash for some granite counter tops and a trip to Tahiti for my wife. Although I would only intend to use $23K of the line of credit to finance the bit over $417K, I thought it was interesting that he reminded me that the lender would be approving up to $80K of HELOC for me, so “you’d have $57K to do those things!”.

    I mean, I don’t see any of the stated income BS going on here (maybe it still is?), but I think it’s funny that the HELOC’s are still promoted as a mortgage financing tool to circumvent the confirming loan limits in an overpriced market, with the good old fashion up sell as if “it’s free money!” to go crazy with.

    1. Eat that!

      You can make a toast to the FHA on your trip to Tahiti with you wife. Oh, and if things don’t work out, just default on the loans, hang in the home for a couple of years. I’m sure the gov’t will have some loan plan for you when need to buy another home because, afterall, we can’t have home prices falling. There are too many boomers who are retiring who need to transfer that debt to younger people for whole ponzi scheme to keep working.

    1. Chris

      I was gonna post this but you beat me to it.

      IR, congrats.

      BTW, for those that followed IR since ’06, San Diego was the first to fall (the vanguard, you might say). Let’s see if this plays out again.

      1. wheresthebeef

        Planet Reality,

        If this all plays out like I’m expecting, you will have many angry former clients who you sold a bill of goods to. I guess you can always tell them to rent their place out (because it’s at rental partiy) while they have to live in a low budget apartment somewhere.

        I personally can’t wait for the next wave to hit. Crow will be the main course…and there will be plenty to go around.

        1. AZDavidPhx

          Just wait until this pool of bubble money finally dries up. Irvine represents a huge SLURPING sound. With each signed contract, imagine a big SLURP and BELCH as the monster claws back some buyer’s paper wealth.

          PlanetReality can make himself feel bullish with the big down payments if he bends over and stuffs his head in the sand while ignoring the state’s pending bankruptcy, increasing unemployment, businesses fleeing the state, etc. Some boomer ate the neighbor kid and now has 500K to throw down to live the rest of his life in debt so all is swell as far as PlanetReality is concerned. He doesn’t care about the seeds being sown down at the bottom end to enable his clients. Sad.

          1. Planet Reality

            The best part is that I am a bear.

            You guys are so far off the plane of reality that you view me as a bull, and a realtor no less LOL.

            Predicting relatively flat prices with slowly rising interest rates is bearish. You guys live in this fantasy land which doesn’t allow you to see that.

          2. AZDavidPhx

            You are being bullish. You are exhibiting the same type of magical thinking that 06 bulls were engaging in when they proclaimed that bubble prices were done rising and we had now reached a plateau – everyone who bought was safe.

            Prices then proceeded to collapse.

            You are making the exact same argument for Irvine and when the negative prices influences are brought up for discussion you start waffling and hand waving about the plane of reality.

            If you are not a realtor then you are most likely a house debtor. You obviously have some influence that has left you in a state of denial that is a reality to you.

          3. Planet Reality

            For reals? You need to get laid badly. Your fantasy of me is far from reality.

            Predicting Irvine house prices 5 years from now as either 5% less, the same, or 5% more is bearish. It’s freaking hilarious that you see this as a bullish view. Keep in mind I have healthy doses of government intervention and interest rates slowly rising baked into my forecast.

          4. wheresthebeef

            Planet Reality,

            When you say “Predicting Irvine house prices 5 years from now as either 5% less, the same, or 5% more is bearish.” I think this is the best case scenario that prices remain relatively unchanged…that’s bullish. Even the biggest bulls will concede that there will be no significant appreciation. A bearish view would be that prices might be lower by ~20%.

            I guess it all depends on how you see things. I’m just questioning your bearish stance.

          5. Planet Reality

            Irvine prices are currently more in most segments than they were at the beginning of 2009.

            I didn’t expect that, did you?

          6. wheresthebeef

            To answer your question, no one expected prices to be higher today than they were in 09.

            However, it’s all attributed to the government constantly injecting morphine into a severely wounded patient. Something will give sooner or later as the morphine doses becomes less and less. When you look at the big economic picture, there is just too much bad news out there…and that is reality.

          7. AZDavidPhx

            So PlanetReality, what kind of income gains are you baking into your forecast over the next 5 years?

            As we burn off this bubble money in the current market, the down payments are going to start getting smaller and smaller. Some other source of money is going to have to be found in order to keep the music going.

            Are income gains going to prop up the downpayments? How long will it take the average Irvine resident to save up 500K the hard way?

            With rising interest rates, 0 appreciation is your best possible outcome. How is the moveup crowd going to make up the difference?

            Something has to give and you are in denial. You think the bubble prices can stay now “just because”. Keep your head in the sand.

          8. Planet Reality

            “0 appreciation is your best possible outcome”

            That’s funny because you are already wrong. There has been positive appreciation in Irvine year over year.

            Dude, bottom line, even 5% growth over 5 years is bearish and I don’t expect that. It can easily happen and is a viable scenario given current rental parity. Your head can’t see burried in sand.

          9. Geotpf

            “To answer your question, no one expected prices to be higher today than they were in 09.”

            I pointed out here at least six months ago that house prices in Irvine clearly had bottomed and were rising.


            Change the graph in the middle to houses only (condos are doing somewhat worse), and the bottom was on Feb 16th, 2009, at $334/sq ft (sold figures). The current price is $355/sq ft, or about the same price as in late Sept. 2008.

            This trend has been obvious for many, many months now to anybody who bothered to look at the actual statistics.

          10. AZDavidPhx

            There has been positive appreciation in Irvine year over year?

            Then why is it that when I go over to Zillow and bring up the charts for houses sold in the last 30 days, I do not see this year over year appreciation that you are talking about?

            From what I am seeing – your houses are selling at ’05 prices. This is not year of year appreciation as we are now in 2010.

            Many of the houses selling were bought a long time ago.

            What kind of income gains are you expecting will make up for this as it burns off?

            Do you have a non hot air answer?

          11. lowrydr310

            Are income gains going to prop up the downpayments? How long will it take the average Irvine resident to save up 500K the hard way?

            No worries – the ‘average’ Irvine resident is a wealthy Asian with a huge cash downpayment. Everyone else is priced out forever!

          12. tacoshark

            AZPHX – I have agree, your perma-bear stance does appear to shine through. Deadcat bounce or not, the market did rise last year and a +/-5% price change is neither bullish nor bearish by definition.

          13. AZDavidPhx

            Permabear? That’s nonsense. I am just looking at all of the pieces of the puzzle and have concluded that the price rise is not justified by rising incomes or improving unemployment. Therefore, it is not sustainable and is going to correct as the bubble money gets SLURPPED up and downpayments get smaller as buyers come to the table with less and less paperwealth from their previous abode.

            ‘Permabear’ is just a veiled ad hominem used by people with no argument.

            It doesn’t take advanced arithmetic to figure out that it will take a 120K household roughly 10 years of hard disciplined saving to save up 500K for a downpayment. I do not believe that you have enough of these types of savers to step in and take over for houses that are no longer appreciating 100K per year.

            With interest rates going up there is obviously nowhere but down for your prices to go.

            The +/- 5% is just a number that PR is pulling out of thin air to masquerade as being bearish because he is trying to convince himself that his investment is not about to plunge in value.

          14. matt138

            5% growth over 5 years is bearish. Get real.

            If people are trucking wheelbarrows full of cash around to buy groceries a la post WWI germany, then we will see house prices rise because the dollar took a beating.

            any amount of appreciation in a downcycle is pure noise.

            no amount of money can fight free market forces long term

          15. matt138

            Why would an all cash buyer purchase when money is so cheap?

            Cash really becomes king when rates are double digit and also when DTIs become tighter.

            Yes this means YOU foreign cash buyers. Unless you are buying with the intent of avoiding a hyperinflation scenario, in which case a bit of leverage would be healthy, just stop already.

  8. Soylent Green Is People

    9/10ths of 1 million dollars to live 300 yards from a freeway…. but the schools are great!

    Price does not compute. How this property is “worth” that much is beyond me.

    HELOC lenders in 2004-2007 created some real turds of loan products out there. Zero to minus 1 percent margin HELOC’s (hellow -0- percent borrowing what with PRIME where it is…) Graduating available balance HELOCS – rising available credit automatically granted if an Automated Value Model said your home appreciated, and of course the ever popular Stated/Stated options put so much money into so many peoples hands without restraint. I’d guess most California HELOC portfolio’s are worth under 5c to the dollar. Wells (Wells/Wachovia) Chase (WAMU) and BofA (BofA/Countrywide) are stuffed to the gills with these loans but no likelyhood of repayment.

    Would be interesting to see if anyone had the time what 2005/2006 company data says on their HELOC originations for each named bank above. Assume some were sold, a few were never used, but most are completely worthless today.

    My .02c

    Soylent Green Is People.

    1. newbie2008

      Then the loans are back stopped to 80 cents on the dollar by the Fed for some investors, the “bad” loans are worth far more than the 20 cent to 60 cents on the dollar that the investors are paying for them. I’m not in the group to qualify for purchasing the back stopped loans or non-back stopped loans. For the Fed and govt, some people are just more equal than the others.

      Very funny “Debt Star” feature you had last week. We’re having an stellar recovery in the stock market with prior record job loss and “great news: the net job loss rate is decreasing, new jobs are being created” mantra.

      Your “9/10ths of 1 million dollars to live 300 yards from a freeway” observation is changed to easy access to the freeway in RE speak.

    2. QueenCityEddie

      “If the first mortgage takes any loss at all, the second mortgage is completely wiped out.” I know a woman in Florida that concluded her property value with respect to her first mortgage was hopeless, but once the decision to stop paying the first was reached, had no problem paying the second, while also paying down credit cards and student loans. Something of an odd choice, but with foreclosures taking considerable time to implement, some borrowers have both extra cash flow and enough integrity not to default on every possible debt.

    3. BD

      Gentlemen All –

      Prices will grind lower until we get to real equilibrium due to rising rates. And they will rise. Look at Greece. Desire for housing is not demand for housing. If we just go back to a 7 or 8% rates over the next 5 years prices will decline in today’s dollars by 20+%. BTW, at our current run of deficit spending (10% of GDP) by 2015 we will be spending close to 1Trillion$ a year in debt service. Rates will rise maybe indefinitely. This will put constant pressure on housing. And don’t forget rising tax rates for all successful people.

    4. tonyE

      For a million dollar home it’s a TOLLWAY, not a FREEWAY.

      Come on, have some sense. We don’t to give the poor people a free ride near the McMansions in Irvines’ Moreno Valley

  9. newbie2008

    The Invincible cartoon would be more accurate with the banksters/Foolishis lenders standing, the HELCO abusers as their attach dogs and the taxpayers and pension funds being beaten by the banksters and bitten by the HELCO abusers.

    The banksters are being made whole by the bailout and stimulus packages. The HELCO abusers are already whole with the cash-out saved or spend. Plus a bonus of 2 years free rent. The free rent is available only because the banksters want to indirectly bill the govt for the free rent via bailout and to keep prices high for another round of bad loans. Why should the banksters change their behavior (issuing bad loans) when they are financially rewarded for that behavior?

    The bailout package is working. Notice the inflation on raw materials? At the retail level, regular prices are a little bit lower, but not much great huge discounts for the prudent shoppers. Retail food prices are down, but the wholesale is below cost for most of the farmers and ranchers. They will be driven out of business and the prices raised at that point. A new spin on “cattlegate.”

  10. freedomCM

    If each of the big HELOC banks has ~$100B in “assets”, how much will they lose per year? 10%/year ($10B) for 5 years each?

    If the whole sector is expecting “only” $30B in profits, how does that play out? and what about the CRE?

    Can anyone tell me how these biggies will survive?

    1. newbie2008

      Answer: None. The bad loans are being remaded into GSE loans. The banks will only be service providers, i.e., working for a fee on each transaction. The question is how much will the taxpayers be losing?

      Alternatively, some of the private banks spin-off’s that purchased the bad loans have been back-stop for loss. However, since the loans were purchased at a much lower cost than the back stop value, they essentially have a govt back profit center. For me to purchase the loan, you pay up front. If the loan pays I win. If the loan fail, you lose and I win. All animals are equal. It just that some are more equal than others.

    2. AZDavidPhx

      They will survive because the government is going to print as much money as it takes in order to make them whole.

      We are going to see massive inflation in this country at some point in the future. They can spin all they want right now about how printing a trillion dollars hasn’t caused any price inflation as of today. The real cost is going to show up later and the government will blame it on the weather, the improving economy, China, OPEC, etc. It’s much easier than raising taxes – better to steal people’s money in silence while the people are distracted by Tiger Woods social life.

      1. matt138

        Let’s see: level to rising house prices, rising DOW, some commodities up, and “the deflationary winds are still blowing hurricane force”.

        Fundamentally, it looks to me as if the deflationary, free market, economic contraction is marching straight against inflationary winds blowing hurricane force.

    1. AZDavidPhx

      Oh my favorite part was the mock funeral for Countrywide. Get it?! A funeral! Because they KILLED them! So funny I forgot to laugh!

      I vote that we take the asshole who came up with that skit and let him go dig up IED’s in Iraq.

      What a disgrace.

  11. theyenguy

    Thanks for an insightful article.

    Stephen Bernard and Tim Paradis of Associated Press report that stocks soared today on earnings from Intel and JPMorgan Chase; the latter announced a $3.3 billion profit, and Huffington Post reports that the bank still owes the US taxpayer over $41 billion.

    What I call the Ben Bernanke Portfolio, the ETF, RWW, RevenueShares Financials, rose 3% today and 65% in the last year

    The article Option ARMs Get Set To Explode, Much More Pain in 2010, 2011 makes for an interesting read.

    As I read the comments, I observe so much optimism about home buying and future real estate prices in Irvine.

    I expect a soon coming economic crash which will likely come from a liquidity evaporation where people will not be able to obtain funds in money market accounts, mutual funds, brokerage accounts and the like, due to a lack of buyers stepping forward to buy assets when prices are quickly falling. Needless to say, real estate prices will drop like lead. I rent.

  12. Mertland408

    As a Star Wars fan and former loan underwriter (left the industry in 1994) I want that Debt Star made into a poster. It’s too funny!

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